As filed with the Securities and Exchange Commission on October 28, 1999.
Registration Nos. 333-82307 and 333-82307-01
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
AMENDMENT NO. 4
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------------------
TXU EASTERN FUNDING COMPANY TXU EUROPE LIMITED
(EXACT NAME OF REGISTRANT AS (EXACT NAME OF REGISTRANT AS SPECIFIED
SPECIFIED IN ITS CHARTER) IN ITS CHARTER)
ENGLAND AND WALES ENGLAND AND WALES
(STATE OR OTHER JURISDICTION OF (STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION) INCORPORATION OR ORGANIZATION)
7389 6719
(Primary Standard Industrial (Primary Standard Industrial
Classification Code Number) Classification Code Number)
98-0203668 98-0188080
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
The Adelphi The Adelphi
1-11 John Adam Street 1-11 John Adam Street
London, England WC2N 6HT London, England WC2N 6HT
011-44-171-879-8081 011-44-171-879-8081
(ADDRESS, INCLUDING ZIP CODE, AND (ADDRESS, INCLUDING ZIP CODE, AND
TELEPHONE NUMBER, INCLUDING AREA TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL CODE, OF REGISTRANT'S PRINCIPAL
EXECUTIVE OFFICES) EXECUTIVE OFFICES)
ROBERT A. WOOLDRIDGE, Esq. PETER B. TINKHAM, Esq. ROBERT J. REGER, JR., Esq.
Worsham, Forsythe & Secretary Thelen Reid & Priest LLP
& Wooldridge, L.L.P. TXU Corp 40 West 57th Street
1601 Bryan Street 1601 Bryan Street New York, New York 10019
Dallas, Texas 75201 Dallas, Texas 75201 (212) 603-2000
(214) 979-3000 (214) 812-4600
(NAMES AND ADDRESSES, INCLUDING ZIP CODES, AND TELEPHONE NUMBERS,
INCLUDING AREA CODES, OF AGENTS FOR SERVICE)
--------------------------------
It is respectfully requested that the Commission send copies of all
notices, orders and communications to:
RICHARD L. HARDEN, Esq. PHILIP ELLIS
Winthrop, Stimson, Putnam & Roberts Secretary, TXU Europe Limited
One Battery Park Plaza c/o Eastern Group plc
New York, New York 10004-1490 Wherstead Park
(212) 858-1000 Ipswich, Suffolk, England IP9 2AQ
011-44-1473-55-3102
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell or the solicitation of an offer to buy these securities in any
jurisdiction in which an offer, solicitation or sale is not permitted.
Subject to Completion, dated October 28, 1999
PROSPECTUS
TXU EASTERN FUNDING COMPANY
OFFER TO EXCHANGE ANY OR ALL OF ITS
$350,000,000 $650,000,000 $500,000,000
6.15% SENIOR NOTES 6.45% SENIOR NOTES 6.75% SENIOR NOTES
DUE MAY 15, 2002 DUE MAY 15, 2005 DUE MAY 15, 2009
FOR FOR FOR
6.15% EXCHANGE 6.45% EXCHANGE 6.75% EXCHANGE
SENIOR NOTES SENIOR NOTES SENIOR NOTES
DUE MAY 15, 2002 DUE MAY 15, 2005 DUE MAY 15, 2009
All of the senior notes and the exchange senior notes are guaranteed by
TXU EUROPE LIMITED
FORMERLY KNOWN AS TXU EASTERN HOLDINGS LIMITED
o The exchange offer and your right to withdraw your tender of senior notes
will expire at 5:00 p.m., New York City time, on _______, 1999 unless
extended by Funding and TXU Europe.
o The exchange offer is subject to customary conditions. Funding and TXU
Europe may decide not to accept tenders that do not comply with those
conditions or may waive them.
o The terms of each series of the exchange senior notes are substantially
identical to the corresponding series of senior notes, except for transfer
restrictions and registration rights relating to the senior notes.
o Funding and TXU Europe will not receive any proceeds from the exchange
offer.
o Funding and TXU Europe are not using an underwriter in connection with the
exchange offer.
o Funding and TXU Europe have applied to list the exchange senior notes on
the Luxembourg Stock Exchange.
INVESTING IN THE EXCHANGE SENIOR NOTES INVOLVES RISKS. RISK FACTORS BEGINS
ON PAGE o.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is ______, 1999.
<PAGE>
TABLE OF CONTENTS
SUMMARY .................................................................... 3
RISK FACTORS ...............................................................16
PRESENTATION OF CURRENCY, FINANCIAL AND OTHER INFORMATION ..................20
TXU EUROPE LIMITED .........................................................21
EASTERN GROUP plc ..........................................................21
TXU EASTERN FUNDING COMPANY ................................................21
OWNERSHIP STRUCTURE ........................................................22
CAPITALIZATION OF TXU EUROPE LIMITED .......................................23
EXCHANGE RATES .............................................................24
FORWARD-LOOKING STATEMENTS .................................................24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ..............................................26
INDUSTRY BACKGROUND ........................................................42
EASTERN BUSINESS OVERVIEW ..................................................49
SECURITY OWNERSHIP .........................................................66
MANAGEMENT OF TXU EASTERN FUNDING COMPANY ..................................66
MANAGEMENT OF TXU EUROPE LIMITED ...........................................67
RELATIONSHIPS OF MANAGEMENT TO FUNDING AND TXU EUROPE AND
RELATED TRANSACTIONS ...................................................69
MANAGEMENT OF EASTERN GROUP plc ............................................69
EXCHANGE OFFER .............................................................71
DESCRIPTION OF THE EXCHANGE SENIOR NOTES .................................. 78
MATERIAL INCOME TAX CONSIDERATIONS ........................................ 95
PLAN OF DISTRIBUTION ......................................................100
EXPERTS ...................................................................101
LEGALITY ..................................................................101
NATURE OF FINANCIAL INFORMATION ...........................................101
WHERE YOU CAN FIND MORE INFORMATION .......................................101
LUXEMBOURG STOCK EXCHANGE AND OTHER INFORMATION ...........................102
INDEX TO FINANCIAL STATEMENTS .............................................F-1
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. TXU
EASTERN FUNDING COMPANY, OR FUNDING, AND TXU EUROPE LIMITED HAVE NOT AUTHORIZED
ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH
DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. FUNDING AND
TXU EUROPE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY JURISDICTION WHERE
THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED
IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT
COVER OF THIS PROSPECTUS. THE BUSINESS PROFILE, FINANCIAL CONDITION, RESULTS OF
OPERATIONS AND PROSPECTS OF FUNDING AND TXU EUROPE MAY HAVE CHANGED SINCE THAT
DATE.
This prospectus incorporates important information about the exchange
senior notes that is not included in or delivered with this prospectus. See
WHERE YOU CAN FIND MORE INFORMATION. You may obtain copies of documents
containing that information from TXU Europe, without charge, by either calling
or writing to:
TXU Europe Limited TXU Europe Limited
The Adelphi c/o TXU Corp
1-11 John Adam Street Secretary's Office
London WC2N 6HT OR 1601 Bryan Street
England Dallas, Texas 75201
Telephone: 011-44-171-879-8081 USA
Telephone: 214-812-4600
In order to obtain timely delivery, you must request documents from TXU
Europe no later than o, which is five business days before the expiration date
of the exchange offer on o.
2
<PAGE>
SUMMARY
This summary may not contain all the information that may be important to
you. You should read the entire prospectus, including the financial data and
related notes, before making an investment decision.
SUMMARY CORPORATE STRUCTURE
Chart of Summary Corporate Structure appears here.
TXU EUROPE LIMITED AND TXU EASTERN FUNDING COMPANY
On August 12, 1999, TXU Eastern Holdings Limited changed its name to TXU
Europe Limited. TXU Europe is a private limited company (Company No. 3505836)
incorporated under the laws of England and Wales on February 5, 1998. TXU Europe
is an indirect wholly-owned subsidiary of Texas Utilities Company. Texas
Utilities Company is now doing business as TXU Corp. TXU Europe is a holding
company for TXU Corp's UK operations.
3
<PAGE>
Funding is a private unlimited company (Company No. 3710529) incorporated
on February 4, 1999 under the laws of England and Wales. It is a wholly-owned
indirect subsidiary of TXU Europe. Funding was organized solely to provide
funding for the operations of TXU Europe and its subsidiaries by issuing debt
securities, including the senior notes and the exchange senior notes, to
investors and lending the proceeds to TXU Europe.
TXU Europe's and Funding's principal offices are located at The Adelphi,
1-11 John Adam Street, London WC2N 6HT, England, and the telephone number is
(011) 44 171 879-8081.
EASTERN GROUP PLC
Eastern, which is an indirect subsidiary of TXU Europe, is the holding
company for a group of companies engaged in a variety of energy businesses in
Europe. The management of these businesses is coordinated to give Eastern access
to many energy markets, to provide Eastern's customers access to a range of
energy products and to enable Eastern to respond efficiently to changes in
demand for and prices of energy throughout Europe. Eastern's principal business
operations are electricity networks and energy businesses in the UK. As used in
this prospectus, "Eastern" refers to Eastern Group plc and its consolidated
subsidiaries, except as the context otherwise requires.
The networks, or electricity distribution, business of Eastern is the
largest distributor of electricity in England and Wales, with over 3 million
customers in an authorized service area covering approximately 20,300 square
kilometers in the east of England and parts of north London.
The energy businesses include retailing of electricity and gas, as well as
generation of electric power, gas production and energy portfolio management
operations. Eastern is one of the largest generators of electricity in the UK,
based on registered generating capacity. It currently owns, operates or has an
interest in approximately 9.4% of the total UK generating capacity. Eastern is
also one of the largest retailers of electricity and natural gas in England and
Wales, with approximately 4.0 million electric and natural gas customers.
Eastern is also forming business alliances with European power companies in
order to position itself to implement its strategy of integrating energy
businesses across the rest of Europe, as these markets open to competition.
THE PRIVATE OFFERING OF THE SENIOR NOTES
Senior Notes ................... On May 13, 1999, Funding issued and sold
beneficial interests in $350,000,000
aggregate principal amount of its 6.15%
senior notes, $650,000,000 aggregate
principal amount of its 6.45% senior notes
and $500,000,000 aggregate principal amount
of its 6.75% senior notes. The offer and
sale of the senior notes was exempt from
registration under the Securities Act. The
initial purchasers of the senior notes sold
beneficial interests in the senior notes to
qualified institutional buyers under Rule
144A and to non-US persons under Regulation
S. All the senior notes originally issued
are outstanding.
4
<PAGE>
THE EXCHANGE OFFER
The terms of the exchange offer, which are specified in greater detail in
EXCHANGE OFFER and in the accompanying Letter of Transmittal, include the
following:
The Exchange Offer ............. Funding and TXU Europe are offering to
exchange Funding's 6.15% exchange senior
notes, Funding's 6.45% exchange senior notes
and Funding's 6.75% exchange senior notes,
in principal amounts of $10,000 and integral
multiples of $1,000 for amounts in excess of
$10,000, for equal principal amounts of
Funding's 6.15% senior notes, Funding's
6.45% senior notes and Funding's 6.75%
senior notes, respectively, that are
properly tendered and accepted.
Funding will issue the exchange senior
notes on or promptly after the expiration
date. See EXCHANGE OFFER.
Resale of the Exchange
Senior Notes.................. Funding and TXU Europe believe that
beneficial interests in the exchange
senior notes may be offered for resale,
resold and otherwise transferred by most
owners of exchange senior notes without
further compliance with the registration and
prospectus delivery requirements of the
Securities Act. This belief is based upon
existing interpretations of the staff of the
SEC's Division of Corporation Finance
explained in several no-action letters and
subject to important restrictions described
in EXCHANGE OFFER-- "Purpose and Effect of
the Exchange Offer." Funding and TXU Europe
do not intend to seek their own no-action
letter. There can be no assurance that the
staff of the SEC's Division of Corporation
Finance would make a similar determination
about the exchange senior notes as it has in
no-action letters about exchanges of the
securities of other companies.
Senior notes that are not tendered for
exchange will continue to be subject to
transfer restrictions and will not have
registration rights. Therefore, the market
for secondary resales of any senior notes
that are not tendered for exchange is likely
to be minimal.
Expiration Date ................ The exchange offer will expire at 5:00 p.m.,
New York City time, on o, 1999, or a later
time to which the exchange offer is
extended. Funding and TXU Europe may extend
the exchange offer at any time, from time to
time, prior to _________, 1999. If the
exchange offer is extended, Funding and TXU
Europe will notify the holders of the new
expiration time and date. The exchange offer
will remain open for at least 30 days after
the date notice of an extension of the
expiration date is mailed to the holders.
Funding and TXU Europe will not extend the
exchange offer beyond six months from
[effective date of registration statement].
Funding and TXU Europe will accept for
exchange all beneficial interests in the
senior notes which are properly tendered in
the exchange offer before the expiration of
the exchange offer. The beneficial interests
in the exchange senior notes issued in
accordance with the exchange offer will
be delivered on or promptly after the
expiration date.
5
<PAGE>
Plan of Distribution of the
Exchange Offer ............... If you want to exchange beneficial interests
in the senior notes for beneficial interests
in the exchange senior notes, you must
provide Funding and TXU Europe with a
representation that:
o you are not an affiliate, within
the meaning of Rule 405 of the
Securities Act, of Funding or TXU
Europe;
o you are acquiring the beneficial
interests in the exchange senior
notes in the ordinary course of
business; and
o you have no arrangement or
understanding with any person to
participate in a distribution,
within the meaning of the
Securities Act, of the exchange
senior notes.
If you are not a broker-dealer, you must
also represent that you are not engaged in,
and do not intend to engage in, a
distribution of the exchange senior notes.
Any broker-dealer who receives exchange
senior notes in the exchange offer must
deliver a prospectus meeting the
requirements of the Securities Act in
connection with a resale of exchange senior
notes. If you are a broker-dealer who is
receiving exchange senior notes in exchange
for senior notes that were acquired, other
than directly from Funding, for your own
account as a result of market-making or
other trading activities, you must
acknowledge to Funding and TXU Europe that
you will deliver a prospectus meeting the
requirements of the Securities Act in any
resale of the exchange senior notes.
However, you will not be admitting that you
are an underwriter within the meaning of the
Securities Act by making that acknowledgment
and delivering the prospectus. If you are a
broker-dealer who acquired the senior notes
from Funding, you cannot rely on the
interpretations of the staff of the SEC's
Division of Corporation Finance in the
no-action letters with respect to resales.
Instead, you must comply with the
registration and prospectus delivery
requirements of the Securities Act, which
include your being named as a selling
securityholder, in connection with any sale
or transfer of the senior notes or the
exchange senior notes.
Funding and TXU Europe have not entered into
any arrangement or understanding with any
person to distribute the exchange senior
notes. They also have not agreed to
compensate a broker-dealer who makes on
behalf of the holders an exchange
of the senior notes for the exchange senior
notes. Funding and TXU Europe will pay the
expenses of registering the exchange senior
notes.
6
<PAGE>
Conditions of the Exchange Offer Funding and TXU Europe will be required to
complete the exchange offer only if specific
conditions are satisfied. If any of the
conditions to the exchange offer are not
satisfied, however, Funding and TXU Europe
may nevertheless waive them and complete the
exchange offer. See EXCHANGE OFFER
--"Conditions." Funding and TXU Europe may
terminate the exchange offer after it has
been open for 30 days and they may amend the
exchange offer at any time before the
expiration date.
Procedures for Beneficial Owners If you are an owner of a beneficial interest
in the senior notes and if you want to
tender your interest in the senior notes in
the exchange offer, you must contact your
securities intermediary and instruct it to
tender on your behalf.
Withdrawal Rights .............. You may withdraw your tender of beneficial
interests in the senior notes through your
securities intermediary at any time before
5:00 p.m., New York City time, on the
expiration date.
Special Procedures for Holders
of Registered Certificates for
Senior Notes ................. If there are certificated registered senior
notes, an appropriate Letter of Transmittal
and specific instructions will be delivered
to the registered holders. When a holder
executes a Letter of Transmittal, it is
making representations to Funding and TXU
Europe.
Exchange Agent ................. The Bank of New York, New York.
THE EXCHANGE SENIOR NOTES
The Exchange Senior Notes....... $350,000,000 principal amount of Funding's
6.15% exchange senior notes due May 15,
2002.
$650,000,000 principal amount of Funding's
6.45% exchange senior notes due May 15,
2005.
$500,000,000 principal amount of Funding's
6.75% exchange senior notes due May 15,
2009.
Interest Accrual ............... Interest on each exchange senior note will
accrue from the date of the last interest
payment on the senior note tendered. If no
interest has been paid on the senior notes,
interest will accrue from the date of
issuance of the senior notes.
Interest Payment Dates ......... Interest will be paid on May 15 and November
15 of each year, beginning November 15,
1999.
Guarantee ...................... TXU Europe will fully, unconditionally and
irrevocably guarantee payments on the
exchange senior notes.
Ratings ........................ The exchange senior notes are expected to be
assigned ratings of BBB+ by Standard &
Poor's Ratings Services and Baa1 by Moody's
Investors Service, Inc., the same ratings as
those currently assigned to the senior
notes. These ratings will have been obtained
7
<PAGE>
with the understanding that the rating
agencies will continue to monitor the credit
ratings of Funding and TXU Europe, and will
make future adjustments when they feel it is
necessary. A rating reflects only the view
of a rating agency. It is not a
recommendation to buy, sell or hold the
exchange senior notes. Any rating can be
revised upward or downward or withdrawn at
any time by a rating agency, if it decides
the circumstances warrant that change. See
RISK FACTORS.
Ranking ........................ The exchange senior notes will be unsecured
and unsubordinated obligations of Funding
and will rank equally with all other
existing and future unsecured and
unsubordinated indebtedness of Funding.
The guarantee will be an unsecured and
unsubordinated obligation of TXU Europe. The
guarantee will rank equally with all other
existing and future unsecured and
unsubordinated indebtedness of TXU Europe.
Because TXU Europe is a holding company, the
guarantee will be effectively subordinated
to existing and future liabilities and
preference share capital of TXU Europe's
subsidiaries, with some exceptions. The
indenture does not limit the amount of
unsecured debt Funding or TXU Europe or any
of their respective subsidiaries may incur.
See RISK FACTORS. As of September 30, 1999,
TXU Europe had no secured debt and had
(pound)2.30 billion of unsecured debt
outstanding, including guarantees of
unsecured debt of finance subsidiaries of
TXU Europe. As of September 30, 1999, there
was an aggregate of (pound)2.20 billion of
debt and preference share capital of
subsidiaries of TXU Europe outstanding,
excluding debt securities of finance
subsidiaries that are guaranteed by TXU
Europe, that was senior to the guarantee.
The indenture contains restrictions on the
ability of Funding, TXU Europe and
significant subsidiaries of TXU Europe to
incur secured indebtedness unless the same
security is also provided for the benefit of
holders of the exchange senior notes.
However, in some circumstances, these
restrictions do permit them to incur secured
indebtedness without securing the exchange
senior notes or the guarantee. See
DESCRIPTION OF THE EXCHANGE SENIOR NOTES --
"Limitation on Liens."
Funding has no operations or assets. TXU
Europe derives substantially all of its
income from its operating subsidiaries.
Therefore, the ability of Funding and TXU
Europe to make payments on the exchange
senior notes or the guarantee is dependent
upon the cash flows of TXU Europe's
operating subsidiaries. See DESCRIPTION OF
THE EXCHANGE SENIOR NOTES -- "Guarantee of
TXU Europe; Effective Priority of Subsidiary
Obligations."
Optional Redemption ............ Funding may redeem the 6.45% exchange senior
notes and the 6.75% exchange senior notes in
whole at any time or in part from time to
time before maturity, at a redemption price
8
<PAGE>
which includes a make-whole premium. See
DESCRIPTION OF THE EXCHANGE SENIOR NOTES --
"Redemption" for additional information
regarding redemption prices.
The 6.15% exchange senior notes may not be
redeemed before maturity except as described
in "Additional Amounts; Tax Redemption"
below.
Additional Amounts;
Tax Redemption ............... Any payments made by Funding or TXU Europe
under the exchange senior notes or the
guarantee generally will be made without
withholding or deduction for taxes unless
required by law. If required to withhold or
deduct taxes from payments due under the
exchange senior notes or the guarantee,
then, subject to exceptions specified in the
indenture, at their option, either:
o Funding or TXU Europe will pay any
Additional Amounts necessary so
that the net amount you receive
after that withholding or deduction
will not be less than the amount
that you would have received in the
absence of the withholding or
deduction; or
o Funding will redeem all but not
part of the exchange senior notes
at their principal amount plus
accrued interest.
See DESCRIPTION OF THE EXCHANGE SENIOR NOTES
-- "Additional Amounts" and "Optional
Redemption to Avoid Additional Amounts" for
additional information. References in this
prospectus to payments made on the exchange
senior notes or under the guarantee include
any Additional Amounts that are required to
be paid.
Listing ........................ Funding has applied to list the exchange
senior notes on the Luxembourg Stock
Exchange.
Form and Denomination .......... Each series of the exchange senior notes
will be represented by one or more global
exchange senior notes in bearer form.
Certificates for these global exchange
senior notes will be deposited with The Bank
of New York, as book-entry depositary, for
the benefit of DTC and its participants. You
will not receive exchange senior notes in
certificated form unless one of the events
described under the heading DESCRIPTION OF
THE EXCHANGE SENIOR NOTES -- "Form,
Book-Entry Procedures and Transfer" occurs.
Instead, the book-entry depositary will
issue to DTC one or more certificateless
book-entry interests representing each
global exchange senior note. DTC will
operate a system of dealing in the
book-entry interests by maintaining records
of interests of DTC participants in
book-entry interests.
Beneficial interests in the exchange senior
notes will be shown on, and transfers of
these interests will be effected only
through, records maintained in book-entry
form by DTC and its direct and indirect
participants, including, in the case of
global exchange senior notes sold under
9
<PAGE>
Regulation S, depositaries for The Euroclear
System and Cedelbank, societe anonyme.
Beneficial interests in exchange senior
notes will be in minimum principal amounts
of $10,000 and multiples of $1,000 for
amounts over $10,000.
Same Day Settlement ............ Beneficial interests in the exchange senior
notes will trade in DTC's Same-Day Funds
Settlement System until maturity or
redemption. Therefore, secondary market
trading activity in those interests will be
settled in immediately available funds. See
DESCRIPTION OF THE EXCHANGE SENIOR NOTES--
"Form, Book-Entry Procedures and Transfer;
Transfers and Settlement."
Trustee and Transfer Agent ..... The Bank of New York, New York.
Paying Agents .................. The Bank of New York, New York and
Kredietbank SA Luxembourgeoise, Luxembourg.
Listing Agent .................. Kredietbank SA Luxembourgeoise, Luxembourg.
Book-Entry Depositary Under
Deposit Agreement ............ The Bank of New York, New York.
Governing Law .................. The exchange senior notes, the guarantee,
the indenture and the deposit agreement
relating to the exchange senior notes will
be governed by, and construed in accordance
with, the laws of the State of New York.
10
<PAGE>
SELECTED FINANCIAL INFORMATION
On May 19, 1998, TXU Europe obtained control of The Energy Group PLC, or
TEG, the former holding company of Eastern. At the same time, TEG disposed of
its US and Australian coal businesses and its US energy marketing business. For
financial reporting purposes, Eastern is considered to be the "Predecessor
Company" to TXU Europe. Eastern constituted 97% of TXU Europe's assets as of
June 30, 1999 and generated 100% of TXU Europe's operating revenues for the six
months ended June 30, 1999. The principal difference between the results of
operation of Eastern and the results of operation of the continuing businesses
of TEG is the interest expense associated with debt securities issued by Energy
Group Overseas, B.V., or Overseas, a financing subsidiary of TEG. See TXU
Europe's unaudited condensed consolidated pro forma statement of income for the
year ended December 31, 1998 included elsewhere in this prospectus. This pro
forma statement of income includes Eastern's operation and the interest expense
of Overseas, as if TXU Europe had acquired TEG on January 1, 1998. See also the
financial statements of Overseas included elsewhere in this prospectus.
The selected financial data of Eastern for, and as of, each of the four
years in the period ended March 31, 1998 and for the period from April 1, 1998
through May 18, 1998, have been derived from financial statements of Eastern,
which have been audited by PricewaterhouseCoopers, independent auditors. The
financial statements of Eastern for each of the four years in the period ended
March 31, 1998 have been prepared in accordance with UK GAAP. The financial
statements of Eastern for the years ended March 31, 1997 and 1998 also have been
prepared in accordance with US GAAP. Eastern's financial statements for the
period from April 1, 1998 through May 18, 1998 have been prepared in accordance
with US GAAP.
In October 1997, Overseas issued $500 million aggregate principal amount of
guaranteed debt securities. Overseas is now a subsidiary of TXU Europe, and its
financial statements for the periods from its formation through March 31, 1998
and from April 1, 1998 through May 18, 1998 are included elsewhere in this
prospectus. If interest expense of Overseas had been included in Eastern's
financial statements, (1) UK GAAP net income/(loss), ratio of earnings to fixed
charges and net interest expense would have been (pound)42 million, 2.5 and
(pound)95 million, respectively, for the year ended March 31, 1998, (2) US GAAP
net income/(loss), ratio of earnings to fixed charges and net interest expense
would have been (pound)(45) million, 1.7 and (pound)136 million, respectively,
for the year ended March 31, 1998 and (pound) (23) million, 0.1 and (pound)19
million, respectively, for the period from April 1, 1998 through May 18, 1998,
(3) UK GAAP long-term debt and other obligations, less amounts due currently,
would have been (pound)1.8 billion as of March 31, 1998 and (4) US GAAP
long-term debt and other obligations, less amounts due currently, would have
been (pound)2.3 billion as of March 31, 1998.
The selected financial data of TXU Europe for the period from formation
(February 5, 1998) through December 31, 1998, for the period from formation
through March 31, 1999 and as of December 31, 1998 and March 31, 1999, have been
derived from financial statements of TXU Europe, which have been audited by
PricewaterhouseCoopers, independent auditors. The selected financial data of TXU
Europe for the six months ended June 30, 1999 have been derived from the
unaudited financial statements of TXU Europe. The financial statements of TXU
Europe have been prepared in accordance with US GAAP. TXU Europe recorded its
approximately 22% equity interest in the net income of TEG for the period from
March to May 18, 1998 and has accounted for TEG and Eastern as consolidated
subsidiaries since May 19, 1998. Results of TXU Europe for the periods from
formation through December 31, 1998 and March 31, 1999 and for the six months
ended June 30, 1999 are not indicative of results for an annual period. Because
TXU Europe obtained control of TEG on May 19, 1998, earnings of Eastern are not
reflected in TXU Europe's results before May 19, 1998, other than as a result of
TXU Europe's 22% equity interest in the net income of TEG for the period from
March through May 18, 1998. In addition, TXU Europe's operations are affected by
seasonal weather patterns.
For more information, see MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS and the consolidated financial statements
and related notes of Eastern as of March 31, 1998 and for the two years in the
period then ended, and for the period from April 1, 1998 through May 18, 1998
and of TXU Europe as of, and for the periods from formation through, December
31, 1998 and March 31, 1999 and as of, and for the six months ended, June 30,
1999 included elsewhere in this prospectus.
TXU Europe's unaudited pro forma condensed consolidated income statement
and other consolidated data presented below for the year ended December 31, 1998
reflect the acquisition by TXU Europe of TEG as if it had occurred as of January
11
<PAGE>
1, 1998. That unaudited pro forma condensed consolidated income statement and
other consolidated data have been prepared by TXU Europe from US GAAP historical
information and assumptions deemed proper by it and include the effects of an
allocation of the purchase price paid. The unaudited pro forma condensed
consolidated income statement and other data presented in this prospectus are
shown for illustrative purposes only and are not necessarily indicative of the
future results of operations of TXU Europe or of the results of operations of
TXU Europe if the transaction had occurred as of January 1, 1998. This
information should be read in conjunction with the unaudited condensed
consolidated pro forma statement of income and related notes of TXU Europe
included elsewhere in this prospectus.
12
<PAGE>
EASTERN GROUP PLC
(PREDECESSOR COMPANY)
UK GAAP US GAAP
------------------------- ------------------------------
PERIOD
PERIOD FROM
FROM JANUARY
APRIL 1, 1,
YEAR ENDED MARCH 31, 1998 1998
--------------------------------------- THROUGH, THROUGH
MAY 18, MAY 18,
1995 1996 1997 1998 1997 1998 1998 1998
---- ---- ---- ---- ---- ---- ------- -------
((POUND) MILLION) (UN-
AUDITED)
CONSOLIDATED INCOME
STATEMENT DATA:
Operating
revenues....... 2,061 2,119 2,984 3,475 2,984 3,475 425 1,563
Operating
income/
(loss)......... 244 43 346 337 298 267 (11) 91
Net
income/
(loss).......... 141 221 265 49 (90) (38) (21) 16
UK GAAP US GAAP
------------------------- ------------
AS OF MARCH 31,
-----------------------------------------
1995 1996 1997 1998 1997 1998
---- ---- ---- ---- ---- ----
((POUND) MILLION)
CONSOLIDATED BALANCE SHEET DATA:
Total assets..................... 2,053 2,364 3,709 3,888 5,422 5,826
Common stock equity.............. 832 1,189 1,314 1,167 2,025 1,802
Minority interest................ (1) (2) 19 6 19 6
Long-term debt and other
obligations, less amounts due
currently...................... 484 682 1,466 1,499 1,837 1,976
UK GAAP US GAAP
----------------------------- ------------------------
PERIOD
PERIOD FROM
FROM JANUARY
APRIL 1, 1,
1998 1998
THROUGH THROUGH
YEAR ENDED MARCH 31, MAY MAY
--------------------------------------- 18, 18,
1995 1996 1997 1998 1997 1998 1998 1998
---- ---- ---- ---- ---- ---- ---- ----
((POUND) MILLION, EXCEPT RATIOS) (UN-
AUDITED)
CONSOLIDATED CASH
FLOW DATA (1):
Operating
activities....... 284 (189) (116) 614 292 341 74 154
Investing
activities....... (452) 306 (1,052) (238) (229) (234) (78) (139)
Financing
activities....... (5) 560 915 (148) (316) 121 16 27
OTHER CONSOLIDATED
DATA:
Earnings before
interest, taxes
and minority
interest (EBIT)
(unaudited)(2).. 217 280 364 347 303 277 (10) 92
Earnings before
interest, taxes,
minority interest,
depreciation
and amortization
(EBITDA)
(unaudited)(2).. 273 345 436 436 464 462 16 165
Ratio of earnings
to fixed charges
(unaudited)(3).. 5.8 4.9 4.2 2.6 2.5 1.7 0.1 1.6
Net interest
expense......... 14 22 46 85 88 126 16 41
13
<PAGE>
TXU EUROPE LIMITED
(SUCCESSOR COMPANY)
US GAAP
PERIOD FROM FORMATION PRO
(FEBRUARY 5, 1998) FORMA PERIOD
THROUGH YEAR FROM SIX
--------------------- ENDED FORMATION MONTHS
DECEMBER MARCH DECEMBER THROUGH ENDED
31, 31, 31, JUNE 30, JUNE 30,
1998 1999 1998 1998 1999
-------- ------- -------- --------- --------
(UNAUDITED)
((POUND) MILLION)
CONSOLIDATED INCOME
STATEMENT DATA:
Operating
revenues...... 2,165 3,338 3,690 326 1,986
Operating
income........ 314 484 508 32 288
Net income..... 77 126 94 10 76
AS OF AS OF AS OF
DECEMBER 31, MARCH 31, JUNE 30,
1998 1999 1999
------------- --------- --------
(UNAUDITED)
((POUND) MILLION)
CONSOLIDATED BALANCE SHEET DATA:
Total assets................... 8,529 8,583 8,498
Total common stock equity..... 1,535 1,581 1,605
Minority interest............. 190 200 199
Note payable to TXU Corp...... 682 682 -
Long-term debt, less amounts
due currently............... 3,629 3,754 4,538
PERIOD
PERIOD FROM FORMATION FROM SIX
(FEBRUARY 5, 1998) THROUGH FORMATION MONTHS
-------------------------- THROUGH ENDED
DECEMBER 31, MARCH 31, JUNE 30, JUNE 30,
1998 1999 1998 1999
------------- ----------- --------- ---------
(UNAUDITED)
((POUND) MILLION)
CONSOLIDATED CASH FLOW DATA:
Operating activities..... 37 44 117 378
Investing activities..... (1,767) (1,858) (1,465) (182)
Financing activities..... 2,197 2,228 3,272 (85)
PERIOD FROM
FORMATION PRO
(FEBRUARY 5, 1998) FORMA PERIOD
THROUGH YEAR FROM SIX
------------------ ENDED FORMATION MONTHS
DECEMBER MARCH DECEMBER THROUGH ENDED
31, 31, 31, JUNE 30, JUNE 30,
1998 1999 1998 1998 1999
-------- ----- -------- --------- --------
(UNAUDITED)
((POUND) MILLION)
OTHER CONSOLIDATED
DATA:
Earnings before
interest, taxes
and minority
interest (EBIT)
(unaudited)(2).... 360 531 539 45 278
Earnings before
interest, taxes,
minority interest,
depreciation
and amortization
(EBITDA)
(unaudited)(2).... 504 733 771 69 395
Ratio of earnings
to fixed charges
(unaudited)(3).... 1.5 1.7 1.4 1.4 1.8
Net interest
expense........... 205 278 341 23 137
14
<PAGE>
(1) Cash flow information on a UK GAAP basis for the years ended March 31,
1995, 1996, 1997 and 1998 have been reformatted to US GAAP
presentation style.
(2) EBIT equals earnings before interest income, interest expense, income
taxes and minority interest. EBITDA equals earnings before interest
income, interest expense, income taxes, minority interest,
depreciation and amortization. This information is provided for
informational purposes only. EBIT and EBITDA are not measures defined
under US GAAP and have not been presented in accordance with US GAAP.
Neither EBIT nor EBITDA should be construed as an alternative to
operating income under US GAAP as an indicator of operating
performance, or as an alternative to cash flows from operating
activities under US GAAP as a measure of liquidity. EBIT and EBITDA
are widely accepted financial indicators of a company's ability to
incur and service debt. However, these measures of EBIT and EBITDA may
not be comparable to similar measures presented by other companies.
(3) The ratio of earnings to fixed charges is computed as the sum of
earnings plus fixed charges divided by fixed charges. Earnings consist
of the aggregate of net income (loss) before minority interests,
income taxes and fixed charges excluding interest capitalized. Fixed
charges consist of interest expensed and capitalized and the estimated
interest portion of rent expense.
15
<PAGE>
RISK FACTORS
In addition to the other information in this prospectus, the following
factors pertain to an investment in the beneficial interests in both the
exchange senior notes offered by this prospectus and the senior notes for which
they will be exchanged.
TXU EUROPE IS A HOLDING COMPANY, AND CLAIMS OF CREDITORS OF TXU EUROPE'S
SUBSIDIARIES ARE SENIOR TO CLAIMS OF HOLDERS OF EXCHANGE SENIOR NOTES UNDER THE
GUARANTEE.
TXU Europe is a holding company. Almost all of its operating income
comes from Eastern and Eastern's subsidiaries. Almost all of TXU Europe's
consolidated assets are held by Eastern and Eastern's subsidiaries. Accordingly,
the ability of TXU Europe to service its debt, including its obligations under
the guarantee, is primarily dependent on the earnings of Eastern and its
subsidiaries and the payment of those earnings to TXU Europe in the form of
dividends, loans or advances and through repayment of loans or advances from TXU
Europe. The subsidiaries of TXU Europe, except for Funding, have no obligation
to pay any amounts due on the exchange senior notes.
The guarantee, therefore, will be effectively subordinated to debt and
preference share capital at the subsidiary level. As of September 30, 1999,
there was an aggregate of (pound)2.20 billion of debt and preference share
capital of TXU Europe's subsidiaries, other than debt securities of finance
subsidiaries that are guaranteed by TXU Europe, that was senior to the
guarantee. The financial statements of TXU Europe and Eastern included in this
prospectus show the aggregate amount of subsidiary debt and preference share
capital as of the date of those statements. This includes trade payables,
guarantees and leases, letters of credit and other obligations of TXU Europe's
subsidiaries. Upon liquidation or reorganization of a subsidiary of TXU Europe,
the claims of that subsidiary's creditors generally will be paid before payments
can be made on the guarantee or to other creditors of TXU Europe. Although some
debt instruments limit the amount of debt TXU Europe and its subsidiaries may
incur, both TXU Europe and its subsidiaries retain the ability to incur
substantial additional indebtedness and other obligations such as those under
leases, letters of credit and other instruments. See MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- "Liquidity and
Capital Resources Financing Arrangements."
Guarantees of other series of debt securities issued under the
indenture and any other unsecured and unsubordinated debt obligations of TXU
Europe will rank equally in right of payment to the guarantee of the exchange
senior notes. See DESCRIPTION OF THE EXCHANGE SENIOR NOTES -- "Limitation on
Liens."
TXU EUROPE HAS ALREADY INCURRED SUBSTANTIAL INDEBTEDNESS. THIS LEVEL OF
INDEBTEDNESS MAY LIMIT TXU EUROPE'S ABILITY TO SERVICE ITS INDEBTEDNESS AND TO
CONDUCT BUSINESS.
As of September 30, 1999, the ratio of TXU Europe's consolidated net
debt to consolidated net debt plus equity as determined in accordance with US
GAAP was approximately 68.5%. See the consolidated financial statements of TXU
Europe and the notes that accompany each of them. The degree to which TXU Europe
and its consolidated subsidiaries may be leveraged in the future could affect
their ability to service their indebtedness, to make capital investments, to
take advantage of business opportunities, to respond to competitive pressures
or to obtain additional financing. In addition, TXU Europe and some of its
subsidiaries have outstanding indebtedness, including the senior notes, that
contains cross-default provisions. The exchange senior notes will have
cross-default provisions. Therefore, a default by TXU Europe or those
subsidiaries on other obligations could cause a default under indebtedness,
including the exchange senior notes, that contains cross-default provisions.
FUNDING HAS NO OPERATIONS OR ASSETS. IF TXU EUROPE DOES NOT PROVIDE SUFFICIENT
FUNDS, FUNDING WILL NOT BE ABLE TO MAKE PAYMENTS ON THE EXCHANGE SENIOR NOTES.
Funding is a special purpose entity formed solely as a financing
vehicle for TXU Europe and its affiliates. Therefore, Funding's ability to make
interest and other payments on the exchange senior notes is entirely dependent
upon TXU Europe making payments on its obligations to Funding as and when
16
<PAGE>
required. If TXU Europe were not to make those payments for any reason, Funding
would not have sufficient funds to make payments on the exchange senior notes.
Unexpected declines in Eastern's future business, which may result
from the increasingly competitive environment in the UK electric and gas utility
industries, increases in operating or capital costs, changes in regulatory
policies or the inability to borrow additional funds, could impair Eastern's
ability to meet its debt service obligations, or to make distributions to TXU
Europe. This could adversely affect (a) TXU Europe's ability to make payments on
its obligations to Funding as well as Funding's ability to make payments on the
exchange senior notes and (b) TXU Europe's ability to make any payments pursuant
to the guarantee. No assurance can be given that additional financing will be
available when needed, or, if available, will be obtainable on terms that are
favorable to TXU Europe or Funding.
CHANGES IN CURRENCY EXCHANGE RATES MAY AFFECT FUNDING'S AND TXU EUROPE'S ABILITY
TO MAKE PAYMENTS ON THE EXCHANGE SENIOR NOTES.
TXU Europe's revenues generated by Eastern will be primarily received
in pounds sterling while the price which was paid to Funding for the senior
notes was paid in US dollars, and the interest and principal payment obligations
on the exchange senior notes will be payable in US dollars. As a result, any
change in the currency exchange rate that increases the effective principal and
interest payment obligations represented by the exchange senior notes upon
conversion of pounds sterling-based revenues into US dollars may, if not
appropriately hedged, have a material adverse effect on TXU Europe and Funding
or on their ability to make payments on the exchange senior notes or the
guarantee. See EXCHANGE RATES for information concerning the Noon Buying Rate
for pounds sterling expressed in US dollars. Although TXU Europe has entered
into transactions to hedge risks associated with exchange rate fluctuations,
there can be no assurance that the counterparties to those transactions will
perform their obligations under those transactions or that the transactions will
be successful in reducing those risks.
THERE ARE A NUMBER OF REGULATORY RISKS ASSOCIATED WITH EASTERN'S BUSINESSES.
Governmental agencies in the UK are reviewing various elements of the
electricity generation, supply and distribution industry, with a view to
increasing competition in each of these segments of the electricity business.
DISTRIBUTION PRICE REVIEW COULD SUBSTANTIALLY REDUCE REVENUES OF EASTERN'S
NETWORKS BUSINESS AND COULD LEAD TO A DOWNGRADE IN THE RATINGS OF THE EXCHANGE
SENIOR NOTES.
Eastern's networks business, which primarily involves the distribution
of electricity in its UK service territory, accounted for approximately 44% of
TXU Europe's profits before interest, taxes and exceptional items for the six
months ended June 30, 1999. This business is regulated under a governmental
license, and electricity distribution pricing is determined by a distribution
price formula established by the regulator. Application of this formula may or
may not allow Eastern to recoup all of its costs with respect to this business.
The various elements of the formula and the terms of Eastern's license are
subject to amendment from time to time. A review of the distribution price
formula is scheduled to be completed by the regulator in April 2000. In his
draft proposals for the distribution price control review which were released in
August 1999 and adjusted in October 1999, the regulator has proposed a
substantial decrease in distribution prices charged by the networks business in
its service territory. TXU Europe cannot predict the final outcome of the
distribution price control review or what the result of the review will be on
TXU Europe's revenues or cash flow or on the rating of the exchange senior
notes. For further information, see EASTERN BUSINESS OVERVIEW -- "UK
Regulatory Matters--Networks Regulation -- Distribution Price Regulation."
SUPPLY PRICE RESTRAINTS MAY REDUCE REVENUES OF EASTERN'S ELECTRICITY SUPPLY
BUSINESS.
Supply charges to residential and small business customers in
Eastern's electricity distribution area account for a substantial portion of
Eastern's supply businesses. They are currently regulated by maximum price
restraints. When the regulator determines that an adequate level of competition
has been established, these supply price restraints are expected to no longer
apply. A determination is not expected for at least two years. Until then, these
17
<PAGE>
maximum price restraints could adversely affect TXU Europe's revenues from these
markets. For further information, see EASTERN BUSINESS OVERVIEW -- "UK
Regulatory Matters--Energy Regulation; Electricity Supply Price Regulation."
UK REGULATIONS ENCOURAGING FURTHER COMPETITION COULD RESULT IN EASTERN LOSING
CUSTOMERS OR REDUCING ITS PRICES TO REMAIN COMPETITIVE.
The phasing in of competition for electricity supply to all service
areas, each of which had previously limited supply service to a single
authorized regional electricity company, was completed in May 1999. With the
introduction of full retail competition, it is expected that supply price
restraints will no longer apply to current supply customers after April 1, 2000,
except for a control on prices charged to residential and small business
customers until an adequate level of competition is established. The generation
market and electricity trading arrangements will also be affected by the outcome
of the current regulatory reviews of energy sources and pool arrangements by
governmental agencies. No assurance can be given that Eastern will maintain or
increase its current market share and margins in each of these markets as they
become more competitive.
OTHER REGULATORY RISKS
Subsidiaries of TXU Europe hold various licenses that subject their
operations to comprehensive regulation. As a result of recent UK government
reviews of the regulation of electric and gas industries, various reforms are
anticipated, which may result in:
o Divestiture of generating plants, by large generators like
Eastern;
o Replacement of the wholesale trading market for electricity in
England and Wales, commonly referred to as the Pool, into which
all electric generation is now sold by generators, with a set of
voluntary markets;
o Separation of the management of the distribution and supply
businesses and/or the legal entities in which those businesses
are held;
o Continuation of the restrictions which limit the construction of
new gas-fired generating plants; and
o Changes encouraging increased competition.
No assurance can be given as to what regulatory reforms may be
implemented, if any, when they might be implemented and how they might affect
Eastern and TXU Europe. For further information, see INDUSTRY BACKGROUND and
EASTERN BUSINESS OVERVIEW - "UK Regulatory Matters."
PROPOSED EUROPEAN UNION (EU) DIRECTIVE ON THE TAXATION OF SAVINGS INCOME COULD
RESULT IN WITHHOLDING TAXES. IF FUNDING WERE REQUIRED TO WITHHOLD TAXES, IT
WOULD HAVE TO PAY ADDITIONAL AMOUNTS TO HOLDERS AND WOULD BE ABLE TO REDEEM THE
EXCHANGE SENIOR NOTES AT THEIR PRINCIPAL AMOUNT.
In May 1998, the European Commission presented to the Council of
Ministers of the European Union a proposal to oblige member states to adopt
either a "withholding tax system" or an "information reporting system" in
relation to interest, discounts and premiums. It is unclear whether this
proposal will be adopted, and, if it is adopted, whether it will be adopted in
its current form. The "withholding tax system" would require a paying agent
established in a member state to withhold tax at a minimum rate of 20 percent,
from any interest, discount or premium paid to an individual resident in another
member state unless that individual presents a certificate obtained from the tax
authorities of the member state in which he or she is resident confirming that
those authorities are aware of the payment due to that individual. The
"information reporting system" would require a member state to supply to other
member states details of any payment of interest, discount or premium made by
paying agents within its jurisdiction to individuals resident in those member
states. For these purposes, the term "paying agent" is broadly defined and
includes an agent who collects interest, discounts or premiums on behalf of an
individual beneficially entitled to payment of those amounts. If this proposal
were to be adopted, it would not apply to payments of interest, discounts and
premiums made before January 1, 2001. If this proposal were to be adopted, tax
18
<PAGE>
might be required to be withheld from some or all payments on and after January
1, 2001. If that happened, Funding would be required to pay Additional Amounts
to the holders of exchange senior notes. In the alternative, Funding could
redeem the exchange senior notes at a price equal to their principal amount plus
accrued interest. While the proposal presently applies only to payments made to
individuals, there can be no assurance that it will not be extended to other
persons.
INTERNAL AND EXTERNAL DATA PROCESSING ERRORS AFTER DECEMBER 31, 1999 COULD
REDUCE EASTERN'S REVENUES AND NET INCOME.
Many existing computer programs use only the last two digits to
identify a year in the date field. Thus, they would not recognize a year that
begins with 20 instead of 19. If not corrected, many computer applications could
fail or produce erroneous data on or about the year 2000.
As Eastern's Year 2000, or Y2K, program proceeds, Eastern will
continue to assess its internal and external risks, not all of which are within
its control. There can be no assurance that all material Y2K risks within
Eastern's control will have been adequately identified and corrected before the
end of 1999. In addition, Eastern's operations are connected with the Pool,
along with those of all UK energy companies that use the Pool, and depend on the
reliability of the national high voltage transmission system and the operations
of the Pool. For additional information about the Pool, see INDUSTRY BACKGROUND
- - "The Electricity Industry in England and Wales --The Pool." Eastern can
make no assurances regarding the Y2K readiness of systems and parties outside
its control, nor can it currently assess the effect of any non-readiness by
those systems or parties. For further information, see MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--"Year 2000
Issues."
UK COURTS MIGHT NOT ENFORCE JUDGMENTS RENDERED OUTSIDE OF THE UK, WHICH MAY MAKE
IT DIFFICULT TO COLLECT ON JUDGMENTS RENDERED AGAINST FUNDING AND TXU EUROPE.
Funding is a private unlimited company and TXU Europe is a private
limited company. Each is incorporated under the laws of England and Wales.
Substantially all the assets of Funding and TXU Europe are located outside the
US. Funding and TXU Europe have appointed Thelen Reid & Priest LLP, New York,
New York, as their authorized agent upon which process may be served in any
action arising out of or based upon the indenture, the exchange senior notes,
the guarantee, the deposit agreement or the registration rights agreement that
may be instituted in any US Federal or state court having subject matter
jurisdiction in the Borough of Manhattan, The City of New York, New York, and
have consented to the jurisdiction of those courts in any of those actions.
However, it may not be possible for investors to effect service of process
within the US upon Funding or TXU Europe in connection with any other actions or
to enforce against either of them, in original actions or in actions for
enforcement of judgments of US courts, civil liabilities based upon US
securities laws.
AN EXCHANGE OF SENIOR NOTES FOR EXCHANGE SENIOR NOTES COULD HAVE TAX
CONSEQUENCES.
An exchange of property for other property that is not materially
different in kind or extent is not a taxable exchange for US federal income
tax purposes. The exchange senior notes are identical to the senior notes,
except that the exchange senior notes will be registered under the Securities
Act, cannot have Additional Interest, and will not bear legends restricting
their transferability. Under applicable regulations, the exchange
of senior notes for exchange senior notes should not constitute a taxable
event because these differences should not be considered economically
significant, and therefore the exchange senior notes should not be considered
to differ materially from the senior notes. However, there is no authority
addressing transactions similar to the exchange offer. If the exchange
were deemed to be a taxable event, holders of senior notes would recognize
gain or loss equal to the difference, if any, between the fair market value
of the exchange senior notes received and the holder's tax basis in the
senior notes surrendered, determined as of the date of the exchange.
19
<PAGE>
PRESENTATION OF CURRENCY, FINANCIAL AND OTHER INFORMATION
TXU Europe publishes its consolidated financial statements in pounds
sterling. In this prospectus, references to "pounds sterling," "GBP," "pence" or
"(pound)" are to currency of the United Kingdom, or UK, and references to "US
dollars," "US$" or "$" are to US currency. References to "NLG" are to currency
of The Netherlands. As used in this prospectus, "US GAAP" means US generally
accepted accounting principles and "UK GAAP" means UK generally accepted
accounting principles. References to "MW" are to megawatts, "MWh" are to
megawatt hours, "kW" are to kilowatts, "kWh" are to kilowatt hours, "TWh" are to
terawatt hours, "GW" are to gigawatts, "GWh" are to gigawatt hours, "kV" are to
kilovolts and "LV" are to low volts.
For the convenience of the reader, this prospectus contains
translations of some pounds sterling amounts into US dollars at specified rates,
or, if the rate has not been specified, at the noon buying rate in New York City
for cable transfers in pounds sterling as certified for customs purposes by the
Federal Reserve Bank of New York (Noon Buying Rate) on June 30, 1999 of $1.58 =
(pound)1.00. Funding and TXU Europe do not make any representation that the
pounds sterling amounts have been, could have been or could be converted into US
dollars at the rates indicated or at any other rates. See EXCHANGE RATES for
historical information regarding Noon Buying Rates.
20
<PAGE>
TXU EUROPE LIMITED
Almost all of TXU Europe's operating income is derived from Eastern
and Eastern's subsidiaries and almost all of TXU Europe's consolidated assets
are held by Eastern and Eastern's subsidiaries. TXU Europe is a private limited
company incorporated in England and Wales in February 1998 and is an indirect
wholly-owned subsidiary of TXU Corp. TXU Europe owns 90% of the outstanding
ordinary shares of TXU Finance (No. 2) Limited, or TXU Finance. The remaining
10% of TXU Finance's outstanding ordinary shares are owned by a wholly-owned US
subsidiary of TXU Corp. In May 1998, TXU Acquisitions Limited (Company No.
3455523), a wholly-owned subsidiary of TXU Finance, gained control of TEG, the
former holding company of Eastern, after all conditions to its offer for all the
ordinary shares of TEG had been satisfied or waived. In August 1998, TXU
Acquisitions completed the acquisition of TEG. In October 1998 TXU Acquisitions
restructured its subsidiaries so that Eastern is now owned by another subsidiary
of TXU Acquisitions.
EASTERN GROUP PLC
TXU Europe's major business operations are conducted through the
following subsidiaries of Eastern:
o Eastern Power and Energy Trading Limited (Company No. 3116221),
or Eastern Trading, which coordinates and manages for Eastern the
price and volume risks associated with Eastern's generation,
electricity and gas retail businesses and those of third parties;
o Eastern Electricity plc, or Eastern Electricity, one of the
largest retailers of electricity in the UK, and Eastern Energy
Limited (Company No. 3181389), which supplies electricity outside
the authorized area served by Eastern Electricity;
o Eastern Generation Limited (Company No. 2353756), or Eastern
Generation, one of the largest generators of electricity in the
UK; and
o Eastern Natural Gas Limited (Company No. 2907433), or Eastern
Natural Gas, one of the largest retail suppliers of natural gas
in the UK.
Eastern sells electricity and natural gas under the brand name of
Eastern Energy. The operations of Eastern Trading and Eastern Generation are
treated by Eastern and TXU Europe as one segment for reporting purposes. The
electric and gas supply business is treated as the Energy Retail segment and the
distribution business is treated as the Networks segment for reporting purposes.
TXU EASTERN FUNDING COMPANY
Funding is a private unlimited company incorporated under the laws of
England and Wales and a wholly-owned indirect subsidiary of TXU Europe. Funding
was organized solely to provide funding for the operations of TXU Europe and its
subsidiaries by issuing debt securities, including the senior notes and the
exchange senior notes, to investors and lending the proceeds to TXU Europe.
Funding's authorized and issued share capital consists of 200 ordinary shares
with a nominal value of (pound)1 per share. Funding currently does not have any
outstanding debt other than the senior notes.
21
<PAGE>
OWNERSHIP STRUCTURE
The following organizational chart illustrates the relationship of TXU
Europe to TXU Corp, Funding and Eastern (all ownership interests are 100% unless
otherwise indicated).
Chart of Ownership Structure appears here.
22
<PAGE>
CAPITALIZATION OF TXU EUROPE LIMITED
The following table describes the actual consolidated capitalization
of TXU Europe as at June 30, 1999, and the consolidated capitalization of TXU
Europe adjusted to reflect the exchange of the exchange senior notes for senior
notes. This table should be read in conjunction with SUMMARY -- "Selected
Financial Information," MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS and the consolidated financial statements
and related notes of TXU Europe included elsewhere in this prospectus. Except as
disclosed in the "As Adjusted" columns, there have been no material changes in
the capitalization of TXU Europe since June 30, 1999.
Solely for the convenience of the reader, UK pounds sterling amounts
have been translated into US dollars at the Noon Buying Rate on June 30, 1999 of
$1.58 = (pound)1. See EXCHANGE RATES.
June 30, 1999
--------------------------------------------------
Actual As Adjusted
------------------------ ------------------------
L $ % L $ %
------- ------- ------ ------- ------- ------
(millions, except %)
Long-term debt and other
obligations, less
amounts due
currently:
Notes and bonds:
Guaranteed notes... 317 501 5.0 317 501 5.0
Sterling bonds..... 826 1,305 13.0 826 1,305 13.0
Senior notes ...... 921 1,455 14.5 - - -
Exchange senior
notes............ - - - 921 1,455 14.5
Other:
Credit Facilities
Agreement........ 923 1,458 14.6 923 1,458 14.6
Rent factoring
loans............ 311 491 4.9 311 491 4.9
Other unsecured
loans............ 134 212 2.1 134 212 2.1
Capital leases..... 782 1,236 12.4 782 1,236 12.4
Cross border
leases........... 324 512 5.1 324 512 5.1
------- ------- ------ ------- ------- ------
Total long-term debt
and other
obligations,
less amounts
due currently......... 4,538 7,170 71.6 4,538 7,170 71.6
------- ------- ------ ------- ------- ------
Minority interest.......... 199 314 3.1 199 314 3.1
------- ------- ------ ------- ------- ------
Common stock equity........ 1,605 2,536 25.3 1,605 2,536 25.3
------- ------- ------ ------- ------- ------
Total
capitalization... L6,342 $10,020 100.0% L6,342 $10,020 100.0%
====== ======= ====== ====== ======= ======
23
<PAGE>
EXCHANGE RATES
The following table lists, for the periods indicated, information
concerning the exchange rates between UK pounds sterling and US dollars based on
the Noon Buying Rate in New York City for cable transfers in pounds sterling as
certified for customs purposes by the Federal Reserve Bank of New York. The
"Average" is the average of the Noon Buying Rates in effect on the last business
day of each month during the relevant period.
PERIOD PERIOD END AVERAGE HIGH LOW
------ ---------- ------- ---- ---
($ PER (POUND) 1.00)
Fiscal Year Ended:
March 31, 1994....................... 1.49 1.50 1.59 1.46
March 31, 1995....................... 1.62 1.56 1.64 1.46
March 31, 1996....................... 1.53 1.56 1.62 1.50
March 31, 1997....................... 1.64 1.60 1.71 1.49
March 31, 1998....................... 1.68 1.65 1.70 1.58
December 31, 1998.................... 1.66 1.66 1.72 1.61
Twelve months ended March 31, 1999... 1.61 1.65 1.72 1.60
Six months ended June 30, 1999....... 1.58 1.61 1.69 1.58
On September 30, 1999, the Noon Buying Rate was $1.66 = (pound)1.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. Funding and TXU
Europe have based these forward-looking statements on their current expectations
and projections about future events and assumptions they believe to be
reasonable. These forward-looking statements are subject to risks, uncertainties
and assumptions about Funding, TXU Europe and TXU Europe's subsidiaries that
could cause the actual results of Funding or TXU Europe to differ materially
from those projected in any forward-looking statement, including, among other
things:
o general economic and business conditions in the UK and in the
service area for Eastern Electricity, formerly Eastern
Electricity's authorized area, which has been opened to
competition;
o unanticipated changes in interest rates, in rates of inflation,
or in foreign exchange rates;
o prevailing governmental, statutory, regulatory or administrative
policies and initiatives affecting TXU Europe, its subsidiaries
or the UK or European electric and gas utility industries;
o general industry trends;
o competition;
o power costs and availability;
o changes in business strategy, development plans or vendor
relationships;
o availability, terms and deployment of capital and capital market
conditions;
o availability of qualified personnel;
o changes in, or the failure or inability to comply with,
governmental regulations, including, among other things,
environmental regulations;
o changes in tax laws;
24
<PAGE>
o weather conditions and other natural phenomena;
o unanticipated population growth or decline, and changes in market
demand and demographic patterns;
o access to adequate transmission facilities to meet changing
demand;
o pricing and transportation of oil, coal, natural gas and other
commodities;
o unanticipated changes in operating expenses and capital
expenditures;
o the ability of TXU Europe to enter into financial instruments to
hedge various market risks or the inability of the counterparties
to meet their obligations with respect to financial instruments;
o changes in technology used and services offered by Eastern;
o unanticipated problems related to Eastern's internal Y2K
initiative and potential adverse consequences related to Y2K
non-compliance of third parties; and
o other factors described in this prospectus.
Any forward-looking statements speak only as of the date of this
prospectus. Funding and TXU Europe undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this prospectus might not
occur.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The discussion below should be read in conjunction with the
consolidated financial statements and the related notes of TXU Europe, Eastern
and Overseas appearing elsewhere in this prospectus. As described under SUMMARY
- - "Selected Financial Information," for financial reporting purposes, Eastern is
considered the predecessor company to TXU Europe.
ACQUISITION OF THE ENERGY GROUP PLC BY TXU CORP
On May 19, 1998, TXU Acquisitions, an indirect, wholly-owned
subsidiary of TXU Corp, gained control of TEG after all conditions to its offer
for all of the ordinary shares of TEG, the former holding company of Eastern,
were satisfied or waived. On August 7, 1998, TXU Acquisitions completed its
acquisition of TEG.
In connection with the offer and immediately before TXU Acquisitions
gained control of TEG, subsidiaries of TEG completed the sale of TEG's former
coal and power trading interests in the US and Australia, referred to as the
Peabody Sale. The adjusted gross consideration for the Peabody Sale was $2.1
billion ((pound)1.3 billion).
ACCOUNTING IMPACTS OF THE ACQUISITION
Purchase accounting adjustments
- -------------------------------
TXU Europe's acquisition of TEG became effective May 19, 1998 and was
accounted for as a purchase in accordance with US GAAP. Accordingly, the results
of operations of Eastern and other subsidiaries of TEG acquired by TXU Europe
have been consolidated into the results of operations of TXU Europe beginning on
that date. The total purchase consideration for the TEG businesses acquired,
which refers to TEG exclusive of the operations sold in the Peabody Sale, was
approximately (pound)4.4 billion. At the date of the acquisition, TEG had assets
of (pound)6.0 billion, including cash of (pound)2.0 billion, and liabilities of
(pound)4.5 billion, including debt of (pound)2.9 billion. The excess of the
purchase consideration plus acquisition costs over the net fair value of
tangible and identifiable intangible assets acquired and liabilities assumed
resulted in goodwill of (pound)3.5 billion, which is being amortized over 40
years. See Note 1 to TXU Europe's consolidated financial statements.
Accounting for coal-fired power stations
- ----------------------------------------
Eastern entered into leases for five power stations in June and July
1996 for terms of 99 years. Under US GAAP, leases for two of the stations are
accounted for as operating leases, and leases for three of the stations are
accounted for as capital leases. Before the acquisition, the capital leased
assets were being depreciated over 12 years and depreciation expense totalled
(pound)49 million, (pound)59 million and (pound)8 million for the years ended
March 31, 1997 and 1998 and for the period from April 1, 1998 through May 18,
1998, respectively. The fixed operating lease payments were being expensed on a
straight-line basis over 12 years, resulting in expense of (pound)32 million for
the year ended March 31, 1997, (pound)42 million for the year ended March 31,
1998 and (pound)6 million for the period from April 1, 1998 through May 18,
1998. Twelve years represented management's best estimate of the remaining
useful lives of the power plants. Contingent payments of approximately (pound)6
per megawatt hour, indexed to inflation, linked to output from these power
stations are payable for up to the first seven years of operation. No
output-linked payments are required after the first seven years of operation.
Before the acquisition by TXU Corp, under US GAAP, these output-linked payments
were charged to expense by Eastern in the period in which they were accruable.
Output-linked payments charged to expense by Eastern totalled (pound)99 million
for the year ended March 31, 1997, (pound)152 million for the year ended March
31, 1998 and (pound)13 million for the period from April 1, 1998 through May 18,
1998.
At the time of the acquisition of TEG, TXU Europe established the fair
value of the capital leased assets and associated debt, including the
output-linked payments. Additionally, as a result of alternative operating
methodologies to be employed by TXU Corp, the estimated useful lives of these
five power stations were extended to a range of 18 to 22 years from original
lease inception.
26
<PAGE>
After the acquisition, total lease expense for all the coal-fired
power stations for the period from formation through March 31, 1999 was
(pound)94 million.
Accounting for unfavorable gas and electricity purchase contracts
- -----------------------------------------------------------------
In addition, TXU Europe recorded a liability at the time of the
acquisition of TEG of (pound)257 million for unfavorable gas and electricity
purchase contracts. This liability, which is being amortized over the terms of
the unfavorable contracts, is based on the estimated fair market value of these
contracts over the present value of the future cash flows under the contracts at
the applicable discount rates and prices. Although amortization of the liability
for unfavorable contracts will reduce the reported expense related to this item,
it will not impact TXU Europe's actual payments or cash flow obligations.
RESULTS OF OPERATIONS
The business operations of Eastern were not significantly changed as a
result of the purchase by TXU Acquisitions. For purposes of the discussion of
operating revenues for the six months ended June 30, 1999 compared to the six
months ended June 30, 1998, the revenues of Eastern for the period from January
1, 1998 through May 18, 1998 have been combined with the revenues of TXU Europe
for the period from May 19, 1998 through June 30, 1998. For purposes of the
discussion of operating revenues for the year ended March 31, 1999 compared to
the year ended March 31, 1998, revenues of Eastern for the period from April 1,
1998 through May 18, 1998 have been combined with the revenues of TXU Europe for
the period from May 19, 1998 through March 31, 1999. None of this combined
information has been audited. The post-acquisition results of TXU Europe include
the results of Eastern plus purchase accounting adjustment and financing costs
of the acquisition. For a discussion of significant purchase accounting
adjustments, see -- "Introduction--Accounting Impacts of the Acquisition."
OPERATING RESULTS
Energy
- ------
Eastern's energy business is comprised of the energy retail and the
energy management and generation segments. Until October 1996, Eastern's energy
operations were only in the UK, where the increase in demand for electricity in
recent years has been modest. However, Eastern managed to increase the profit
attributable to its energy operations significantly by:
o adding related assets, including three power stations leased from
National Power in June 1996 and two power stations leased from
PowerGen in June and July 1996, which increased Eastern's
generation capacity by almost 6,000 MW;
o successfully expanding electricity and gas sales in markets
opened to competition; and
o developing energy management activities to optimize the portfolio
of physical assets and supply contracts.
Prior to May 1999, Eastern had a license, or exclusive franchise, to
sell electricity to all customers in its authorized distribution area that had
an annual maximum demand of less than 100kW. Because this franchise market for
electricity sales became fully deregulated in May 1999, these customers now are
referred to as ex-franchise customers. Deregulation of the franchise market
allows Eastern to compete for ex-franchise customers outside its authorized
distribution area. Other licensed electricity suppliers also can compete with
Eastern for ex-franchise customers in Eastern's authorized distribution area.
Eastern cannot predict the effect that increased competition due to the
deregulation of the franchise market will have on its results of operations.
The prices that the energy retail business can charge in the
ex-franchise market are subject to a price control formula that sets a maximum
price. The current supply price control formula is under review by the Office of
Gas and Electricity Markets. In October 1999, the Office of Gas and Electricity
Markets is expected to issue proposed price adjustments for the electricity
27
<PAGE>
supply businesses. The final Office of Gas and Electricity Markets report is
expected in November 1999, and the supply price adjustments are expected to
become effective April 1, 2000. TXU Europe and Eastern cannot predict at this
time either the final price adjustments that will be applicable to Eastern or
the ultimate impact of those adjustments on TXU Europe's financial position,
results of operations or cash flows.
Networks
- --------
The networks business primarily consists of Eastern's electricity
distribution business in the UK. The networks business has been a predictable
source of operating income and cash flow and, historically, the growth in units
of electricity distributed has generally matched increases in the gross domestic
product for the UK. The networks business is highly regulated. The rates charged
by the networks business in the UK are regulated by a distribution price control
formula. This formula is subject to periodic review and adjustment. Two
distribution price control reviews by the Office of Electricity Regulation
covering England, Wales and Scotland in 1994 and 1995 established the current
distribution price control formula. Based on the current distribution price
control formula, future increases in profit by the networks operations will
depend upon unit growth and productivity improvements, which there can be no
assurance Eastern will achieve. A further distribution price control review is
scheduled to be completed in April 2000. On August 12, 1999, the Office of Gas
and Electricity Markets, the successor to the Office of Electricity Regulation
covering England, Wales and Scotland, issued a draft report, adjusted on
October 8, 1999, proposing a range of substantial net revenue reductions for the
distribution businesses of all regional electricity companies in the UK. The
final Office of Gas and Electricity Markets report is expected at the end of
November 1999, and the distribution price adjustments are expected to become
effective April 1, 2000. TXU Europe and Eastern are analyzing the draft proposal
and cannot predict at this time either the final price adjustments that will be
applicable to Eastern or the ultimate impact of those adjustments on TXU
Europe's financial position, results of operations or cash flows.
Eastern's retail sales and units distributed through the network were
as follows:
SIX MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
-------------------------- -------------------
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
Retail sales (units sold):
Electricity (GWh)... 32,546 35,920 37,859 18,599 19,335
Gas (millions of
therms)........... 1,266 1,262 1,352 664 702
Network sales
(GWh distributed)... 31,550 31,776 32,700 16,224 17,206
The following tables set out the revenues by segment, total operating
income and net interest expense of Eastern and TXU Europe for the periods
indicated:
EASTERN AND TXU
EASTERN TXU EUROPE EUROPE
---------------- ----------------- ------
SIX MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
-------------------------- ----------------
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
((POUND) MILLION)
Revenues:
Energy:
Energy
retail............ 2,158 2,151 2,298 1,138 1,170
Energy
management
and generation.... 952 1,337 1,487 880 983
Networks.................. 420 414 427 212 220
Other..................... 44 69 35 15 6
Intra-group sales......... (509) (496) (484) (364) (393)
----- ----- ----- ----- -----
2,984 3,475 3,763 1,881 1,986
----- ----- ----- ----- -----
28
<PAGE>
EASTERN TXU EUROPE
------------------------------------ --------------
YEAR ENDED MARCH 31, APRIL 1, 1998 FORMATION
-------------------- THROUGH THROUGH
1997 1998 MAY 18, 1998 MARCH 31, 1999
------- ------ -------------- --------------
((POUND) MIlLION)
Operating income ........ 298 267 (11) 484
Net interest expense .... 88 126 16 278
EASTERN TXU EUROPE
-------------------- ---------------------------------
SIX MONTHS
JANUARY 1, 1998 FORMATION THROUGH ENDED
THROUGH MAY 18, 1998 JUNE 30, 1998 JUNE 30, 1999
-------------------- ----------------- -------------
((POUND) MILLION)
Operating income......... 91 32 288
Net interest expense..... 41 23 137
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
Revenues
- --------
Energy retail - Revenues in the energy retail operation increased by
approximately 3% from (pound)1.1 billion for the six months ended June 30, 1998
to (pound)1.2 billion for the six months ended June 30, 1999. The revenues are
primarily determined by the volumes of gas and electricity sold and the unit
sales prices. The increase in revenue arises from additional revenues in the gas
residential market of (pound)87 million offset by lower revenues in the
electricity residential market of (pound)17 million as a result of these markets
being fully opened to competition.
Energy management and generation - Revenues in the energy management
and generation operations increased by approximately 12% from (pound)880 million
for the six months ended June 30, 1998 to (pound)983 million for the six months
ended June 30, 1999. This increase was principally attributable to increased
trading volumes in the gas portfolio which resulted in approximately (pound)135
million in revenue, partially offset by the loss of (pound)18 million of revenue
due to a fire at a coal-fired power station.
Networks - Revenues in the networks business increased by
approximately 4% from (pound)212 million in the six months ended June 30, 1998
to (pound)220 million in the six months ended June 30, 1999. This increase was
primarily due to an increase of 6.1% in the GWh distributed, resulting in an
approximately 3% increase in regulated revenue, and an increase in regulated
prices of approximately 1%.
Other - Other revenues decreased by approximately 60% from (pound)15
million in the six months ended June 30, 1998 to (pound)6 million in the six
months ended June 30, 1999. This decrease can be attributed to the sale of the
telecommunications business which contributed (pound)6 million to the revenues
for the 1998 period in December 1998 and the modular building business operated
by Rollalong Limited in February 1999, which resulted in a net decrease of
(pound)3 million.
Operating income
- ----------------
Operating income of TXU Europe for the six months ended June 30, 1999
of (pound)288 million consisted of (pound)1,986 million of operating revenues
offset by costs and expenses of (pound)1,698 million. Costs and expenses
included (pound)864 million for purchased power, (pound)447 million for gas
purchased for resale, (pound)270 million for operation and maintenance expense
and (pound)117 million for depreciation and amortization. Depreciation and
amortization included depreciation of goodwill of (pound)42 million and
amortization of the fair value of the power station leases of (pound)16 million.
Operating income of TXU Europe for the period from formation through
June 30, 1998 consisted of (pound)326 million of operating revenues offset by
costs and expenses of (pound)294 million. These results include the operations
of Eastern from May 19, 1998. Costs and expenses included (pound)141 million for
purchased power, (pound)59 million for gas purchased for resale, (pound)70
29
<PAGE>
million for operation and maintenance expense and (pound)24 million for
depreciation and amortization.
Operating income of Eastern for the period from January 1, 1998
through May 18, 1998 consisted of (pound)1,563 million of operating revenues
offset by costs and expenses of (pound)1,472 million. Costs and expenses
included (pound)743 million for purchased power, (pound)281 million for gas
purchased for resale, (pound)375 million for operation and maintenance expense
and (pound)73 million for depreciation and amortization.
Net interest expense
- --------------------
Net interest expense of TXU Europe for the six months ended June 30,
1999 of (pound)137 million included interest expense of (pound)166 million
offset by interest income of (pound)29 million. Interest expense included
payments of (pound)30 million under the Sterling Credit Agreement, (pound)6
million under the senior notes and (pound)17 million on the note payable to TXU
Corp. Interest income for this period consisted of interest on surplus cash
balances.
Net interest expense of TXU Europe for the period from formation
through June 30, 1998 of (pound)23 million included interest expense of
(pound)44 million offset by interest income of (pound)21 million. Interest
expense included payments of (pound)12 million under the Sterling Credit
Agreement and (pound)5 million on the note payable to TXU Corp. Interest income
for this period consisted of interest on surplus cash balances.
Net interest expense of Eastern for the period from January 1, 1998
through May 18, 1998 of (pound)41 million included interest expense of (pound)76
million offset by interest income of (pound)35 million. Interest income for this
period consisted of interest on surplus cash balances.
Total tax expense
- -----------------
Total tax expense of TXU Europe for the six months ended June 30, 1999
was (pound)56 million. Total tax expense of TXU Europe for the period from
formation through June 30, 1998 was (pound)9 million. Total tax expense of
Eastern for the period from January 1, 1998 through May 18, 1998 was (pound)35
million.
YEAR ENDED MARCH 31, 1999 COMPARED WITH YEAR ENDED MARCH 31, 1998
Revenues
- --------
Energy retail - Revenues in the energy retail operation increased by
approximately 7% from (pound)2.2 billion for the year ended March 31, 1998 to
(pound)2.3 billion for the year ended March 31, 1999. The revenues are primarily
determined by the volumes of gas and electricity sold and the unit sales prices.
The increase in revenue is a result of higher prices in gas retail, 5.4% higher
volumes in electricity retail primarily in the industrial and commercial markets
and 7.1% higher volumes in gas retail primarily in the domestic market.
Energy management and generation - Revenues in the energy management
and generation operations increased by approximately 11% from (pound)1.3 billion
for the year ended March 31, 1998 to (pound)1.5 billion for the year ended March
31, 1999. This increase was attributable to a significant increase in generation
output, including a full year's output from the King's Lynn power station which
became fully operational in December 1997 and resulted in additional revenue of
(pound)30 million, partially offset by reduced output from a coal-fired power
station that was out of service for four months of the year due to a fire in
October 1998, resulting in reduced revenues by approximately (pound)33 million.
Networks - Revenues in the networks business increased by
approximately 3% from (pound)414 million in the year ended March 31, 1998 to
(pound)427 million in the year ended March 31, 1999. This increase was primarily
the result of an increase of 2.9% in the GWh distributed.
Other - Other revenues decreased by approximately 49% from (pound)69
million in the year ended March 31, 1998 to (pound)35 million in the year ended
March 31, 1999. This decrease can be attributed primarily to the sale of
Eastern's contracting business in December 1997, which had revenues of (pound)47
million for the period prior to sale. This was offset by increased revenues of
30
<PAGE>
(pound)10 million in the telecommunications business. The telecommunications
business was sold in December 1998.
Operating income
- ----------------
Operating income of TXU Europe for the period from formation through
March 31, 1999 consisted of (pound)3,338 million of operating revenues offset by
costs and expenses of (pound)2,854 million. Costs and expenses inCluded
(pound)1,480 million for purchased power, (pound)646 million for gas purchased
for resale, (pound)526 million for operation and maintenance expense and
(pound)202 million for depreciation and amoritization. Included in operating
income is a net decrease in operating expenses as a result of purchase
accounting adjustments of (pound)125 million offset by goodwill amoritization of
(pound)72 million.
Operating income of Eastern for the year ended March 31, 1998
consisted of (pound)3,475 million of operating revenues offset by costs and
expenses of (pound)3,208 million. Costs and expenses included (pound)1,703
million for purchased power, (pound)514 million for gas purchased for resale,
(pound)806 million for operation and maintenance expense and (pound)185 million
for depreciation and amoritization.
Operating income of Eastern for the period from April 1, 1998 through
May 18, 1998 consisted of (pound)425 million of operating revenues offset by
costs and expenses of (pound)436 million. Costs and expenses included (pound)202
million for purchased power, (pound)85 million for gas purchased for resale,
(pound)123 million for operation and maintenance and (pound)26 million for
depreciation and amoritization.
Net interest expense
- --------------------
Interest income of TXU Europe for the period from formation through
March 31, 1999 was (pound)78 million and interest expense for the same period
was (pound)356 million including interest expense of (pound)89 million relating
to the Sterling Credit Agreement and (pound)44 million on the note payable to
TXU Corp.
Interest income of Eastern for the year ended March 31, 1998
was(pound)76 million and interest expense for the same period was(pound)202
million.
Interest income of Eastern for the period from April 1, 1998 through
May 18, 1998 was(pound)12 million and interest expense for the same period
was(pound)28 million.
Total tax expense
- -----------------
The tax expense of TXU Europe for the period from formation through
March 31, 1999 was (pound)106 million. The tax expense for Eastern for the year
ended March 31, 1998 was (pound)189 million, including a windfall tax charge of
(pound)112 million (see -- "Windfall Tax" below). The tax benefit of Eastern for
the period from April 1, 1998 through May 18, 1998 was (pound)5 million.
YEAR ENDED MARCH 31, 1998 COMPARED WITH YEAR ENDED MARCH 31, 1997
Revenues
- --------
Energy retail - Overall revenues from the energy retail business
decreased approximately 0.3% from (pound)2,158 million for the year ended March
31, 1997 to (pound)2,151 million for the year ended March 31, 1998.
In the part of the electricity retail market which was open to
competition (customers with an annual maximum demand over 100 kW - principally
industrial and commercial customers), revenues increased by (pound)70 million to
(pound)0.7 billion. The increase in revenues in the competitive market of
(pound)70 million was offset by lower revenues in the price regulated part of
the electricity retail market which was not open to competition (customers with
an annual maximum demand under 100 kW - principally residential and small
business customers) in which sales volumes decreased by 3.3% to 18,642 GWh
arising mainly from weather effects. Revenues in the price regulated market
31
<PAGE>
decreased by (pound)74 million, or 8%, to (pound)1.2 billion reflecting the
effect of the supply price control regulatory formula.
In the gas retail market, volumes and revenues remained stable at
approximately 1.3 billion therms and (pound)0.2 billion, respectively, for each
period. There was, however, a substantial increase in the number of customers
signed up with future contract start dates as the remaining areas of the UK gas
retail market were opened up to competition.
Energy management and generation - Revenues of (pound)1,337 million
from the energy management and generation operations for the year ended March
31, 1998 increased approximately 40% from (pound)952 million for the year ended
March 31, 1997. Of the increase, (pound)267 million was attributable to the
inclusion for a full year of the additional output provided by the five power
stations leased in June and July 1996 and an increase in the power station
output levels during the year. There was also additional revenue of (pound)30
million during the commissioning period of the King's Lynn gas-fired power
station.
Networks - Networks revenues of (pound)414 million for the year ended
March 31, 1998 decreased approximately 1.4% from (pound)420 million for the year
ended March 31, 1997. Revenues from Eastern's core regulated electricity
distribution business, which are determined by the distribution price control
formula, remained broadly stable since the allowed increase referable to the
Retail Price Index was offset by the required, regulated price reduction factor
of 3%. Units distributed through the network increased by 0.7% from 31,550 GWh
to 31,776 GWh.
Other - Revenues in the other segment increased from the year ended
March 31, 1997 to the year ended March 31, 1998 as a result of increased
revenues of (pound)3 million from the telecommunications business.
Operating income
- ----------------
Operating income decreased approximately 10% from(pound)298 million
for the year ended March 31, 1997 to(pound)267 million for the year ended March
31, 1998.
Operating income for energy retail operations decreased substantially
as a result of higher gross profit in gas of (pound)10 million and in
electricity of (pound)2 million, partially offset by (pound)40 million of
increased costs associated with adding a substantial customer base in Eastern's
retail gas business, including costs of acquiring customers which are expensed
as incurred. During this period, operating income from the retail electricity
business remained stable in the price regulated franchise market and increased
slightly in the competitive market from higher gross margins. Operating income
from the energy management and generation business remained stable at (pound)178
million in the year ended March 31, 1997 and (pound)180 million in the year
ended March 31, 1998. The operating income in the networks business increased by
(pound)24 million to (pound)189 million due to cost savings in Eastern's core
electricity distribution business. The losses in the other segment were reduced
from the year ended March 31, 1997 to the year ended March 31, 1998 because in
the year ended March 31, 1997 there were charges of (pound)19 million in this
segment related to exposures on the overall energy portfolio.
Net interest expense
- --------------------
Net interest expense increased by approximately (pound)38 million from
(pound)88 million in the year ended March 31, 1997 to (pound)126 million in the
year ended March 31, 1998. The increase arose partly from interest capitalized
in the year ended March 31, 1997 of (pound)11 million relating to the
construction period of the King's Lynn gas-fired power station. In addition,
some funds were placed in a tax efficient scheme in the year ended March 31,
1998 resulting in dividends receivable of approximately (pound)4 million in
place of interest on cash deposits. The remaining increase is a result of
interest expenses of (pound)23 million on higher net borrowings.
Total tax expense
- -----------------
Total tax expense decreased by (pound)115 million from (pound)304
million in the year ended March 31, 1997 to (pound)189 million in the year ended
March 31, 1998. The decrease is a result of a large deferred tax charge in
connection with the five coal-fired power station leases and the related rent
factoring transaction in the year ended March 31, 1997. See -- "Financing
32
<PAGE>
Arrangements" below. The decrease was offset by the windfall tax charge in the
year ended March 31, 1998 referred to below under - "Windfall Tax."
LIQUIDITY AND CAPITAL RESOURCES
PERIOD FROM JANUARY 1, 1998 THROUGH MAY 18, 1998 OF EASTERN AND PERIOD FROM
FORMATION THROUGH JUNE 30, 1998 AND SIX MONTHS ENDED JUNE 30, 1999 OF TXU EUROPE
Net cash generated by operating activities of Eastern was (pound)154
million for the period from January 1, 1998 to May 18, 1998. Net cash generated
by operating activities of TXU Europe was (pound)117 million for the period from
formation through June 30, 1998 and (pound)378 million for the six months ended
June 30, 1999. Cash provided by changes in operating assets and liabilities of
Eastern was (pound)109 million for the period from January 1, 1998 through May
18, 1998. Cash provided by changes in operating assets and liabilities of TXU
Europe for the period from formation through June 30, 1998 and for the six
months ended June 30, 1999 was (pound)126 million and (pound)180 million,
respectively. Cash flows from operations before changes in operating assets and
liabilities of Eastern were (pound)45 million for the period from January 1,
1998 to May 18, 1998 and for TXU Europe were (pound)(9) million for the period
from formation to June 30, 1998 and (pound)198 million for the six months ended
June 30, 1999. The principal change affecting 1999 is the interest expense
related to the TEG acquisition.
Cash provided by financing activities of Eastern for the period from
January 1, 1998 through May 18, 1998 was (pound)27 million. Cash provided by
financing activities of TXU Europe for the period from formation through June
30, 1998 was (pound)3,272 million including common stock issued to parent of
(pound)1,467 million and borrowings under the acquisition facility of
(pound)1,656 million. In the six months ended June 30, 1999, cash used for
financing activities by TXU Europe was (pound)85 million. This included the
effect of the issuance of the senior notes and the application of the net
proceeds as described under --"Financing Arrangements" below. Also impacting
1999 financing activities was the amendment of the Sterling Credit Agreement
and the securitization of receivables also described under --"Financing
Arrangements" below.
Cash used in investing activities of Eastern was (pound)139 million
for the period from January 1 to May 18, 1998 and for TXU Europe was
(pound)1,465 million for the period from formation to June 30, 1998 and
(pound)182 million for the six months ended June 30, 1999. The amount for TXU
Europe for the period from formation through June 30, 1998 includes (pound)1.4
billion representing the net cash paid to acquire TEG. Capital expenditures were
(pound)112 million, (pound)33 million and (pound)124 million, respectively.
YEARS ENDED MARCH 31, 1997 AND 1998 AND PERIOD FROM APRIL 1 TO MAY 18, 1998 OF
EASTERN AND PERIOD FROM FORMATION THROUGH MARCH 31, 1999 OF TXU EUROPE
Net cash generated by operating activities of Eastern for the years
ended March 31, 1997 and 1998 was (pound)292 million and (pound)341 million,
respectively. Net cash generated by operating activities of Eastern was
(pound)74 million for the period from April 1, 1998 through May 18, 1998. Net
cash generated by operating activities of TXU Europe was (pound)44 million for
the period from formation through March 31, 1999. Cash provided by (used by)
changes in operating assets and liabilities was (pound)(23) million, (pound)223
million and (pound)(244) million for the years ended 1997, 1998 and 1999,
respectively. The variances arise based upon changes in working capital
requirements. Cash flows from operations before changes in operating assets and
liabilities were (pound)315 million, (pound)118 million and (pound)362 million
for the years ended 1997, 1998 and 1999, respectively. In 1997 net deferred tax
liabilities associated with leasing transactions were established, resulting in
a non-cash expense of (pound)251 million. There were no transactions of this
magnitude in 1998 or 1999. The increase in 1999 in comparison to 1998 reflects
net income which is (pound)143 million higher than that recognized in 1998 as
well as an increase in depreciation and amortization expense, which are non-cash
items.
In the year ended March 31, 1997, cash used for financing activities
of Eastern was (pound)316 million. This included the net effect of the receipt
of (pound)1.1 billion from commercial banks as a part of the rent-factoring
agreement less the (pound)408 million which was set aside in investments as cash
collateral for the future intra-group rental payments assigned. Further details
are set out below under -- "Financing Arrangements." Also impacting 1997 cash
flows was the retirement of (pound)468 million of long-term debt, the repayment
of (pound)389 million of bank debt and the payment of (pound)140 million of
dividends on common stock.
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In the year ended March 31, 1998, cash provided by financing
activities of Eastern was (pound)121 million. In that year, long-term debt of
(pound)240 million was raised and a further (pound)300 million was raised
through a financing of receivables under a debt securitization program. In
addition, in that same year, retirements of long-term debt totalled (pound)215
million and a dividend of (pound)200 million was paid.
In the period from formation through March 31, 1999, cash provided by
financing activities was (pound)2.2 billion. There were drawings under the
acquisition facilities of (pound)2.1 billion, which were later rearranged as
described further below under -- "Financing Arrangements." There was also an
issue of common stock of TXU Europe to subsidiaries of TXU Corp of (pound)1.5
billion. These funds together provided a portion of the financing for the
acquisition of TEG. Approximately (pound)1.3 billion of borrowings under the
Credit Facilities Agreement were repaid during the period using the proceeds of
the sale of TEG's former coal and power trading interests. Part of the
acquisition of TEG was financed by the issue of common stock of TXU Corp to TEG
shareholders. A subsidiary of TXU Europe acquired the TXU Corp common stock used
for this purpose by issuing a term note to TXU Corp for (pound)882 million,
(pound)200 million of which was later repaid in cash in the period. TXU
Acquisitions also issued (pound)85 million of loan notes to TEG shareholders.
Another subsidiary of TXU Corp provided the remainder of the acquisition
financing. There were also additional net borrowings of approximately (pound)98
million in the period.
Cash used in investing activities of Eastern for the years ended March
31, 1997 and 1998 and the period from April 1, 1998 through May 18, 1998 were
(pound)229 million, (pound)234 million and (pound)78 million, respectively. Cash
used in investing activities of TXU Europe for the period from formation through
March 31, 1999 was (pound)1.9 billion. The amount for TXU Europe includes
(pound)1.4 billion representing the net cash paid to acquire TEG. The capital
expenditures of Eastern were (pound)204 million, (pound)254 million and
(pound)281 million for the years ended March 31, 1997, 1998 and 1999,
respectively. The increases primarily relate to the increased level of
expenditures on the distribution network and in 1998, on the development of the
telecommunications business, which was sold in December 1998. In addition, in
the year ended March 31, 1997, Eastern invested (pound)29.5 million in acquiring
an 11.6% interest in Severomoravska Energetica a.s., a distribution company in
the Czech Republic, and (pound)19.9 million in acquiring a 52.8% interest in
Teplarny Brno a.s., a district heating company in the Czech Republic. In the
year ended March 31, 1998 further investments totalling (pound)9.9 million were
made to increase Eastern's interest in these two companies. In the period from
formation through March 31, 1999, a subsidiary of TXU Europe also acquired the
offtake generated from water rights in hydroelectric power facilities in Norway
for (pound)124 million and spent (pound)36 million to increase its interest in
Hidroelectrica del Cantabrico, a Spanish energy company, to 5%.
Eastern received government consent to build a 215 MW combined heat
and power plant for which there is a commitment of (pound)117 million, most of
which falls due in 2000. Eastern also has a commitment to invest (pound)42
million in Savon Voima Oy, a regional electricity distributor in Finland, in
October 1999. Eastern was also contractually committed at June 30, 1999 to a
payment of (pound)88 million for the acquisition of gas assets. This payment was
made on July 5, 1999.
FINANCING ARRANGEMENTS
At December 31, 1998, TXU Europe, TXU Finance, TXU Acquisitions and
TEG had a joint sterling-denominated line of credit with a group of banking
institutions under a credit facility agreement (Sterling Credit Agreement).
Chase Manhattan plc, Lehman Brothers International (Europe) and Merrill Lynch
Capital Corporation are the lead arrangers of the bank group. The Sterling
Credit Agreement had an acquisition facility and a revolving credit facility.
Eastern Electricity also has a separate revolving credit facility, terminating
March 2, 2003, for short-term borrowings of up to (pound)250 million to be used
for Eastern Electricity's general corporate purposes. Borrowings under the
acquisition facility provided financing to acquire TEG and pay acquisition
related expenses. The revolving credit facility provided for short-term
borrowings. At December 31, 1998, borrowings totalled (pound)750 million under
the acquisition facility and a total of (pound)231 million under the two
revolving credit facilities. Under the terms of the Sterling Credit Agreement,
one half of the borrowings under the facilities were required to be swapped from
floating rate to fixed rate and, accordingly, swaps with a notional amount of
(pound)800 million were entered into. On January 2, 1999 TXU Europe's ability to
borrow additional amounts under the acquisition facility terminated.
The Sterling Credit Agreement was amended in March 1999. The amended
Sterling Credit Agreement provides for borrowings up to (pound)1.275 billion and
has two facilities: a (pound)750 million term facility which will terminate on
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March 2, 2003 and a (pound)525 million revolving credit facility which has a
(pound)200 million 364-day tranche (Tranche A) and a (pound)325 million tranche
which terminates March 2, 2003 (Tranche B). Under the Sterling Credit Agreement,
TXU Finance must maintain a ratio of earnings before interest, taxes,
depreciation and amortization to net interest cost, each as calculated under the
Sterling Credit Agreement, of at least 2:1. In addition, TXU Europe's
consolidated debt must not exceed 70% of consolidated capitalization, each as
calculated under the Sterling Credit Agreement. All of these financial ratios
under the Sterling Credit Agreement are determined in accordance with UK GAAP.
TXU Europe is in compliance with these ratios. TXU Europe and TXU Finance
currently are the only permitted borrowers under the amended Sterling Credit
Agreement. So long as no default under the Sterling Credit Agreement has
occurred and is continuing, any subsidiary or holding company of Eastern which
also is a wholly-owned subsidiary of TXU Finance and is incorporated under the
laws of England and Wales, except Eastern Electricity, may be designated as an
additional borrower under Tranche A or Tranche B by agreeing to be bound by the
terms of the Sterling Credit Agreement and by giving notice to the banks. The
amended Sterling Credit Agreement allows for borrowings at various interest
rates based on the prevailing rates in effect in the countries in which the
borrowings originate. At June 30, 1999, TXU Europe had borrowings outstanding in
Pounds Sterling at an interest rate of 5.75%, in Spanish Pesetas at 3.37% and in
Norwegian Krona at 7.19%. As of June 30, 1999, (pound)750 million of borrowings
were outstanding under the term facility, and approximately (pound)177 million
under Tranche B. On May 18, 1999, $198 million in letters of credit issued under
Tranche B of the revolving credit facility matured and were not renewed.
The interest rate on Eastern Electricity's revolving credit facility
is based on LIBOR plus 0.5%. As of June 30, 1999, there were no borrowings
outstanding under Eastern Electricity's revolving credit facility.
As of June 30, 1999, Eastern Electricity had issued long-term, fixed
rate bonds in the aggregate outstanding principal amount of (pound)750 million,
and Overseas had issued notes in the aggregate principal amount of US$500
million which are guaranteed by TEG and TXU Europe.
Eastern Merchant Properties Limited, a subsidiary of TXU Europe, has
leased the five coal-fired power stations operated by Eastern for 99 year terms
commencing in 1996. Eastern Merchant Properties has sub-leased those power
stations to Eastern Merchant Generation Limited, another subsidiary of TXU
Europe, for a five year term ending in 2001. Eastern Merchant Properties has
assigned the intra-group rental payments receivable from Eastern Merchant
Generation under the subleases to a group of banks, for which Barclays Bank plc
is the agent, in return for (pound)1,097 million. Eastern and Eastern Generation
have guaranteed the payment to those banks of the assigned payments, or in some
cases, the net present value of remaining payments upon transfer by a bank of
the right to receive future payments. The guarantee requires:
o That Eastern maintain a consolidated tangible net worth, as
calculated under the guarantee, of not less than (pound)1
billion;
o That Eastern's consolidated net borrowings do not exceed 200% of
its consolidated tangible net worth, each as calculated under the
guarantee; and
o That the ratio of Eastern's consolidated profit before interest
and taxes to its interest costs, each as calculated under the
guarantee, is in excess of 2:1.
As of June 30, 1999, Eastern was in compliance with these covenants.
The (pound)1,097 million described above was borrowed on October 28,
1996. (pound)408 million of the proceeds was used as collateral for obligations
to another group of banks in respect of the funding of the payment of a portion
of the fixed payments due under the leases of the West Burton, Rugeley B and
Ironbridge power stations.
Eastern has facilities with Citibank N.A. to provide financing through
trade accounts receivable whereby Eastern Electricity may sell up to (pound)300
million of its electricity receivables and, beginning June 11, 1999, TXU Finance
may borrow up to an aggregate of (pound)275 million, collateralized by
additional receivables of Eastern Electricity, through a short-term note issue
arrangement. The program has an overall program limit of (pound)550 million.
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Through March 31, 1999, the electricity receivable financings were in
the form of short-term loans collateralized by Eastern's trade accounts
receivable. Subsequent to March 31, 1999, the program was restructured so that a
portion of the receivables are sold outright rather than being used to
collateralize short-term borrowings. Eastern Electricity continually sells
additional receivables to replace those collected. At June 30, 1999, accounts
receivable of Eastern were reduced by (pound)255 million to reflect the sales of
the receivables under the new program. An additional (pound)45 million of
receivables remain as collateral for short-term loans. At June 30, 1999, TXU
Finance had borrowed (pound)150 million through the note issue arrangement. The
borrowings by Eastern Electricity and TXU Finance bear interest at an annual
rate based on commercial paper rates plus 0.225%, which was 5.225% at June 30,
1999.
On May 13, 1999, Funding issued $1.5 billion ((pound)915 million)
worth of senior notes which are guaranteed by TXU Europe in three tranches: $350
million ((pound)214 million), 6.15% due May 15, 2002, $650 million ((pound)396
million), 6.45% due May 15, 2005, and $500 million ((pound)305 million), 6.75%
due May 15, 2009. The proceeds of this issuance were used as follows: (pound)680
million to repay the note payable to TXU Corp, (pound)55 million to reduce
borrowings under the Sterling Credit Agreement and (pound)180 million for
general corporate purposes. Shortly afterwards, TXU Europe entered into various
interest rate and currency swaps that in effect changed the interest rates on
the borrowings from fixed to variable based on LIBOR and fixed the principal
amount to be repaid in sterling.
CUSTOMER ACQUISITION COSTS
Beginning in the year ended March 31, 1998, Eastern has paid
commissions to agents who assist Eastern in acquiring customers in the newly
deregulated gas market. Those costs of acquiring customers are charged to
expense when incurred, although revenues from the acquired customer base are
expected to be received over several years. Total charges for the years ended
March 31, 1997, 1998 and 1999 were zero, (pound)41 million and (pound)25
million, respectively, and for the six months ended June 30, 1999 were (pound)7
million. Eastern expects that it will continue to incur those costs in
connection with its effort to acquire natural gas customers for the foreseeable
future, although to a lesser degree. In addition, Eastern expects to incur
similar customer acquisition costs in connection with efforts to acquire
customers in deregulated electricity franchise markets.
WINDFALL TAX
For the year ended March 31, 1998, a windfall tax was levied on
Eastern according to a formula contained in the UK Finance (No. 2) Act 1997. The
liability for the tax was assessed at (pound)112 million of which half was paid
on December 1, 1997 and the balance was paid on December 1, 1998. The windfall
tax was included in the tax provision for the year ended March 31, 1998.
CURRENCY RISKS; ABSENCE OF HEDGING TRANSACTIONS
TXU Europe's revenues generated by Eastern will be primarily in pounds
sterling while the purchase price which was paid to Funding for the senior notes
was paid in US dollars, and the interest and principal payment obligations with
respect to the exchange senior notes will be payable in US dollars. As a result,
any change in the currency exchange rate that reduces the amount in pounds
sterling obtained upon conversion of the US dollar-based net proceeds of the
senior notes or that increases the effective principal and interest payment
obligations represented by the exchange senior notes upon conversion of pounds
sterling-based revenues into US dollars may, if not appropriately hedged, have a
material adverse effect on TXU Europe and Funding or on their ability to make
payments on the exchange senior notes or the guarantee. See EXCHANGE RATES for
information concerning the Noon Buying Rate for pounds sterling expressed in US
dollars. Although TXU Europe has entered into transactions to hedge risks
associated with exchange rate fluctuations, there can be no assurance that the
transactions will be successful in reducing those risks.
EUROPEAN MONETARY UNION (EMU)
Most of Eastern's income and expenditures are denominated in pounds
sterling or in the currencies of other countries which either are not eligible
or have not joined the first stage of EMU. Eastern therefore does not expect the
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introduction of the Euro, the new currency of countries which participate in
EMU, to have a material impact on those operations for so long as the UK
continues to remain outside EMU. Eastern has prepared its accounting systems to
be able to deal with the receipt of payments in Euros effective from January 1,
1999.
EFFECT OF INFLATION
Because of the relatively low level of inflation experienced in the
UK, inflation did not have a material impact on results of operations for the
periods presented.
CHANGES IN ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," is effective for fiscal years
beginning after June 15, 1999. This standard requires that all derivative
financial instruments be recognized as either assets or liabilities on the
balance sheet at their fair values and that accounting for the changes in their
fair values is dependent upon the intended use of the derivatives and their
resulting designations. The new standard will supersede or amend existing
standards which deal with hedge accounting and derivatives. While TXU Europe has
not yet determined the effects adopting this standard will have on the
consolidated financial statements, those effects could be material. On May 19,
1999, the Financial Accounting Standards Board decided that it would amend
Statement of Financial Accounting Standards No. 133 and defer its effective date
to fiscal quarters of all fiscal years beginning after June 15, 2000.
The Emerging Issues Task Force, or EITF, has issued No. 98-10,
"Accounting for Energy Trading and Risk Management Activities," which is
effective for fiscal years beginning after December 15, 1998. EITF 98-10
requires that contracts for energy commodities which are entered into under
trading activities should be marked to market with the gains and losses shown
net in the income statement. As TXU Europe's fiscal year ends on December 31,
TXU Europe adopted EITF 98-10 effective January 1, 1999 for the fiscal year
ending December 31, 1999. As TXU Europe is not primarily involved in trading
activities, EITF 98-10 has not had a material impact on the consolidated
financial statements upon adoption.
YEAR 2000 ISSUES
Many existing computer programs use only the last two digits to
identify a year in the date field. Thus, they would not recognize a year that
begins with 20 instead of 19. If not corrected, many computer applications could
fail or produce erroneous data on or about the year 2000.
In August 1996, Eastern established a program of projects to ensure
that all its systems are Y2K compliant. In testing for conformity, Eastern uses
the revised version of the British Standards Institute's definition of Y2K
Conformity. Eastern's Y2K program is sponsored by the Chief Executive of Eastern
and is managed by a committee consisting of Eastern Managing Directors and
Senior Managers. Each of the projects in the program has six phases: inventory;
risk assessment; analysis; remediation; testing and contingency.
EASTERN'S STATE OF READINESS
The inventory, risk assessment and analysis of the mainframe systems
were completed in June 1997. All COBOL code was fixed by November 1998. The
mainframe remediation work was completed in March 1999 and the testing work was
completed in September 1999.
Inventories of all the other information technology, or IT, systems
and of embedded systems that are part of controls, monitoring and protection
systems, including electricity meters and customer premises and systems used in
the offices of Eastern and TXU Europe, were completed in February 1998. Risk
assessments were completed in September 1999. Since October 1996, requirements
have been included in Eastern's purchasing terms and conditions requiring Y2K
readiness for new systems. Acceptance tests for any significant new or upgraded
system include testing for Y2K readiness.
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The IT infrastructure is currently based on a mixture of hardware and
operating systems connected by local and wide area networks. The system was
remediated in March 1999 and has been tested and verified compliant. The
infrastructure PABX systems were upgraded to be compliant in February 1999.
The eight power station turbine control systems have been tested and
verified compliant. All the electricity distribution systems have been checked,
and testing will be completed by the end of 1999.
COSTS TO ADDRESS Y2K ISSUES
The costs of addressing the Y2K issue are estimated to be
approximately (pound)20 million. These costs include all Y2K activities. They do
not include the cost of achieving Y2K compliance for new IT systems installed in
connection with the opening up of the domestic electricity retail market to
competition, new systems installed to meet other business needs, or the cost of
developing contingency plans for the energy management business. Costs of
addressing the Y2K issue are being expensed as incurred. Amounts expended
through December 1998 totalled (pound)2.8 million, cost expenditures for 1999
are estimated at (pound)14.7 million, of which approximately (pound)2.0 million
were incurred in the first quarter of 1999, and an additional (pound)2.4 million
for 2000.
RISKS AND CONTINGENCY PLANS
With respect to internal risks, Eastern's current assessment of the
most reasonably likely worst case scenario is that impacts on either service or
financial performance will not be materially adverse. Eastern believes, based on
the results of testing that has already occurred on a large portion of
production equipment with embedded systems, that if any disruption to service
occurs, it will be isolated and of short-term duration.
All of Eastern's businesses have developed Y2K contingency plans. The
Y2K process includes a review of all the existing contingency plans and further
development of contingency arrangements to cover Y2K failure scenarios.
Each of Eastern's businesses has carried out an analysis of potential
Y2K risks based on the following scenarios:
o Failure of data/voice communications - internal and external;
o Failure of electricity - Generation/National Grid/Distribution
Network;
o Failure of water supply and sewage;
o Failure of gas supply - predominantly to power stations; and
o Failure of computer systems due to unforeseen Y2K problems.
Each business has assessed the criticality and impact of each risk
based upon their key business processes and operational sites.
Contingency plans have been prepared by each business for the risks
associated with the scenarios identified above. These contingency plans are
being revised on a monthly basis as contingency planning is considered to be a
continually developing process that reflects the review/testing process and
changes in the risk portfolio. Final contingency plans are scheduled to be
completed during October 1999.
Eastern is working with its equipment suppliers to ensure their
products and services are Y2K compliant. Reviews were completed by December
1998. Eastern believes that any failure of those suppliers to be compliant is
unlikely to have a material effect on Eastern or its operations. Eastern's
operations are heavily dependent upon the reliability of National Grid, the high
voltage transmission system in England and Wales, and the operations of the
Pool. If National Grid were to have service disruptions as a result of a Y2K
problem, it might affect Eastern in either of two ways. Eastern's generation
business might not be able to deliver electricity on to National Grid or
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Eastern's distribution business might not be able to deliver electricity to its
customers. If the Pool were to have service disruptions as a result of a Y2K
problem, it might affect energy trading and the payments for that energy.
Eastern, as a generator, might be delivering electricity on to National Grid but
not be receiving the correct payments in the agreed timeframe. Eastern, as a
distributor and as a supplier, might not be able to settle its payments with
other electricity participants in the market place in the agreed timeframe.
National Grid and the Pool have taken the position that they anticipate no
material disruptions of service.
CHANGE IN CERTIFYING ACCOUNTANT OF TXU EUROPE
On August 6, 1999, based upon the recommendation of its Audit
Committee, the Board of Directors of TXU Europe voted to appoint Deloitte &
Touche as the principal accountants for TXU Europe and its subsidiaries for the
year ended December 31, 1999. TXU Europe chose not to continue the engagement of
PricewaterhouseCoopers, its former principal accountants. The decision by TXU
Europe to change principal accountants was made in order to align the principal
accountants of TXU Europe with those of TXU Corp. Deloitte & Touche LLP have
been the principal accountants for TXU Corp and its predecessors since 1945.
No report of PricewaterhouseCoopers on TXU Europe's financial
statements, including the period from formation, February 5, 1998, through
December 31, 1998, contained any adverse opinion or disclaimer of opinion, nor
was any report qualified in any manner.
During the period from formation through December 31, 1998 and the
period from January 1, 1999 to August 6, 1999, there were no disagreements with
PricewaterhouseCoopers on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure. During this
period, there were no "reportable events" as that term is defined in Item
304(a)(1)(v) of Regulation S-K of the Securities Act.
TXU Europe requested and received from PricewaterhouseCoopers a letter
dated August 9, 1999 addressed to the SEC stating that it agreed with the above
statements for the period from formation through December 31, 1998 and the
period from January 1, 1999 to August 6, 1999.
On August 6, 1999, TXU Europe engaged Deloitte & Touche as its
principal accountants to audit the financial statements for the year ending
December 31, 1999. TXU Europe has not consulted Deloitte & Touche regarding any
of the matters or events listed in Item 304(a)(2)(i) and (ii) of Regulation S-K
of the Securities Act. TXU Corp had routine discussions with Deloitte & Touche
LLP concerning the application of accounting principles and other matters
primarily relating to the application of purchase accounting principles and
other matters primarily relating to the application of purchase accounting to
the consolidated financial statements of TXU Corp. TXU Corp and Deloitte &
Touche LLP do not believe that these discussions constitute consultations within
the context of Item 304(a)(2) of Regulation S-K.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK MANAGEMENT
TXU Europe is exposed to a number of different market risks including
changes in gas and electricity prices, interest rates and foreign currency
exchange rates. TXU Europe has developed a control framework of policies and
procedures to monitor and manage the exposures arising from volatility in these
markets. To implement these policies and procedures, TXU Europe enters into
various derivative instruments for hedging purposes. Both the energy management
and the treasury operations make use of those instruments, but only well
understood derivative instruments are authorized for use.
INTEREST RATE RISK
TXU Europe's exposure to interest rate risk is managed by maintaining
a balance of fixed and floating rate borrowings and deposits. Interest rate
swaps and forward rate agreements are used from time to time to adjust the
proportion of fixed rate exposure within the specified limits.
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The table below provides information concerning TXU Europe's financial
instruments as of March 31, 1999 that are sensitive to changes in interest
rates, which include debt obligations by principal amount and interest rate
swaps. For debt obligations, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates. TXU Europe has
entered into interest rate swaps under which it has agreed to exchange the
difference between fixed-rate and variable-rate interest amounts calculated with
reference to specified notional principal amounts. The contracts require
settlement of net interest receivable at specified intervals which generally
coincide with the dates on which interest is payable on the underlying debt,
primarily semi-annually. When differences exist between the swap settlement
dates and the dates on which interest is payable on the underlying debt, the gap
exposure, or basis risk, is managed by means of forward rate agreements. These
forward rate agreements are not expected to have a material effect on TXU
Europe's financial position, results of operations or cash flows. For interest
rate swaps, the table presents notional amounts and weighted average interest
rates by expected, or contractual, maturity dates. Weighted average variable
rates are based on rates in effect at the reporting date.
EXPECTED MATURITY DATE
-------------------------------------------
MARCH
31,
THERE- 1999
2000 2001 2002 2003 2004 AFTER TOTAL VALUE
---- ---- ---- ---- ---- ----- ----- -----
Long-term Debt
(including
Current
maturities):
Fixed Rate
((pound)m).. 225.1 923.8 127.9 361.9 1,160.1 2,798.8 2,874.2
Average
interest
rate........ 7.35% 6.87% 7.35% 8.38% 8.20% 7.61%
Variable
Rate
((pound)m).. 1,004.0 75.6 1,079.6 1,079.6
Average
interest
rate........ 6.33% 5.42% 6.27%
Interest
Rate Swaps:
Fixed to
Variable
((pound)m).. 100.0 100.0 15.2
Average
pay rate.... 4.75%
Average
Receive
rate........ 8.38%
Variable
to Fixed
((pound)m).. 15.8 400.0 432.0 847.8 (57.4)
Average
pay rate.... 12.91% 6.71% 6.45%
Average
receive
rate........ 8.02% 5.63% 5.76%
Forward rate agreements totalling (pound)355 million for a maximum duration of
approximately one year to swap floating rate deposits into fixed rates were
outstanding at March 31, 1999 with a weighted average interest rate of
approximately 6.66%. The market value of these forward rate agreements was not
materially different from the notional value.
The market risk information of TXU Europe as of June 30, 1999 is not
significantly different from the March 31, 1999 information presented above,
except for changes in interest rate risk relating to new issues of long-term
debt as described in the notes to the June 30, 1999 financial statements
presented elsewhere in this prospectus.
ENERGY RISK MANAGEMENT
The energy business contracts to supply electricity to customers at
fixed prices and buys output from the electricity Pool to meet the demand of
these customers. Since the price of electricity purchased from the Pool can be
volatile, Eastern is exposed to the risk arising from the differences between
the fixed price at which it sells electricity to customers and the variable
prices at which it buys electricity from the Pool. Eastern's generation business
provides a physical hedge to this risk as it is exposed to Pool price
fluctuations from selling electricity into the Pool. Eastern's overall exposure
to those risks is managed by the energy management business which also enters
into derivatives to hedge the portfolio and maintain energy price exposure to
within a limit set by the Board of Directors of Eastern. The derivatives used
are contracts for differences and electricity forward agreements. Contracts for
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differences are bilaterally negotiated contracts which fix the price of
electricity for an agreed quantity and duration by reference to an agreed strike
price, which is the price specified in the contract for differences. Electricity
forward agreements are similar in principle to contracts for differences but are
on standard terms and tend to be for smaller quantities and shorter durations.
The hypothetical loss in fair value of Eastern's contracts for differences and
electricity forward agreements in existence at March 31, 1999 arising from a 10%
adverse movement in future electricity prices is estimated at (pound)52 million.
This loss is calculated by modeling the contracts against an internal forecast
of Pool prices using discounted cash flow techniques. The fair value of
outstanding contracts for differences and electricity forward agreements at
March 31, 1999 was (pound)48 million, calculated as the difference between the
expected value of the contracts for differences and electricity forward
agreements, based on their known strike price and known value and the current
market value, based on an estimate of forward prices for the contract for
difference or electricity forward agreement term.
Eastern also sells fixed price gas contracts to customers and supplies
the customer through a portfolio of gas purchase contracts and other wholesale
contracts. Eastern's overall net exposure to the gas spot market is also managed
within a limit set by the Board of Directors of Eastern using natural gas
futures and swaps, as appropriate, to hedge the exposures. There were no gas
swaps outstanding at March 31, 1999.
Management of the market risks associated with the portfolio of
physical generation assets, upstream gas assets and gas and electricity sales
and derivative contracts is critical to the success of Eastern and therefore
comprehensive risk management processes, policies and procedures have been
established to monitor and control these market risks.
FOREIGN CURRENCY
TXU Europe manages its exposure to foreign currency rates principally
by matching foreign currency denominated assets with borrowings in the same
currency. Currency swaps and options are also used where appropriate to hedge
any residual exposures. In addition, some imports of capital equipment and fuel
are denominated in foreign currencies and the sterling cost of these is fixed by
means of forward contracts as soon as TXU Europe's contractual commitment is
firm. The US$ option contracts outstanding at December 31, 1998 all matured in
the period to March 31, 1999. The principal foreign currency hedges outstanding
at March 31, 1999 were as follows:
US$/GBP swaps in respect of the semi-annual interest payments on, but not the
principal amount of, the $500 million of guaranteed notes previously issued to
swap from US$ to GBP as follows:
Annual March 31, 1999
Period Amount Rate Fair Value
------ ------ ---- --------------------
Annually to 2017 $14.8 million 1.61 (pound)(5.7) million
Annually to 2027 $22.5 million 1.62 (pound)(15.6) million
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INDUSTRY BACKGROUND
GENERAL
Traditionally, the electric industry in the UK, including
distribution, transmission and generation, has been highly regulated. Throughout
England and Wales, electricity power stations, together with the transmission
and distribution systems, constitute a single integrated network. Privatization
of the UK electricity industry has opened the market to new participants. Each
participant must be licensed to generate, transmit or supply electricity. Almost
all electricity generated in England and Wales must be sold to and purchased
from the wholesale trading market for electricity, commonly known as the Pool.
Prices for electricity are set by the Pool for each half hour based on bids of
generators and a complex set of calculations that matches supply and demand.
The gas industry in Great Britain has been privatized and competition
among suppliers is encouraged by deregulation of the supply of gas, first to
larger customers and, more recently, to smaller customers including residential
users. Most of the gas transmission and distribution network in Great Britain is
owned and operated by BG plc, which is required to provide fair access to its
network to all shippers of gas. Charges to shippers of gas are based on the
amount of pipeline capacity reserved and the number of points of entry and exit
to and from the national network.
THE ELECTRICITY INDUSTRY IN ENGLAND AND WALES
Almost all electricity generated at power stations in England and
Wales is delivered through the high voltage transmission system owned and
operated by The National Grid Company. It is then transformed for delivery on to
the local distribution networks owned and operated by holders of public
electricity supply licenses like Eastern Electricity.
During the five years ended March 31, 1998, demand for electricity in
England and Wales rose by approximately eight percent. The National Grid Seven
Year Statement published in April 1998 states that demand is expected to rise by
approximately seven percent during the five years ended March 31, 2003.
"Energy Trends," the energy statistical bulletin issued by the UK
Department of Trade and Industry, reports that electricity produced by the UK
generating industry, including imports from Electricite de France, in the year
ended December 31, 1991, totalled approximately 300 TWh, of which approximately
66 percent was produced by coal-fired power stations and 21 percent by nuclear
power stations. Thirteen percent was output from pumped storage facilities - a
type of hydroelectric generating facility that uses generating capacity to pump
water from a lower reservoir to an upper reservoir during periods of low demand
for electricity and uses the flow of water from the upper to the lower reservoir
to generate electricity during periods of high demand, from oil fired power
stations and from interconnectors, which are electrical connectors between the
electrical facilities of two electric systems permitting a flow of energy
between the systems. During that time there was no significant production from
combined cycle gas turbine power stations. The bulletin indicates that in the
year ended December 31, 1997, including imports from Electricite de France, the
percentage of total electricity generated by coal-fired power stations had
declined to approximately 34 percent and the output from pumped storage, oil,
gas (other than combined cycle gas turbine power stations) and interconnectors
had declined to 12 percent while the percentage generated by nuclear power
stations had increased to 27 percent and combined cycle gas turbine power
stations accounted for 27 percent. Combined cycle gas turbine power stations are
a type of generating facility which combines a gas-powered combustion turbine
with a heat recovery boiler and a steam turbine. The heat recovery boiler uses
excess heat from the combustion turbine to produce steam to power the steam
turbine. This type of facility increases output and improves efficiency compared
to a facility that uses only a combustion turbine. Reasons for the development
of combined cycle gas turbine generating capacity since 1991 include the
availability of large volumes of natural gas, developments in technology and the
privatization of the UK electricity industry, which has allowed new entrants to
participate in the generation market.
In December 1997, the UK government announced a review of energy
sources for power generation, including fuel diversity, sustainable development
and the role of coal. The government's conclusions were published in an October
1998 policy statement. The government's policy for issuing consents for the
construction of new generating stations, as set out in the October 1998 policy
statement, is that gas-powered generation would normally be inconsistent with
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the government's energy policy, unless the project has other benefits, such as
combined heat and power projects which produce both power and usable heat and
have environmental or transmission system benefits.
THE POOL
The Pool was established in 1990 for bulk trading of electricity in
England and Wales between generators and suppliers. The Pool reflects two
principal characteristics of the physical generation and supply of electricity
from a particular generator to a particular supplier. First, it is not possible
to trace electricity from a particular generator to a particular supplier.
Second, it is not practicable to store electricity in significant quantities.
These characteristics create the need for a constant matching of supply and
demand.
All electricity generated in England and Wales, other than electricity
generated by small generators connected directly to the local distribution
networks rather than National Grid, must be sold to the Pool. In turn,
electricity suppliers generally must buy electricity from the Pool for resale to
their customers. Even groups which are both generators and licensed suppliers,
like Eastern, in most circumstances, must act through the Pool to sell all the
electricity they generate and to purchase all electricity they sell to
customers.
The Pool is operated under the Pooling and Settlement Agreement, which
is currently under review by the UK government. The Pooling and Settlement
Agreement governs the constitution and operation of the Pool and the calculation
of payments due to and from generators and suppliers of electricity. The UK
government and all licensed generators and suppliers of electricity in England
and Wales are parties to the Pooling and Settlement Agreement. The Pool also
provides centralized settlement of accounts and clearing.
Generators sell electricity to the Pool at a price for each unit of
electricity generated. Also, generators receive availability payments when they
declare themselves to be available but are not called upon to run. Suppliers buy
electricity through the Pool at a price which reflects these components and
which may also include additional amounts payable to National Grid.
Prices for electricity are set by the Pool daily for each half hour of
the following day based on the bids of the generators and a complex set of
calculations that matches supply and demand and takes account of system
security. Generators make individual bids into the Pool once each day, stating
the price and volume at which they are prepared to generate at any point during
the following day. National Grid ranks the generating units in an order known as
the "merit order," primarily according to the price offered. National Grid then
schedules the generating units to operate according to this merit order, calling
into service the least expensive generating units first and continuing to call
generating units into service until enough are operating to meet demand. Factors
which may constrain National Grid's ability to order stations into operation in
strict observance of the merit order include the constraints of transmission
systems and the technical operating characteristics of some generating units.
The price paid to all generators which are called to run is set primarily by
reference to the highest bid price of all the generators selected to run in that
half hour. A computerized settlement system is used to calculate prices and to
process metered, operational and other data and to carry out the other
procedures necessary to calculate the payments due under the Pool trading
arrangements. The settlement system is administered on a day to day basis by
Energy Settlements and Information Services Limited, a subsidiary of National
Grid, as settlement system administrator. Pool prices for the purchase of power
can vary significantly from day to day and during each day.
In order to reduce their exposure to fluctuations in Pool prices,
generators and suppliers enter into financial hedging contracts with each other.
These contracts are in the form of contracts for differences and electricity
forward agreements. Contracts for differences and electricity forward agreements
in effect fix the price that a supplier pays and a generator receives for
electricity. They therefore are used to reduce the price risk that would
otherwise be associated with the sale and purchase of electricity through the
Pool.
ELECTRICITY SUPPLY MARKETS IN ENGLAND AND WALES
The regulatory framework in England and Wales differs for consumers
with maximum annual demands over and under 100 kW. The under 100 kW market,
comprising the former regional supply monopolies or franchises of the twelve
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regional electricity companies, has recently been opened to competition. It is
sometimes referred to as the "ex-franchise" market. This market itself contains
two subdivisions. The first consists of all residential customers and small
businesses using up to 12,000 kWh/year. It is called the designated market. The
remainder of the ex-franchise market consists of smaller businesses with annual
maximum demands under 100 kW that use more than 12,000 kWh/year. The over 100 kW
market consists of all customers with an annual maximum demand of 100 kW or
more.
Until September 1998, residential and small business customers in all
service areas could buy electricity only from the regional electricity company
authorized to supply service in the area where the customers were located.
However, competition has been introduced fully and customers are now able to buy
electricity from any licensed supplier. Ex-franchise customers are usually
supplied with electricity in accordance with published tariffs. A price control
formula set out in the supplier's public electricity supply license limits
prices charged to customers in the designated market. These prices are regulated
by the Director General of Electricity Supply as described below under EASTERN
BUSINESS OVERVIEW -- "UK Regulatory Matters; Energy Regulation; Electricity
Supply Price Regulation." A formula determines the maximum prices which any
public electricity supply license holder is permitted to charge. A separate
price control formula described below under EASTERN BUSINESS OVERVIEW -- "UK
Regulatory Matters; Networks Regulation; Distribution Price Regulation"
determines the maximum distribution revenue which a public electricity supply
license holder may earn from charges made to its own electricity supply business
and other electricity suppliers for use of its distribution network. These
formulas are in effect until March 31, 2000.
To be able to supply electricity, a supplier must either have a second
tier supply license issued under the Electricity Act 1989 of Great Britain
described below under EASTERN BUSINESS OVERVIEW -- "UK Regulatory Matters;
Networks Regulation; Distribution Price Regulation" or hold a public electricity
supply license for the authorized area where its customers are located. The
license holder must demonstrate that it has adequate systems and processes in
place to fulfill its obligations. Customers in the over 100 kW market are
charged under the terms of commercial contracts negotiated with their supplier,
which may provide for fixed or variable prices. Variable prices normally reflect
expected fluctuations in the price paid by suppliers for the purchase of
electricity from the Pool. Customers in the under 100kW market who choose to be
supplied by a second tier supplier are charged under the terms of standard
published contracts.
All suppliers use the national transmission system, for which they pay
published transmission charges, and the distribution system of the local public
electricity supply license holder, for which they pay published distribution
charges, to secure delivery of electricity to their customers.
Electricity supply and distribution businesses in England and Wales
are subject to price controls. Since the implementation of the initial price
controls in 1990, there have been two reviews of the supply price control,
effective for the periods from April 1, 1994 to March 31, 1998 and from April 1,
1998 to March 31, 2000. These reviews have resulted in reduced supply and
distribution prices, but because related costs have also been reduced, the
effect on Eastern has not been material. On August 12, 1999, the Office of Gas
and Electricity Markets issued draft proposals, adjusted on October 8, 1999,
for a range of substantial net revenue reductions for the distribution
businesses of all regional electricity companies in the UK. The Office of Gas
and Electricity Markets issued its price adjustment proposals for the
electricity supply businesses on October 8, 1999. The final Office of Gas and
Electricity Markets report is expected at the end of November 1999 and both
distribution and supply price adjustments are expected to become
effective April 1, 2000. See EASTERN BUSINESS OVERVIEW-- "Energy
Regulation--Electricity Supply Price Regulation" and "Networks
Regulation--Distribution Price Regulation." There can be no assurance whether
the final price adjustments will impact the financial position, results of
operations or cash flows of Eastern or TXU Europe.
With the consent of the public electricity supply license holders, the
Director General of Electricity Supply has modified the public electricity
supply licenses to require that the public electricity supply license holders
support the introduction of competition for ex-franchise supply customers by
offering services to competing suppliers. These services include registration,
data collection and aggregation, emergency reporting and meter operation. The
public electricity supply license holders may be required to provide meters to
customers who pay in advance for their electricity, usually customers with
outstanding obligations to the public electricity supply license holder. The
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public electricity supply license holders are also required to provide,
collectively, consumption and other customer data and a data transfer service to
facilitate customer transfers to other providers in the open electricity market.
The regional electricity companies also have contributed to a program
by the Pool to adopt settlement arrangements for the competitive market in 1998.
The costs of this program will be recovered from charges to be made to suppliers
by the Pool over a five year period. There is a cap above which the regional
electricity companies will only partially recover these costs. Eastern's share
of the costs beyond this cap is not expected to be material.
REGULATION OF THE ELECTRICITY SUPPLY INDUSTRY UNDER THE ELECTRICITY ACT
The Electricity Act created the institutional framework under which
the industry is currently regulated, including the office of the Director
General of Electricity Supply, who is appointed by the UK Secretary of State for
Trade and Industry. The government is currently consulting on legislation to
make significant amendments to the Electricity Act to reflect proposed changes
in the regulatory and legal framework of the industry. The government appointed
Callum McCarthy, a former banker, as the Director General of Gas Supply
beginning November 1, 1998. He assumed the duties of the Director General of
Electricity Supply beginning January 1, 1999. The Office of Gas Supply merged
with that of the Office of Electricity Regulation covering England, Wales and
Scotland. Since June 17, 1999, the merged office has been known as the Office of
Gas and Electricity Markets.
The Director General of Electricity Supply's functions under the
Electricity Act include:
o Granting licenses to generate, transmit or supply electricity, a
function which he exercises under a general authority from the UK
Secretary of State for Trade and Industry;
o Proposing modifications to licenses and, in case of
non-acceptance of those proposals by licensees, making license
modification referrals to the Monopolies and Mergers Commission;
o Enforcing compliance with license conditions;
o Advising the UK Secretary of State for Trade and Industry in
respect of the setting of each public electricity supply license
holder's non-fossil fuel obligation, which fixes the requirement
for the licensee to purchase electricity from non-fossil sources;
o Calculating the rate of the levy to reimburse generators and
regional electricity companies for the extra costs involved in
non-fossil fuel plant generation and collecting this fossil fuel
levy;
o Determining disputes between electricity licensees and customers;
and
o Setting standards of performance for electricity licensees.
The term "supply" as used in the context of the Electricity Act covers both
distribution and supply activities.
The Director General of Electricity Supply exercises concurrently with
the Director General of Fair Trading functions relating to monopoly situations
under the UK Fair Trading Act 1973 and functions relating to courses of conduct
which have, or might have, the effect of restricting, distorting or preventing
competition in the generation, transmission or supply of electricity in
contravention of the UK Competition Act 1980. The new Competition Act which
becomes effective March 1, 2000 will replace some provisions of the UK Fair
Trading Act 1973 and the UK Competition Act 1980. The new Competition Act
conforms to fair trade laws being enacted throughout the EU, including the
introduction of stricter enforcement and investigative powers.
Subject to these duties, the UK Secretary of State for Trade and
Industry and the Director General of Electricity Supply are further required to
exercise their functions in the manner which each considers is best calculated:
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o To protect the interests of consumers of electricity supplied by
licensed suppliers in terms of price, continuity of supply and
the quality of electricity supply services;
o To promote efficiency and economy on the part of licensed
electricity suppliers and the efficient use of electricity
supplied to consumers;
o To promote research and development by persons authorized by
license to generate, transmit or supply electricity;
o To protect the public from the dangers arising from the
generation, transmission or supply of electricity; and
o To secure the establishment and maintenance of machinery for
promoting the health and safety of workers in the electricity
industry.
The UK Secretary of State for Trade and Industry and the Director General of
Electricity Supply also have a duty to take into account the effect on the
physical environment of activities connected with the generation, transmission
or supply of electricity.
In performing their duties to protect the interests of consumers in
respect of prices and other terms of supply, the UK Secretary of State for Trade
and Industry and the Director General of Electricity Supply are required to take
into account in particular the interests of consumers in rural areas. In
performing their duties to protect the interests of consumers in respect of the
quality of electricity supply services, they are required to take into account
in particular the interests of those who are disabled or of pensionable age.
The Electricity Act requires the Director General of Electricity
Supply and the UK Secretary of State for Trade and Industry to carry out their
functions in the manner each considers is best calculated to ensure that all
reasonable demands for electricity will be satisfied, that license holders will
be able to finance their licensed activities and that will promote competition
in the generation and supply of electricity.
GOVERNMENT REVIEW OF UTILITY REGULATION
On June 30, 1997, the UK government announced its intention to conduct
a comprehensive review of the regulatory framework governing the electricity
distribution and supply businesses in England and Wales, as well as the
regulatory framework applicable to providers of water and telecommunications
services. The review culminated in a March 1998 policy statement which sets
forth a number of proposals of the UK government designed to re-examine utility
regulation in the UK. Among the main proposals contained in that policy
statement, some of which would require implementing legislation, are:
o The retention of the current distribution price control formula
as the basis for price regulation;
o Increased transparency and consistency of regulations;
o The separate licensing of the distribution and supply businesses
of the regional electricity companies; and
o Amendment of the statutory duties of utility regulators to
provide a new primary duty to exercise their functions in the
manner best calculated to protect the interests of the consumers
in the short and long term wherever possible, through promoting
competition and adopting price regulation to distinguish between
income earned through companies' own efforts and income which
results from other factors.
On May 13, 1998, the Director General of Electricity Supply issued a
consultation paper on the separation of distribution and supply businesses for
regional electricity companies and the future treatment of metering and meter
reading. The material proposals and recommendations set out in the consultation
paper are the following:
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o Full separation of the management of the supply and distribution
business was recommended and consideration of appropriate interim
arrangements for separate companies that will make up the
distribution and supply activities, each acting independently of
the other. Measures should be introduced to ensure that each
public electricity supply license holder's supply subsidiary
operates at arm's length from the distribution subsidiary. These
measures would include separate contracts between the supply and
distribution businesses to avoid the sharing of facilities
between the businesses. Separate management teams would be
required for the two businesses and corporate headquarters
activities would be minimized.
o The distribution company should be responsible for the
maintenance and operation of the network and have a statutory
duty to develop and maintain an efficient, coordinated and
economical system of electricity distribution and to facilitate
competition in generation and supply. It should connect any
customer to the network on reasonable terms and provide "last
resort" meter reading service for any supplier not wishing to
provide the service itself.
o All suppliers should be placed on the same legislative footing,
and tariff supply should be replaced by supply under contract.
License conditions would be introduced to protect customers and
competitors against dominant suppliers.
o Metering services should be open to competition, and arrangements
for transmission in Scotland should be brought into line with
those in England and Wales.
In October 1998, the Department of Trade and Industry published a
consultation paper setting out its views, following consultation on a number of
issues relating to the reform of regulatory structure in the gas and electricity
markets. It intends to consult on issues arising from responses in the fall of
1999. The October 1998 consultation paper sets out the government's view that
separate ownership of distribution and supply companies was inappropriate, but
that the two businesses should be held in separate subsidiary companies.
In November 1998, the Director General of Electricity Supply set out
further proposals on business separation. These proposals concentrate on the
goal of full operational separation of integrated support activities for the
distribution and supply businesses. He also appointed consultants to advise him
in drawing up a separation compliance plan. These were followed on May 19, 1999
by a further document of the Office of Electricity Regulation covering England,
Wales and Scotland that stressed the need to move rapidly towards operational
separation and proposed that work begin immediately on company specific
compliance plans. The Office of Electricity Regulation covering England, Wales
and Scotland also proposes the appointment of a senior level compliance manager
within each regional electricity company.
The Director General of Electric Supply is also reviewing the
operations of the Pool with a view to promoting alternative trading
arrangements.
TXU Europe and Eastern cannot predict the results of any of these
reviews, whether proposals recommended in the consultation paper will be
implemented or the ultimate effects on Eastern or TXU Europe.
THE GAS INDUSTRY IN THE UK
Natural gas is used for a wide range of residential and small business
and industrial purposes and also for gas-fired electricity generating stations.
Total consumption of natural gas in the UK in 1997 was equal to approximately 54
million tons of oil which equated to approximately 407 million barrels of oil.
Production of natural gas in the UK in 1997 was equal to approximately 87
million tons of oil which equated to approximately 656 million barrels of oil.
From the nationalization of the gas industry in Great Britain in 1948
until 1986, when British Gas plc was privatized, the supply of piped gas to
customers was a monopoly. Simultaneously with the privatization of British Gas
plc, steps were taken to develop greater competition within the industry,
initially by deregulating the supply of gas to the contract market. The contract
market is made up of customers that use more than 25,000 therms per year (1,000
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tons of oil equivalent is equal to 0.3968 therms). Within the contract market
there are "interruptible" customers, whose supply can be interrupted in periods
of exceptional demand, and "firm" customers to whom supply is guaranteed.
Competition has been extended to all consumers, including residential
and small business customers.
British Gas plc divided itself into two separate companies, Centrica
plc and BG plc. Centrica plc is a shipper and supplier of gas, while almost all
of the UK gas transmission and distribution network is owned and operated by BG
plc.
Participants in the gas industry are required to hold licenses granted
by the Director General of Gas Supply. These are:
o A "public gas transporter's license," which permits the licensee
to carry gas through pipelines to any premises or to a pipeline
system operated by another public gas transporter;
o A "gas supplier's license," which is required to supply gas to
customers; and
o A "gas shipper's license," which allows the licensee to arrange
with a public gas transporter to introduce, convey or take gas
out of the transporter's pipeline system.
In addition, the exploration for and production of gas in the North Sea is
subject to license by the Department of Trade and Industry.
BG plc is required to provide fair access to its network to all
shippers of gas, who pay charges determined by the amount of capacity they have
reserved on the system's entry and exit points and commodity charges based on
the amount of gas actually transmitted.
Shippers and suppliers obtain natural gas directly from offshore
fields, in which they may own equity interests, from wholesalers, or from both.
There are various types of contracts for the purchase of gas, but most of these
currently relate directly to physical volumes to be delivered into the UK gas
supply network. Many of these include "take or pay" obligations, under which the
buyer agrees to pay for a minimum quantity of gas in a year, although the amount
it takes in any specific time period can vary according to its need. Gas can be
purchased for delivery from one day to several years ahead.
Shippers in the gas industry have financial incentives to ensure that
they have sufficient gas, within limited tolerances, to meet the needs of their
suppliers and customers on a daily basis. Failure to do so could result in
additional costs being incurred. Fluctuations in demand are met by altering the
quantity of gas taken from fields, by adjusting wholesale purchase contracts and
the use of storage. Demand may also be limited by interrupting supplies to
interruptible customers. Any excess or shortfall in supply has to be sold to, or
bought from, the network operator at prices determined each day under an agreed
pricing formula.
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EASTERN BUSINESS OVERVIEW
GENERAL
Eastern, which is an indirect subsidiary of TXU Europe, is the holding
company for a group of companies engaged in a variety of energy businesses in
Europe. The management of these businesses is coordinated to give Eastern access
to many energy markets, to provide Eastern's customers access to a range of
energy products and to enable Eastern to respond efficiently to changes in
demand for and prices of energy throughout Europe. Eastern's principal business
operations are electricity networks and energy businesses in the UK.
The networks business is the largest distributor of electricity in
England and Wales, with over 3 million customers in a service area covering
approximately 20,300 square kilometers in the east of England and parts of north
London.
Eastern's energy business is made up of:
o Eastern Trading, which coordinates and manages for Eastern the
price and volume risks associated with Eastern's generation and
electricity and gas retail businesses and those of third parties;
o Energy Retail, Eastern's electricity and gas supply operations,
which is one of the largest retailers of electricity in the UK,
with approximately 3.1 million electricity customers of Eastern
Electricity and Eastern Energy Limited and 822,000 customers of
Eastern Natural Gas as of August 31, 1999; and
o Eastern Generation, one of the largest generators of electricity
in the UK, which currently owns, operates or has an interest in
ten power stations representing approximately 9.4% of the UK's
total generating capacity as of December 31, 1998.
Eastern also has interests in other parts of Europe, including
Scandinavia, Germany, the Czech Republic, The Netherlands, Poland and Spain, and
in four natural gas producing fields in the North Sea.
The electric operations of Eastern are highly seasonal with a very
substantial proportion of its profits earned in the winter months. The purchase
price for electricity in each half hour varies according to total demand, the
amount of generation capacity available but not needed and the prices bid by
generators. Consequently, the purchase price tends to be highest during mid-week
afternoons in winter, when demand is highest, or in late autumn, when a
significant number of power stations undergo scheduled maintenance. Purchase
prices are generally lowest during summer months. Seasonal variations in results
are likely to continue under revised trading arrangements that are due to be
introduced during 2000.
The energy retail, energy management and generation and networks
segments, the primary operating segments of Eastern, contributed 61%, 39% and
11%, respectively, of Eastern's revenues, before eliminating sales among Eastern
subsidiaries, during the last fiscal year. For financial information by
operating segment for the years ended March 31, 1997 and 1998, and for the
period from April 1, 1998 through May 18, 1998, see Note 15 to the Consolidated
Financial Statements of Eastern Group plc and Subsidiaries included elsewhere in
this prospectus. For financial information by operating segment for the periods
from formation on February 5, 1998 through December 31, 1998 and from formation
through March 31, 1999, see Note 17 to the Consolidated Financial Statements of
TXU Europe Limited and Subsidiaries included elsewhere in this prospectus. That
information has been prepared and presented in accordance with Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
EASTERN'S FLEXIBLE ENERGY PORTFOLIO CONCEPT
Eastern began as a regional electricity company, operating what is now
the largest electric networks and supply business in the UK. As the UK energy
market has become increasingly competitive, Eastern has been a pioneer in the
development of the flexible energy portfolio concept in the UK. The growth in
Eastern's electric generation and gas production assets has provided the
opportunity to hedge Eastern's retail electricity and natural gas contracts and
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commitments to customers. Eastern Trading now has a substantial portfolio of
positions in physical assets and contracts with which it can supply electricity
and gas to Eastern and other industry participants. The physical positions are a
natural hedge to the risks associated with Eastern's retail operations. To the
extent Eastern is naturally hedged, Eastern can avoid the expenses of entering
into alternative hedging arrangements. However, the physical positions are not
an exact match with Eastern Trading's supply commitments to the customers.
Therefore Eastern Trading manages the remaining exposure through contracts by
adjusting the balance of supply and demand in Eastern's portfolio, by varying
power station and gas field output, by contracting with counterparties and by
adjusting trading prices to the retail operations. Some of these arrangements
are described under "Portfolio Management/Energy Trading" below.
Overall, Eastern Trading integrates all aspects of Eastern's energy
business. It coordinates Eastern's energy operations, taking into account
anticipated demand and the availability to Eastern of electricity and natural
gas from all sources, including generation, gas production, and contracted
supplies.
In carrying out these duties, Eastern Trading:
o Offers Eastern's and others' retail operations a range of prices
for electricity and gas on which the energy retailers may base
prices for the supply of that energy to end customers;
o Bids into the Pool both price and volume for Eastern's
generation, taking account of anticipated retail demand and the
overall contractual position;
o Manages purchases from the Pool for Eastern and others;
o Manages Eastern's contracts for differences and electricity
forward agreements; and
o Matches Eastern's gas assets and purchase contracts, including
access to gas storage, with anticipated demand, including demand
from Eastern's gas-fired generating plants, and buys and sells
gas in the event of an excess or shortfall.
Finally, Eastern is also forming various business alliances with
European power companies and expects to implement a similar strategy in other
parts of continental Europe as markets there open to competition.
STRATEGY FOR EASTERN'S ENERGY BUSINESS
Eastern's strategy for the energy business is to increase Eastern's UK
market share in the retail sale of gas and electricity by strengthening its
existing positions in those markets. Eastern believes that substantial economic
and marketing benefits are derived from operating its natural gas and
electricity retailing business as a single unit. Competitive markets provide
opportunities for Eastern to expand its retail base through superior marketing
and a focus on service to customers. As the retail base grows, Eastern's overall
energy portfolio will be adapted to manage the associated price and volume
risks. Providing similar development and management of portfolios to third
parties that are other energy providers gives Eastern additional opportunities
to develop its customer base.
Eastern also plans additional growth in continental Europe. Eastern
expects competition to increase in European markets. As opportunities arise,
Eastern intends to expand its current European presence by developing its
European energy business similarly to what it has done in the UK. This could be
by direct acquisition or contractual arrangements. As appropriate, Eastern aims
to establish positions through interests in physical assets or through contracts
and trading. It expects to develop distribution and retail customer bases
through direct marketing and alliances, or joint ventures, with businesses with
existing customer bases. These steps will enable Eastern to operate profitably
in these markets by taking advantage of price, weather, the timing of demands on
the system or other differentials between connected European markets, as it does
in the UK.
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EASTERN GENERATION
Eastern Generation is one of the largest generators of electricity in
the UK. Its share of total UK generating capacity is approximately 9.4%. It
currently owns, operates or has an interest in ten power stations in the UK.
Eastern Generation also has a controlling interest in Nedalo (UK) Limited, the
largest supplier of small electrical combined heat and power plants, which are
those with less than 1.5 MW, in the UK.
UK GENERATION FACILITIES
Eastern's current portfolio of power stations is predominately a mix
of combined cycle gas turbine and coal-fired stations. It represents both plants
which run throughout most of the year and plants which run only during periods
of high demand. Eastern's portfolio of power stations provides flexibility in
managing the price and volume risks of its energy contracts and has enabled
Eastern to diversify its fuel supply risk.
Information on Eastern's interests in power stations in the UK is set
out in the following table and discussed further below. In all cases installed
generating capacity is equal to registered generating capacity except for
Peterborough and King's Lynn, which have registered generating capacities of 405
MW and 380 MW, respectively, but installed generating capacities, as shown
below, of 360 MW and 340 MW, respectively.
- --------------------------------------------------------------------------------
Installed
Capacity Date of earliest
Plant Type MW commissioning
- --------------------------------------------------------------------------------
West Burton Coal-fired 2,012 1967
Rugeley B Coal-fired 1,046 1972
Drakelow C Coal-fired 976 1965
Ironbridge Coal-fired 970 1970
High Marnham Coal-fired 945 1959
Peterborough Combined cycle gas turbine 360 1993
King's Lynn Combined cycle gas turbine 340 1997
Barking Combined cycle gas turbine 135(1) 1995
London-Citigen Combined heat and power 31 1992
Grimsby-MIC(2) Combined heat and power 15 1995
-----
Total 6,830
=====
(1) Represents Eastern's approximately 13.5% interest in a 1,000 MW plant.
(2) Located on the property of a customer.
West Burton, Rugeley B and Ironbridge. In June 1996, Eastern assumed
-------------------------------------
operational and commercial control, through a combination of lease and outright
purchase from National Power, of all of the assets and a portion of the
liabilities of the West Burton, Rugeley B and Ironbridge power stations. Eastern
holds a 99-year lease over the land, buildings and plant at each of those power
stations and has the right to purchase the freehold land after 50 years. Under
the leases, Eastern was committed to make fixed payments totalling (pound)737.5
million, of which (pound)337.5 million was paid at commencement of the leases.
The balance, together with interest at 7.75%, is payable in 2001. Further
payments of approximately (pound)6 per MWh, indexed to inflation and linked to
output levels from these stations, are also payable to National Power through
2004. National Power has agreed in principle with the Department of Trade and
Industry to modify the payment terms to reduce Eastern's output-linked payments
by (pound)1.50 per MWh for four months of the year. The specific terms of the
modification are not yet agreed. The new terms will not otherwise change
Eastern's obligations under the leases. The National Power leases have been
characterized as capital leases under US GAAP.
Drakelow C and High Marnham. Eastern has leased the land, buildings
---------------------------
and plant at the Drakelow C and High Marnham power stations from PowerGen for 99
years, under agreements entered into in July 1996. PowerGen is responsible for
decommissioning costs if Eastern decides to close these stations during the term
of the leases. Eastern is committed to fixed payments totalling (pound)230
million, subject to minor adjustments if aggregate capacity is reduced. The
51
<PAGE>
payments, together with interest, are to be made in installments, over eight
years beginning in 1996. As with the National Power leases, further
output-related payments of approximately (pound)6 per MWh, indexed to inflation,
are payable to PowerGen for the first five years of operation by Eastern. On
November 25, 1998, the UK Secretary of State for Trade and Industry confirmed
that, as a condition for allowing PowerGen to acquire East Midlands Electricity
plc, he would require that the output-related elements of these lease
arrangements be terminated 15 months early. The output-related payments to
PowerGen will now terminate in March 2000.
Peterborough. The power station at Peterborough was developed and
------------
built as a joint venture between Eastern and Hawker Siddeley Power
(Peterborough) Limited between 1990 and 1993. Eastern acquired Hawker Siddeley's
interest in September 1994. Eastern Trading has secured contracts with natural
gas suppliers to meet the station's natural gas requirements. The Peterborough
plant is operated and maintained on behalf of Eastern by a third party
contractor under a seven year contract which commenced in 1993.
King's Lynn. The 340 MW combined cycle gas turbine power station at
-----------
King's Lynn was constructed for Eastern under a contract which required the
contractor to provide a functioning power plant. The station began commercial
generation in December 1997 and is operated and maintained by Eastern. Eastern
Trading has secured contracts with natural gas suppliers to meet the station's
natural gas requirements.
Barking. Eastern has an interest of approximately 13.5% in a 1,000 MW
-------
combined cycle gas turbine power station at Barking which was constructed as a
joint venture between Eastern and a number of other companies and which became
operational in 1995.
London-Citigen and Grimsby-MIC. In December 1998, Eastern Generation
------------------------------
acquired from BG plc two combined heat and power plants: a 15 MW combined heat
and power plant based on the Millennium Inorganic Chemicals site at Grimsby and
a 31 MW district heating and chilling plant, Citigen, in London.
Nedalo. Eastern owns 75% of Nedalo, which provides to customers small
------
scale combined heat and power equipment that can produce up to 1.5 electrical MW
per single unit. Separate units can be grouped together. When grouped together,
the units can have a total output equal to the sum of the outputs for the
individual units. Approximately 70 MW of small scale combined heat and power
equipment is expected to be installed in the UK in 1999, and Nedalo has
approximately 70% of this market.
NON-UK GENERATION FACILITIES
Czech Republic. Eastern has invested (pound)27.8 million in an
--------------
interest of 83.7% in Teplarny Brno, a district heating and generation company
based in Brno, the second largest city in the Czech Republic. Teplarny Brno owns
oil and gas-fired plants that are capable of generating 851 MW of energy in the
form of steam and hot water. This is sold principally to industrial and
residential customers. It also owns a 169 kilometer pipeline network for
distributing heat to customers' premises. Teplarny Brno also has an electricity
generation capacity of approximately 97 MW. The output is sold to the regional
electricity company. A combined cycle gas turbine plant is currently being
commissioned and will provide 86 MW of additional heat capacity and 95 MW of
additional electricity generating capacity. This plant, which has a contract
value of approximately (pound)31.6 million, is expected to be fully commissioned
by the end of October 1999.
Poland. Eastern has acquired 49% of Zamosc Energy Company, a joint
------
venture with the Polish regional distribution company, Zamejska Korporacja
Energetyczna SA, which was established to develop power plants in southeast
Poland. A 125 MW combined cycle gas turbine project is being developed at
Jaraslaw. The project is expected to cost approximately US$100 million, but the
financing has not yet been closed.
Finland. In September 1999, Eastern announced that it was to form a
-------
joint venture company with Pohjolan Voima Oy, Finland's second largest
electricity generator. The joint venture company will be owned 81% by Eastern
and 19% by Pohjolan Voima Oy. As part of the transaction the joint venture will
acquire approximately 600 MW of Pohjolan Voima Oy's thermal generating capacity.
Eastern will pay approximately (pound)200 million for its share of the joint
venture. The formation of the joint venture is a part of Eastern's strategy
to build a European energy portfolio by working in partnership with other
companies.
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OTHER PROJECTS
In December 1997, the UK government stopped granting consents for the
construction of new gas-fired power stations pending adoption of the stricter
consents policy announced in an October 1998 policy statement on Energy Sources
for Power Generation. This policy has delayed the construction of some projects
by Eastern and its competitors. However, in December 1998, Eastern received
government consent to build a 215 MW combined heat and power plant to provide
heat and power to Shotton Paper on Deeside. In addition in July and September
1999, Eastern received government consent to modify the Drakelow and Rugeley
power stations to enable those power stations to be fueled by gas in addition to
coal, or by a combination of gas and oil.
Eastern continues to consider other new generation projects and in
April 1999 it announced that a one MW wind turbine in Northern Ireland had
successfully completed tests and had begun generating electricity.
The UK government imposes on electricity suppliers an obligation to
purchase a portion of their requirements from renewable energy sources under the
non-fossil fuel obligation levy scheme. Renewable energy sources are those that
are not currently consumed faster than they are replenished. Renewable energy
sources include solar and wind power. As of September 30, 1999, Eastern had
entered into development agreements in the UK for 110 MW installed capacity of
on-shore wind projects under power purchase contracts that are awaiting planning
consents from local authorities. An agreement outlining the main terms has been
signed with joint developers for up to 100 MW of on-shore wind power in Portugal
and 65 MW of electricity to be produced from forest waste in the UK. Additional
opportunities for renewable energy projects and large and small scale combined
heat and power plants are being actively considered, together with other
conventional generating projects.
COMPETITION IN GENERATION
Eastern is one of the largest generators in the UK, with a share of
approximately 9.4% of the UK's total generation capacity registered as of
December 31, 1998.
Eastern's mix of generating plants enables it to operate in the
sectors of the market for both plants that run throughout most of the year and
plants that run only during periods of high demand, and to spread its fuel
risks.
The generation market will be affected by the outcome of the review of
energy sources by the UK government and the regulatory review of electricity
trading arrangements.
The UK government has initiated a program of reform in the electricity
market. The program involves:
o Reform of the electricity trading arrangements in England and
Wales;
o Seeking practical opportunities for divestment of assets by major
coal-fired generators;
o Moving forward with competition in electricity supply for all
customers;
o Separating supply and distribution in electricity markets;
o Revising its policy relating to the construction of new gas-fired
generation facilities;
o Continuing to press for open energy markets in Europe.
One of the results of this program is that the major coal-fired
generators, National Power and PowerGen, are in the process of divesting
generating plants. AES Corp. is buying the 4,000 MW Drax coal-fired station
from National Power and Edison Mission Energy is acquiring the two 2,000 MW
coal-fired stations at Ferrybridge and Fiddlers Ferry from PowerGen. These
transactions are yet to be completed. In addition, construction of new
gas-fired generating facilities is likely to increase competition in the
generation market. Eastern cannot predict the impact these reforms will have
on its financial position, results of operations or cash flows.
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<PAGE>
ENERGY RETAILING
Eastern has integrated its electricity and gas retailing operations
into a single energy business.
The electricity retailing business involves the sale to customers of
electricity that is purchased from the Pool. Pool price risk is managed on
behalf of the retail business by Eastern Trading. The energy business is charged
a regulated price by transmission and distribution companies, including Eastern
Electricity, for the physical delivery of electricity.
Eastern Electricity supplies electricity to customers in all sectors
of the market and is one of the largest retailers of electricity in England and
Wales. Eastern's service area, which covers approximately 20,300 square
kilometers in the east of England and parts of north London, was one of four
areas in the first group to be fully opened for competition. At August 31, 1999,
Eastern Electricity supplied electricity to approximately 2.9 million customers,
including approximately 2.6 million residential customers and 178,000 small
businesses. Industrial and commercial customers accounted for approximately 53%
of Eastern Electricity's retail sales.
Eastern Natural Gas is one of the largest suppliers of natural gas in
the UK. At December 31, 1998 Eastern's market share by volume was estimated at
approximately 11% of gas delivered to the competitive industrial and commercial
market. At August 31, 1999, it was supplying 822,000 customers in the UK,
ranging from residential households to large industrial companies.
In November 1998, Eastern announced a gas retailing joint venture in
Holland with Energie Noord West and an electricity trading and retail joint
venture with Lunds Energi in Sweden.
In June 1999, Eastern announced details of a program to restructure
the energy retailing business in order to be more cost effective in the
competitive energy markets. This program will result in the closure of two
principal offices with the loss of 300 permanent and 200 temporary positions and
a cost of approximately (pound)8.6 million. Eastern also intends to seek new
ways to access the energy markets and to form more partnerships with the
objective of reducing costs, improving access to customers and capitalizing on
emerging new markets like the internet.
COMPETITION IN ELECTRICITY RETAILING
Eastern is an active participant in the competitive UK electricity
market. The competitive market is made up of customers with maximum annual
demand of more than 100 kW. It typically includes large commercial and
industrial users. As of December 31, 1998, this market consisted of over 51,000
sites. Eastern estimates that this represents a market size of approximately
(pound)6 billion per year based upon electricity prices at that date. In
addition, Eastern estimates that more than 85% of these sites are outside its
authorized area, and that over 60% of its electricity sales to the competitive
market are to customers outside its authorized area. Eastern had more than 13%
of this market. Eastern competes in the competitive market for customers with
maximum annual demand of more than 100kW on the basis of the quality of its
customer service and by competitive pricing. The largest suppliers in this
market over the same period were PowerGen and National Power.
Competition has been fully introduced for customers in all areas of
Great Britain. New entrants to the competitive market have been limited to
British Gas Trading Limited, Independent Energy and a small number of other
companies. Eastern competes nationally for residential and small business
customers and, by August 31, 1999, it was supplying 174,000 customers outside
its traditional service area and had agreed contracts with a further 60,000
residential customers. At the same date, approximately 282,000 customers in
Eastern's service area had transferred to other suppliers.
There is no assurance whether or not competition among suppliers of
electricity will adversely affect Eastern.
54
<PAGE>
COMPETITION IN GAS SUPPLY BUSINESS
As a result of UK government action in recent years, the UK retail gas
supply market is open to competition. Eastern's main competitors are Centrica
plc and the gas marketing arms of some major oil companies. Further competition
is provided by a number of other electricity companies and smaller gas suppliers
which are independent of the major oil companies and which each have a minor
presence in the market.
Eastern intends to maintain a significant share of this market through
high-quality customer service and competitive pricing.
PORTFOLIO MANAGEMENT/ENERGY TRADING
Typically, holders of public electricity supply licenses issued under
the Electricity Act in connection with supply and distribution within an
authorized area in Great Britain are exposed to risk, as they are obliged to
supply electricity to their customers at stable prices but have to purchase
almost all the electricity necessary to supply those customers from the Pool at
prices that are constantly changing. The ownership of generating assets provides
a natural hedge against these risks; the use of financial instruments like
contracts for differences provide another hedging alternative.
A contract for differences is an agreement between two parties calling
for payments between the parties of amounts equal to the product of:
o The difference in each settlement period between the Pool price
and the price, known as the strike price, specified in the
contract for differences and
o The amount of electricity provided for in that settlement period,
which is usually expressed in MW of demand.
Each settlement period is one-half hour. Contracts for differences effectively
fix the prices a supplier pays and a generator receives for electricity. If the
Pool price is lower than the price specified in the contract for differences for
the settlement period, the supplier pays the generator; and if the Pool price is
higher, the generator pays the supplier. In this way, contracts for differences
reduce the financial risk otherwise associated with the sale and purchase of
electricity through the Pool.
Eastern Trading coordinates Eastern's activities in managing risk. It
provides support to Eastern's energy retail activities, taking into account its
energy purchases and sales and its contract portfolios, including Eastern's
generating assets and natural gas production interests. Eastern Trading is
responsible for setting the level of bids into the Pool for the output of each
of Eastern's generating stations, other than Barking and the combined heat and
power plants. Eastern Trading uses this method to coordinate the operation of
Eastern's generating stations with Eastern's fuel contract position and its
retail and wholesale energy sales portfolios to Eastern's best advantage. It
also coordinates the operation of Eastern's generating stations, taking into
consideration the relative prices in the energy markets. Eastern Trading also
earns revenue by providing risk management services to other energy retailers to
assist in managing their Pool/market price risk.
Eastern Trading manages Eastern's financial exposure to fluctuations in
electricity prices by:
o Managing its portfolio of contracts for differences;
o Bidding both price and volume for Eastern's generation output,
other than for the Barking plant and the combined heat and power
plants, into the Pool for each half hour of the day; and
o Deciding with the electricity retailing division of Eastern on
the volume and pricing of sales in the competitive and
ex-franchise markets.
55
<PAGE>
The overall electricity position for each half hour of the day is
monitored by Eastern Trading with the goal of optimizing electricity purchases
and sales positions through the use of generation facilities, long and
short-term retail sales contracts and appropriate financial instruments. The
overall gas position is monitored in a similar way with additional opportunities
presented through the operation of gas-fired power stations, storage facilities
and the use of gas assets which are the source of electricity. Together, the
overall electricity and gas positions are managed by reference to risk exposure
limits that are monitored by a risk management team within Eastern. The risk
management team verifies that the trading instruments employed have been
approved for use by Eastern Trading and carries out credit checks on current and
proposed counterparties. Eastern's ability to manage that risk in the future
will depend, in part, on the terms of its supply contracts, the continuation of
an adequate market for hedging instruments and the performance of its generating
and gas assets which are the source of electricity.
In order to help meet the expected needs of its natural gas wholesale
and retail customers, including Eastern's power stations, Eastern has entered
into a variety of gas purchase contracts. As of December 31, 1998, the
commitments under long-term purchase contracts amounted to an estimated
(pound)1.3 billion, covering periods of up to 16 years. Firm sales commitments,
including estimated power station usage, at the same date amounted to an
estimated (pound)3.0 billion, covering periods up to 18 years.
Eastern Trading also purchases coal, oil and natural gas for the
Eastern's UK power stations and has equity interests in four natural
gas-producing fields in the North Sea. In July 1999, Eastern significantly
expanded its North Sea gas interests through the purchase of all of BHP
Petroleum's assets in the Southern North Sea for approximately (pound)102
million. In December 1998, Eastern also agreed to purchase Monument Oil's share
of the Johnston field in the Southern North Sea for almost (pound)20 million.
These purchases would increase Eastern's interest in the Johnston field from
approximately 5.5% to 55%. The acquisition of Monument Oil's assets was approved
by the UK Department of Trade and Industry on October 20, 1999. Monument Oil is
now required to obtain consents from its partner companies under various
agreements relating to the Johnston field. Further agreements have been entered
into which would increase Eastern's interest to 64.2%. These agreements are
subject to approval by the UK Department of Trade and Industry.
The energy management business also trades on the Nord Pool, the
electricity trading market in Scandinavia, and has recently acquired access to
up to 140 MW of hydro output in Norway for 55 years, for which Eastern has paid
an upfront fee of up to (pound)124 million. This agreement also provides for
Eastern to acquire an additional 47MW of hydropower in Norway. In Spain, Eastern
has acquired a 5% minority shareholding in Hidroelectrica del Cantabrico, S.A.
It has created a 50/50 joint venture trading company with Hidroelectrica del
Cantabrico, S.A., Synergia Trading S.A., covering the Iberian peninsula.
In September 1999, the energy management business established an
office in Geneva, Switzerland, which will coordinate European energy management
and development projects.
NETWORKS
ELECTRICITY DISTRIBUTION
Eastern's electricity networks business consists of the ownership,
management and operation of the electricity distribution network within
Eastern's authorized area. Eastern receives electricity in England and Wales
from National Grid. Eastern then distributes electricity to end users connected
to Eastern's power lines.
Almost all electricity customers in Eastern's authorized area, whether
franchise or competitive, are connected to and dependent upon Eastern's
distribution system. Eastern distributes approximately 32 TWh of electricity
annually to over three million customers, representing more than seven million
people. Most of the tangible fixed assets owned by Eastern in the UK are
currently employed in the electricity distribution business. The distribution by
Eastern of electricity in its authorized area is regulated by its public
electricity supply license, which, other than in exceptional circumstances, is
due to remain in effect until at least 2025.
56
<PAGE>
PHYSICAL DISTRIBUTION SYSTEM
Eastern receives electricity from National Grid at 21 supply points
within its authorized area and three points in the authorized areas of
neighboring regional electricity companies. Most of this electricity is received
at 132kV. It is then distributed to customers through Eastern's system of
approximately 35,200 kilometers of overhead lines, 54,600 kilometers of
underground cable and numerous transformers and circuit breakers, through a
series of interconnected networks operating at successively lower voltages.
Eastern also receives electricity directly from generating stations located in
its authorized area and, from time to time, from customers' own generating
plants and connections with neighboring regional electricity companies.
At March 31, 1999, Eastern's electricity distribution system network,
excluding service connections to consumers, included overhead lines and
underground cables at the operating voltage levels indicated in the table below:
OVERHEAD LINES UNDERGROUND CABLES
OPERATING VOLTAGE (CIRCUIT KILOMETERS) (CIRCUIT KILOMETERS)
- ----------------- -------------------- --------------------
132kV................ 2,365 220
33kV................. 3,883 2,450
25kV................. 0 23
11kV................. 19,377 16,625
6.6kV................ 0 29
3kV.................. 0 21
LV................... 9,533 35,221
------ ------
Total.............. 35,158 54,589
====== ======
In addition to the circuits referred to above, Eastern's distribution facilities
also include:
AGGREGATE CAPACITY
TRANSFORMERS NUMBER (MEGA VOLT AMPERES)
------------ ------ -------------------
132kV................ 230 13,306
33kV................. 869 10,360
11kV................. 61,406 14,719
------ ------
Total.............. 62,505 38,385
====== ======
AGGREGATE CAPACITY
SUBSTATION NUMBER (MEGA VOLT AMPERES)
---------- ------ -------------------
132kV................ 99 13,306
33kV................. 437 10,360
11kV................. 61,828 14,719
------ ------
Total.............. 62,364 38,385
====== ======
CUSTOMERS
Most of the revenue from use of the distribution system is from
Eastern's electricity retail operations. The rest is derived from holders of
second tier supply licenses in respect of the delivery of electricity to their
customers located in Eastern's authorized area.
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The following table set out details of Eastern's customers and
electricity units distributed:
FISCAL YEAR ENDED MARCH 31,
------------------------------------------
1997 1998 1999
---------- ---------- ----------
NUMBERS OF CUSTOMERS CONNECTED
- ------------------------------
AT YEAR END
-----------
Residential................... 2,868,090 2,891,970 2,957,943
Commercial,
Industrial
and Other................... 254,245 263,502 268,208
---------- --------- ---------
Total......................... 3,122,335 3,155,472 3,226,151
========== ========= =========
ELECTRICITY DISTRIBUTED (GWH)
- -----------------------------
Residential................... 13,390 12,946 13,786
Commercial,
Industrial
and Other................... 18,160 18,830 18,914
---------- ---------- ----------
Total......................... 31,550 31,776 32,700
========== ========== ==========
SYSTEM PERFORMANCE
The performance of all UK distribution networks is monitored and
publicly reported upon annually by the Office of Electricity Regulation covering
England, Wales and Scotland, now known as the Office of Gas and Electricity
Markets. According to the Office of Electricity Regulation covering England,
Wales and Scotland's Report on Distribution and Transmission System Performance
1997/98, Eastern achieved the best overall distribution system performance,
measured by number of faults per 100 kilometers of network, of all the public
electricity supply license holders in the year ended March 31, 1998. For the
year ended March 31, 1999, Eastern achieved a 25% reduction in minutes lost per
customer and an 18% reduction in interruptions per 100 customers compared to the
year ended March 31, 1998. These improvements exceeded the targets of 70
interruptions in a year per 100 customers and 66 minutes lost in a year per
customer that Eastern had declared for itself for the year ended March 31, 2000.
DISTRIBUTION CHARGES AND PRICE CONTROL
The distribution charges levied by Eastern and the other regional
electricity companies consist of charges for use of the system and charges for
other services outside the scope of the price control, including connection
charges. Distribution and supply charges are regulated by conditions in
Eastern's public electricity supply license, which sets out a formula for
determining the maximum average charge per unit distributed in any financial
year. Sales of Eastern's electricity network business consist primarily of
charges for the use of its distribution system, most of which are levied on
Eastern's electricity retail business, being the largest supplier from the
network, and are passed through to its customers. Most of the charges for the
use of the distribution system are subject to distribution price controls. See
"UK Regulatory Matters--Networks Regulation-- Distribution Price Regulation"
below.
COMPETITION IN THE ELECTRICITY NETWORKS BUSINESS
At present, Eastern experiences little competition in the operation of
its electricity distribution system. In limited circumstances, some customers
may establish or increase capacity for their own generation by becoming directly
connected to National Grid or by establishing their own generating capacity;
they then avoid charges for the use of the distribution system. Eastern does not
currently consider this a significant threat to its electricity networks
business.
STRATEGY FOR THE ELECTRICITY NETWORKS BUSINESS
In support of Eastern's European integrated energy business concept,
the electricity networks business may evaluate growth opportunities that enhance
value. Eastern is also examining opportunities to manage major third-party
networks.
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CZECH REPUBLIC
In October 1996, Eastern acquired an 11.6% minority interest in
Severomoravska Energetika a.s., a Czech electricity distribution and supply
company, as part of its plan to develop interests in companies that would
further its integrated energy strategy overseas. This interest was increased to
16.3% in March 1998.
FINLAND
Eastern announced in May 1999 that it had agreed to make an investment
in Savon Voima Oy, a regional electricity distributor in central Finland. The
investment will be a purchase of 36% of Savon Voima Oy's share capital for a
purchase price of (pound)42 million. Savon Voima Oy is currently owned by 29
local municipalities. There are put options exercisable by the municipalities
which if exercised would automatically give Eastern a controlling stake. The
purchase is part of Eastern's overall strategy to manage a flexible Scandinavian
energy portfolio and to develop Eastern's Scandinavian businesses working with
local partners. The parties signed the agreement for this investment in October
1999, though the purchase is not yet complete and is subject to a number of
conditions.
OTHER ACTIVITIES
In December 1998, Eastern sold its wholly-owned subsidiary, Eastern
Group Telecoms Limited, to NTL Incorporated for (pound)91 million. Eastern's
current strategic plan does not focus on telecommunications activities.
EMPLOYEES
At December 31, 1998, Eastern had approximately 7,000 full-time
employees.
Eastern recognizes trade unions for collective bargaining purposes,
and approximately 54% of employees of Eastern's businesses are union members.
Union membership existed at Eastern when it was privatized. However, the new
companies set up by Eastern after privatization have no obligations to recognize
trade unions. Eastern Natural Gas and Eastern Trading do not recognize trade
unions, and most workers in these businesses are employed under individual
contracts. There have been no industrial disputes or work stoppages at Eastern
during the period following its privatization in 1990.
UK REGULATORY MATTERS
The electricity industry in the UK, including Eastern, is subject to
regulation under, among other things, the Electricity Act and UK and EU
environmental legislation described below. Eastern is also subject to existing
UK and EU legislation on competition and regulation in its gas business. Eastern
has all of the necessary franchises, licenses and certificates required to
enable it to conduct its businesses. In addition, part of any profit on disposal
of assets vested in Eastern at the time of its privatization is subject to
recovery by the UK Secretary of State for Trade and Industry until March 31,
2000.
Eastern expects proposals with respect to utility regulation to be
part of legislation that will be introduced in 1999 or 2000. The implementation
of utility regulation could result in significant changes to the existing
regulatory regime. There can be no assurance regarding the potential impact of
regulatory changes, if any, on Eastern.
ENERGY REGULATION
GENERATION
Unless covered by an exemption, all electricity generators operating a
power station in the UK are required to have generation licenses. The conditions
attached to a generation license in the UK require the holder, among other
things, to be a member of the Pool and to submit the output of the power
station's generating units or turbines for central dispatch. Failure to comply
with any of the generation license conditions may subject the licensee to a
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variety of sanctions, including enforcement orders by the Director General of
Electricity Supply and license revocation if an enforcement order is not
complied with.
The UK Secretary of State for Trade and Industry has power under the
Electricity Act to require generators operating power stations with a capacity
of not less than 50 MW to maintain stocks of fuel and other materials at power
stations. The UK Secretary of State for Trade and Industry has recently
completed a review of the level of fuel stocks held by generators in 1997. No
increase was required, but Pool rules were changed as of December 1997 to
penalize gas power plants that reduce output during times of insufficient plant
margins. Eastern does not anticipate that these changes will have a material
adverse effect on its results of operations.
In the UK each public electricity supply license limits the amount of
generation capacity in which each regional electricity company may hold an
interest without the prior consent of the Director General of Electricity
Supply. These "own-generation" limits currently restrict the participation by a
regional electricity company and its affiliates in generation to a level of
approximately 15% of the simultaneous maximum electricity demand in that
regional electricity company's authorized area at the time of privatization.
Eastern's limit is 1,000 MW. The Director General of Electricity Supply stated
in January 1996 that he would be prepared to consider a regional electricity
company's request to increase its own-generation capacity on the condition that
it accept explicit restrictions on the contracts it signs with its own supply
business. At a minimum, a regional electricity company would be prohibited from
entering into contracts to provide the additional own-generation output to its
franchise market. Following public consultation, the Director General of
Electricity Supply set out the basis on which consents for regional electricity
companies to acquire new generation capacity would be allowed. The specific
consent of the Director General of Electricity Supply to the leasing by Eastern
of approximately 6,000 MW of generating capacity from National Power and
PowerGen was later confirmed by the Office of Electricity Regulation covering
England, Wales and Scotland and is not subject to the above-noted supply
business restrictions. Eastern received government consent to build a combined
heat and power plant at Shotton in December 1998 and the acquisition of
additional generation capacity at Dowlais has been approved in principle by the
Director General of Electricity Supply.
ELECTRICITY RETAILING
Subject to specific exceptions, retail suppliers of electricity in the
ex-franchise market in the UK are required either to have a public electricity
supply license for an authorized area or to obtain a second tier supply license.
Public electricity supply license holders are required under the Electricity Act
to provide a supply of electricity upon request to any premises in their
authorized area, except in specified circumstances. Each public electricity
supply license holder is subject to various obligations under its public
electricity supply license. These include prohibitions on cross-subsidies among
its various regulated businesses and discrimination in respect of the supply of
customers. Each public electricity supply license holder is also required to
offer open access to its distribution network on non-discriminatory terms. This
obligation includes a requirement not to discriminate between its own supply
business and other users of its distribution system. Public electricity supply
license holders are subject to separate controls on the tariffs to ex-franchise
customers and in respect of distribution charges. The Office of Gas and
Electricity Markets is reviewing the distribution and supply price controls.
A supplier of electricity to the competitive market in the UK must
have, subject to specific exemptions, a second tier supply license or a public
electricity supply license for the service area in which customers are supplied.
ELECTRICITY SUPPLY PRICE REGULATION
Supply charges in the ex-franchise market are regulated by a maximum
price control that applies to each tariff in the residential and small business
customer market and effectively provides customers with price guarantees. On
April 1, 1998, Eastern's tariffs were reduced by 8.9%, before adjustments for
inflation. As provided in the formula, Eastern's tariffs were reduced by a
further 3%, before adjustments for inflation, beginning April 1, 1999. There are
no other changes in place for retail tariffs. On October 8, 1999, the Office of
Gas and Electricity Markets issued proposed price adjustments for the
electricity supply businesses. The final Office of Gas and Electricity Markets
report is expected at the end of November 1999, and the supply price adjustments
are expected to become effective April 1, 2000. TXU Europe and Eastern cannot
predict at this time either the final price adjustments that will be applicable
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to Eastern or the ultimate impact of those adjustments on TXU Europe's financial
position, results of operations or cash flows.
As the ex-franchise market is opened to competition, supply price
restraints are no longer expected to be applicable to current franchise market
supply customers. However, the Director General of Electricity Supply has
indicated in his supply price restraint proposals published in October 1997,
that beginning April 1, 1998, price regulation would be put in place for supply
to all designated (residential and small business) customers whose annual
consumption is below 12,000 kWh within Eastern's authorized area, and will
remain in place until an adequate level of competition is established, and, at
least, until March 31, 2000.
GAS
The natural gas supply activities of Eastern are principally regulated
by the Director General of Gas Supply under the UK Gas Act 1986, as amended by
the UK Gas Act 1995 and by the conditions of Eastern's gas licenses granted by
the Director General of Gas Supply. Eastern Natural Gas currently holds a gas
supplier's license. Eastern's natural gas supply business is not subject to
price regulation. Subsidiaries of Eastern currently hold a gas shipper's license
and a public gas transporter's license.
ENERGY TRADING
Eastern Trading is permitted by the Financial Services Authority under
the Financial Services Act 1986 to deal in contracts for differences, including
futures and options. A subsidiary of Eastern Trading is a joint holder of
production licenses relating to its equity interests in four North Sea natural
gas fields.
NETWORKS REGULATION
DISTRIBUTION PRICE REGULATION
A formula determines the maximum average price per unit of electricity
distributed, in pence per kilowatt hour, that a regional electricity company is
entitled to charge. This price, when multiplied by the expected number of units
to be distributed, determines the expected distribution revenues of the regional
electricity company for the relevant year. The current Distribution Price
Control Formula, P x (1+(RPI-Xd)), is based on the following:
o P is the previous year's maximum average price per unit of
electricity distributed. Because the maximum average price in any
year is based in part on the maximum average price in the
preceding year, a price reduction in any given year has an
ongoing effect on the maximum average price for all later years.
o RPI is a measure of inflation, and equals the percentage change
in the UK Retail Price Index between the six-month period of July
to December of the two previous years. Because RPI is based on a
weighted average of the prices of goods and services purchased by
a typical household, which bear little resemblance to the inputs
contributing to Eastern's business costs, the RPI calculation may
not accurately reflect price changes affecting Eastern.
o The Xd factor is established by the Director General of
Electricity Supply each five years. It is based on an estimate of
expected efficiency gains during the next five years.
The formula permits regional electricity companies to retain part of their
additional revenues due to increased distribution of units and allows for a
pound sterling for pound sterling increase in operating profit for efficient
operations and reduction of expenses within a review period. In relation to the
next Distribution Price Control Formula review, scheduled to be implemented in
April 2000, the Director General of Electricity Supply may reduce any increase
in operating profit to the extent he determines it not to be a function of
efficiency savings and/or, if genuine efficiency savings have been made, he
determines that customers should benefit through lower prices in the future.
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On August 12, 1999, the Office of Gas and Electricity Markets issued a
draft report, adjusted on October 8, 1999, proposing a range of substantial net
revenue reductions for the distribution businesses of all regional electricity
companies in the UK. The final Office of Gas and Electricity Markets report is
expected at the end of November 1999, and the distribution price adjustments are
expected to become effective April 1, 2000. TXU Europe and Eastern are analyzing
the draft proposals and cannot predict at this time either the final price
adjustments that will be applicable to Eastern or the ultimate impact of those
adjustments on TXU Europe's financial position, results of operations or cash
flows.
Distribution costs vary according to the voltage at which consumers
are connected and the level of use of the distribution system at the time units
are distributed. Changes in the mix of units distributed at different voltage
levels and between peak and off-peak periods are reflected in the calculation of
the maximum average permitted charge per unit distributed by reference to a
"basket" of distribution categories.
Electricity distributed to extra high voltage premises is excluded
from the Distribution Price Control Formula, as are charges for specific
additional services including connection charges. Connection charges must be set
at a level which enables the licensee to recover no more than the appropriate
proportion of the costs incurred and no more than a reasonable rate of return on
the capital represented by those costs. Any dispute over connection charges may
be determined by the Directory General of Electricity Supply. In addition,
income received in respect of exit charges related to National Grid that are
incurred by a regional electricity company and received through system charges
is not subject to distribution price control.
The Director General of Electricity Supply may propose amendments to
the Distribution Price Control Formula or any other terms of the license. In the
cases where a public electricity supply license holder is not willing to accept
modifications to the license conditions put forward by the Director General of
Electricity Supply, the normal process would be for the Director General of
Electricity Supply to refer the matter to Monopolies and Mergers Commission or,
after March 1, 2000, or its replacement, the Competition Commission for a
determination of whether continued operation without the proposed license
modifications is in the public interest.
ENVIRONMENTAL REGULATIONS AND EMISSIONS
Eastern's businesses are subject to numerous regulatory requirements
with respect to the protection of the environment. The electricity generation
industry in the UK is subject to a framework of national and EU environmental
laws which regulate the construction, operation and decommissioning of
generating stations. Under these laws, each generating station operated by
Eastern is required to have an authorization which regulates its releases into
the environment and seeks to minimize pollution of the environment taken as a
whole, having regard to the best available techniques not entailing excessive
cost. These authorizations are issued by the Environment Agency which has the
responsibility for regulating the impact of Eastern's generating stations on the
environment. The principal laws which have environmental implications for
Eastern are the Electricity Act, the Environmental Protection Act 1990 and the
UK Environment Act 1995.
The Electricity Act requires Eastern to consider the preservation of
natural beauty and the conservation of natural and man-made features of
particular interest when it formulates proposals for development of power
stations with a capacity in excess of 50 MW or installation of overhead power
lines. Environmental assessments are required to be carried out in some cases,
including overhead line constructions at high voltages and generating station
developments. Eastern has produced Environmental Policy Statements and
Electricity Act Schedule 9 Statements which explain the manner in which it
complies with its environmental obligations.
Possible adverse health effects of electro-magnetic fields from
various sources, including transmission and distribution lines, have been the
subject of extensive worldwide scientific research. Over eighty independent and
authoritative scientific review bodies have concluded that the scientific
evidence to date does not establish that electro-magnetic fields cause adverse
human health effects. Even with no health effects established, it is possible
that the passage of legislation and changing regulatory standards could require
measures to mitigate electro-magnetic fields. These changes could result in
increased capital and operational costs. In addition, it is always possible for
lawsuits to be brought by plaintiffs alleging damages caused by electro-magnetic
fields. The National Radiological Protection Board is the body in the UK with
the statutory responsibility for advising on electro-magnetic fields. Eastern
fully complies with the guidance of the National Radiological Protection Board.
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Eastern has approximately 680 and 192 kilometers of underground cables
insulated with an oil-filled wrap which operate at 33kV and 132kV, respectively.
This type of cable is in common use by utilities in the UK and parts of
continental Europe. These cables generally supply substantial amounts of
electricity to large substations in urban areas and to large customers. Most of
Eastern's cables are between 30 and 50 years old. Eastern operates these cables
in accordance with the Environment Agency's Operating Code for Fluid-Filled
Cables, monitoring and repairing both gradual and substantial leaks that arise
through age deterioration and damage by a third party. Eastern has a program to
reduce oil leakage and minimize the possibility of pollution to watercourses and
ground water. This involves establishing a more effective standard procedure for
dealing with cable leaks and implementation of an effective monitoring system.
Eastern also has a plan for gradual replacement and refurbishment of these
cables with more modern solid cables in the future. Eastern believes that its
existing monitoring systems and planned replacement and refurbishment program
effectively minimize the risk of major environmental incidents or additional
replacement expenditures. Eastern could incur significant expenditures if it
were required to replace its fluid-filled cables, other than in the ordinary
course of business, pursuant to new or existing legislation; however, Eastern is
not aware of any plans of any governmental authority to impose that kind of
requirement.
The principal EU Directive affecting atmosphere emissions to the
environment currently in force is the Large Combustion Plants Directive. The
Large Combustion Plants Directive required the UK to reduce from 1980 levels its
sulfur dioxide (SO2) emissions from its existing plants by 60% by 2003 and
nitrogen oxides (NOx) emissions by 30% by 1998. The Large Combustion Plant
National Plan is the mechanism by which the Large Combustion Plants Directive
has been implemented in the UK and sets annual targets for reductions in
emissions for the electricity industry. Discussions are under way in the EU
regarding an update of the Large Combustion Plants Directive which will
introduce tighter emission controls as well as national limits for 2010. The UK
government has recently made a review of energy sources and electricity trading
arrangements and has made proposals regarding new limits for SO2 emissions to
apply in the period to 2005. The government is expected to propose tighter
controls on NOx emissions in the near future. Eastern is examining the economic
and practical implications of fitting a flue gas desulphurization plant to its
West Burton station to reduce the sulphur output of the plant; the flue would
operate beginning in autumn 2003.
At a local level, the UK's Air Quality Strategy provides set targets
for 2005 and places a duty on local authorities to review air quality with a
view to setting up action plans for management in places where targets are
unlikely to be met. When adverse meteorological conditions occur, some
generating stations might have to introduce measures to comply with these
targets, which could include installation of costly equipment or reduction of
the operating level of the stations.
In December 1997, the Conference of the Parties of the United Nations
Framework Convention on Climate Change adopted the Kyoto Protocol which
specifies targets and timetables to reduce greenhouse gas emissions. The UK is a
signatory to the Kyoto Protocol and this involves a 12% reduction in carbon
dioxide emissions by 2010 if the Protocol is ratified. Eastern is unable to
predict what impact the implementation of the Kyoto Protocol will have on it,
although the UK government is proposing to introduce a tax on the business use
of energy in order to reduce energy consumption.
Eastern believes that it is currently in compliance with, has taken,
and intends to continue to take, measures to comply, in all material respects,
with the applicable law and government regulations for the protection of the
environment. There are no material legal or administrative proceedings pending
against Eastern with respect to any environmental matter.
Estimated capital expenditure on environmental control facilities is
(pound)2 million in the fourth quarter of 1999, (pound)43 million in 2000,
(pound)50 million in 2001, (pound)40 million in 2002, and (pound)35 million in
2003.
FOSSIL FUEL LEVY
All the regional electricity companies are obliged to obtain a
specified amount of generating capacity from renewable, or non-fossil fuel,
sources. Because electricity generated from renewable energy sources is
generally more expensive than electricity from fossil fuel plants, a non-fossil
fuel obligation levy has been instituted to reimburse the generators and the
regional electricity companies for the extra costs involved. The Director
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General of Electricity Supply sets the rate of the non-fossil fuel obligation
levy annually. The current non-fossil fuel obligation levy is 0.9% of the value
of sales of electricity made in England and Wales and 0.8% of the value of sales
of electricity made in Scotland.
UK AND EU FAIR COMPETITION LAW
Eastern is subject to the fair competition, or antitrust, rules of
both the UK and the EU.
The UK Fair Trading Act 1973 and the UK Competition Act 1980 both
regulate the activities of companies with market power. The UK Resale Price Act
1976 regulates resale prices and the UK Restrictive Trade Practices Act 1976
regulates price fixing agreement. UK competition law is in the process of reform
in accordance with the UK Competition Act 1998 which will become effective on
March 1, 2000. In broad terms, the UK Competition Act 1998 conforms to fair
trade laws at the EU level. It prohibits anti-competitive agreements and abuse
of dominant market position and introduces stricter enforcement and
investigative powers.
The Treaty of Rome contains provisions which prohibit anti-competitive
agreements and practices, including the abuse of a dominant position within the
EU or a substantial part of it. Penalties for violation of these provisions
include fines, third party damages and making infringing contractual provisions
unenforceable.
EU Directive 93/36 was implemented by the UK in December 1996 and
covers service contracts as well as supply and work contracts. Those contracts
that exceed the relevant financial thresholds have to be advertised in the
Official Journal of the European Communities. Disappointed suppliers and
contractors who believe they have suffered harm from a company's failure to
implement the correct procedures in awarding a contract are able to institute
proceedings in the English High Court. The European Commission also has a role
for ensuring compliance with EU procurement regulations.
PROPERTIES
The principal properties owned or occupied by TXU Europe's continuing
businesses are as follows:
SITE
AREA
(ACRES
EXCEPT
OWNER/ TERM OF PRINCIPAL THE
PROPERTY LEASEHOLDER INTEREST LEASE USE ADELPHI)
- ------------------ ----------- -------- --------- --------- --------
The Adelphi Eastern
Group plc Leasehold 15 years Offices 14,905
sq. ft.
Bedford Eastern
Electricity Freehold -- Offices and 5.0
Depot
Carterhatch Lane,
Enfield Eastern
Electricity Freehold -- Offices and 4.0
Depot
Milton, Cambridge Eastern
Electricity Freehold -- Offices and 24.0
Depot
Rayleigh Eastern
Electricity Freehold -- Offices and 7.8
Depot
Wherstead Park,
Wherstead, Ipswich Eastern
Electricity Freehold -- Offices 17.0
King's Lynn
Power Station Anglian Power Freehold -- Power station 16.1
Generators
Limited
Peterborough
Power Station Eastern
Generation Freehold -- Power station 18.1
Drakelow C Power
Station Eastern
Merchant Leasehold 99 years Power station 177.0
Properties
Limited
High Marnham
Power Station Eastern
Merchant Leasehold 99 years Power station 178.4
Properties
Limited
Ironbridge Power
Station Eastern
Merchant Leasehold 99 years Power station 212.7
Properties
Limited
Rugeley B Power
Station Eastern
Merchant Leasehold 99 years Power station 299.0
Properties
Limited
West Burton Power
Station Eastern
Merchant Leasehold 99 years Power station 511.5
Properties
Limited
For information concerning Eastern's generating stations, see --
"Generation" above.
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LEGAL PROCEEDINGS
TXU Europe is not involved in any legal or arbitration proceedings
which management believes will have a material adverse effect upon TXU Europe's
business or financial position.
On May 19, 1998 a complaint was filed in the High Court of Justice in
London, Chancery Division, Patents Court, by Optimum Solutions Limited against
National Grid, Yorkshire Electricity Group plc, Eastern Electricity and Logica
Plc. Yorkshire Electricity and Eastern Electricity are both members of the Pool.
Optimum Solutions Limited alleges breach of confidence in respect of information
supplied in the context of the development of the trading arrangements for the
1998 liberalization of electricity supply in England and Wales, or Trading
Arrangements. Optimum Solutions Limited requests an unspecified amount of
damages relating to breach of contract, an unspecified amount of equitable
compensation for misuse of the confidential information and return of material
alleged to contain confidential information. It is alleged that the Pool has
made use of the confidential information in the development of the Trading
Arrangements and that Eastern Electricity made use of it in using the systems
developed by the Pool for trading purposes. The action against Eastern
Electricity is being strenuously defended.
In February 1997, the official government representative of pensioners
in the UK, the Pensions Ombudsman, made final determinations against National
Grid and its group trustees with respect to complaints by two pensioners in
National Grid's section of the Electricity Supply Pension Scheme relating to the
use of the pension fund surplus resulting from the March 31, 1992 actuarial
valuation of the National Grid section to meet costs arising from the payment of
pensions of early retirement upon reorganization or downsizing. These
determinations were 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, and judgment
has now been received although a final order is awaited. The appeal endorsed the
Pensions Ombudsman's determination that the corporation was not entitled to
unilaterally deal with any surplus. If a similar claim were to be made against
Eastern in relation to its use of actuarial surplus in its section of the
Electricity Supply Pension Scheme, it would vigorously defend the action,
ultimately through the courts. However, if a determination were finally to be
made against it and upheld in the courts, Eastern could have a potential
liability to repay to its section of the Electricity Supply Pension Scheme an
amount estimated by Eastern to be up to (pound)45 million, exclusive of any
future applicable interest charges.
On January 25, 1999, the Hindustan Development Corporation issued
proceedings in the Arbitral Tribunal in Delhi, India against TEG claiming
damages of US$413 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. TXU Europe is vigorously defending this claim.
In November 1998, five complaints were filed in the High Court of
Justice in London, Queens Bench Division, Commercial Court, against subsidiaries
of Eastern by five of their former sales agencies. The agencies claim a total
(pound)104 million arising from the summary termination for the claimed
fundamental breach of their respective contracts in April 1998. The five
agencies are claiming damages for failure to give reasonable notice and for
compensation under the UK Commercial Agents Regulations 1994. These actions are
all being defended strenuously, and counterclaims have been filed. Eastern
cannot predict the outcome of these claims and counterclaims.
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SECURITY OWNERSHIP
TXU Europe is wholly-owned indirectly by TXU Corp. Funding is
wholly-owned indirectly by TXU Europe. The following table shows the number of
shares of common stock of TXU Corp owned by the directors of TXU Europe and
Funding as of September 30, 1999.
The number of shares under "Phantom Stock Plans" represents share
units held in individual accounts in phantom stock plans of TXU Corp and
Eastern. Although the plans allow the units to be paid only in the form of cash,
investments in the units create essentially the same investment stake in the
performance of the common stock of TXU Corp as do investments in actual shares
of common stock.
NUMBER OF SHARES
--------------------------------------------
BENEFICIALLY
NAME OWNED PHANTOM STOCK PLANS TOTAL
---- ----- ------------------- -----
Erle Nye 121,173 71,511 192,684
H. Jarrell Gibbs 35,098 29,907 65,005
Michael J. McNally 49,445 22,682 72,127
Robert A. Wooldridge 1,952 0 1,952
Philip G. Turberville o o o
Paul C. Marsh o o o
James Whelan o o o
Derek C. Bonham 3,000 0 3,000
Directors of Funding and
TXU Europe as a
group (8 persons) o o o
The named individuals have sole voting and investment power for the
shares of common stock reported as beneficially owned. Ownership of that common
stock by each individual director and for all directors as a group constituted
less than 1% of the outstanding shares of TXU Corp.
MANAGEMENT OF TXU EASTERN FUNDING COMPANY
MANAGEMENT OF FUNDING
The following table lists information with respect to the management
of Funding as of September 30, 1999:
NAME AGE POSITION
---- --- --------
Erle Nye 62 Director
H. Jarrell Gibbs 61 Director
Michael J. McNally 45 Director
Robert A. Wooldridge 61 Director
Philip G. Turberville 48 Director
Paul C. Marsh 41 Director
Erle Nye has been a director of Funding since February 1999. He has
served as a director and Chairman of the Board and Chief Executive of TXU Corp
since May 1997 and of TXU Gas Company since August 1997. He has also been a
director and Chairman of the Board and Chief Executive of TXU Electric Company
for more than the last five years. Mr. Nye is also a director of TXU Europe. In
addition, Mr. Nye was President of TXU Corp from February 1987 through May 1995
and President and Chief Executive of TXU Corp from May 1995 through May 1997.
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H. Jarrell Gibbs has served as a director of Funding since February
1999. He is Vice Chairman of TXU Corp and a director and Vice Chairman of the
Board of TXU Gas Company. Before that, Mr. Gibbs was the President of TXU
Electric Company and Vice President and Principal Financial Officer of TXU Corp.
Mr. Gibbs is also a director of Eastern and of TXU Europe.
Michael J. McNally has served as a director of Funding since February
1999. He is the Executive Vice President and Chief Financial Officer of TXU
Corp. Before that, Mr. McNally was President of the Transmission Division of TXU
Electric Company; Executive Vice President of TXU Electric Company; Principal of
Enron Development Corporation; Managing Director of Industrial Services of Enron
Capital and Trade Resources; and President of Houston Pipe Line Company and
Enron Gas Liquids, Inc. Mr. McNally is also a director of TXU Electric Company,
TXU Gas Company and TXU Europe.
Robert A. Wooldridge has been a director of Funding since February
1999. Mr. Wooldridge is a partner in the law firm Worsham, Forsythe & Wooldridge
L.L.P. in Dallas, Texas which provides legal services to TXU Europe and Funding,
as well as TXU Corp and other subsidiaries of TXU Corp. Mr. Wooldridge is also a
director of TXU Gas Company and TXU Europe.
Philip G. Turberville has served as a director of Funding since August
1999. Mr. Turberville has served as a director and the Chairman of the Board and
Chief Executive Officer of Eastern since January 4, 1999. Before that, Mr.
Turberville was President of the Europe Oil Products division of The Royal Dutch
Shell Group, where he had worked in a variety of roles providing him with
extensive international experience since 1976. Mr. Turberville is also a
director of TXU Europe and Eastern.
Paul C. Marsh has served as a director of Funding since August 1999.
He has been with Eastern since October 1992 and has served as Finance Director
of Eastern since February 24, 1997. Before that, Mr. Marsh worked in Ernst &
Young's Corporate Advisory Services Division. Before that, Mr. Marsh served as
Finance Director in two medium sized private sales and trading groups. Mr. Marsh
is also a director of TXU Europe and Eastern.
There is no family relationship between any of the above-named
directors. Funding has no executive officers other than its directors.
DIRECTOR COMPENSATION OF FUNDING
Mr. Wooldridge does not receive compensation for his services as a
director of Funding. The remaining directors of Funding listed above have
received, and will continue to receive, compensation in respect of services
performed by those persons as directors of Funding from their primary employer
which is either TXU Corp or another subsidiary of TXU Corp. These directors
receive no cash or non-cash compensation beyond that which they would otherwise
receive from TXU Corp or a TXU Corp subsidiary for the services performed by
them for those companies.
MANAGEMENT OF TXU EUROPE LIMITED
MANAGEMENT OF TXU EUROPE
The following table lists information with respect to the management
of TXU Europe as of September 30, 1999:
NAME AGE POSITION
---- --- --------
Erle Nye 62 Director
H. Jarrell Gibbs 61 Director
Michael J. McNally 45 Director
Robert A. Wooldridge 61 Director
Philip G. Turberville 48 Director
Paul C. Marsh 41 Director
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NAME AGE POSITION
---- --- --------
James Whelan 47 Director
Derek C. Bonham 56 Director
Erle Nye has been a director of TXU Europe since February 1998. He has
served as a director and Chairman of the Board and Chief Executive of TXU Corp
since May 1997 and of TXU Gas Company since August 1997. He has also been a
director and Chairman of the Board and Chief Executive of TXU Electric Company
for more than the last five years. Mr. Nye is also a director of Funding. In
addition, Mr. Nye was President of TXU Corp from February 1987 through May 1995
and President and Chief Executive of TXU Corp from May 1995 through May 1997.
H. Jarrell Gibbs has served as a director of TXU Europe since February
1998. He is Vice Chairman of TXU Corp and a director and Vice Chairman of the
Board of TXU Gas Company. Before that, Mr. Gibbs was the President of TXU
Electric Company and Vice President and Principal Financial Officer of TXU Corp.
Mr. Gibbs is also a director of Eastern and of Funding.
Michael J. McNally has served as a director of TXU Europe since
February 1998. He is the Executive Vice President and Chief Financial Officer of
TXU Corp. Before that, Mr. McNally was President of the Transmission Division of
TXU Electric Company; Executive Vice President of TXU Electric Company;
Principal of Enron Development Corporation; Managing Director of Industrial
Services of Enron Capital and Trade Resources; and President of Houston Pipe
Line Company and Enron Gas Liquids, Inc. Mr. McNally is also a director of TXU
Electric Company, TXU Gas Company and Funding.
Robert A. Wooldridge has been a director of TXU Europe since February
1998. Mr. Wooldridge is a partner in the law firm Worsham, Forsythe & Wooldridge
L.L.P. in Dallas, Texas, which provides legal services to TXU Europe and
Funding, as well as TXU Corp and other subsidiaries of TXU Corp. Mr. Wooldridge
is also a director of TXU Gas Company and Funding.
Philip G. Turberville has served as a director of TXU Europe since May
1999. Mr. Turberville has served as a director and the Chairman of the Board and
Chief Executive Officer of Eastern since January 4, 1999. Before that, Mr.
Turberville was President of the Europe Oil Products division of The Royal Dutch
Shell Group, where he had worked in a variety of roles providing him with
extensive international experience since 1976. Mr. Turberville is also a
director of Funding.
Paul C. Marsh has served as a director of TXU Europe since May 1999.
He has been with Eastern since October 1992 and has served as Finance Director
of Eastern since February 24, 1997. Before that, Mr. Marsh worked in Ernst &
Young's Corporate Advisory Services Division. Before that, Mr. Marsh served as
Finance Director in two medium sized private sales and trading groups. Mr. Marsh
is also a director of Eastern and Funding.
James Whelan has served as a director of TXU Europe since May 1999. He
has been the Managing Director, Power and Energy Trading of Eastern since July
1, 1997. Before that, Mr. Whelan led Eastern's acquisitions of the National
Power and PowerGen interests in 1996. Mr. Whelan joined Eastern in 1993. Mr.
Whelan is also a director of Eastern.
Derek C. Bonham has served as a director of TXU Europe since May 1999.
He has served as Chairman of Imperial Tobacco Group PLC since October 1996.
Before that, Mr. Bonham was Chairman of The Energy Group PLC from February 1997
through July 1998. Before that, Mr. Bonham served as Deputy Chairman and Chief
Executive of Hanson PLC from November 1993 through February 1997 and as Chief
Executive of Hanson PLC from April 1992 through November 1993. Mr. Bonham is
also a director of Glaxo Wellcome PLC, Imperial Tobacco Group PLC, Newsquest
PLC, Fieldens PLC and TXU Corp.
There is no family relationship between any of the above-named
directors. TXU Europe has no executive officers other than its directors.
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DIRECTOR COMPENSATION OF TXU EUROPE
In the fiscal year ended December 31, 1998, the directors of TXU
Europe did not receive any compensation in respect of their services performed
for TXU Europe. Mr. Wooldridge did not receive compensation for his services as
a director of TXU Europe. Messrs. Nye, Gibbs and McNally received, and will
continue to receive, compensation in respect of services performed by those
persons as directors of TXU Europe from their primary employer which is either
TXU Corp or another US subsidiary of TXU Corp and an affiliate of TXU Europe.
These directors received no cash or non-cash compensation beyond that which they
would have otherwise received from TXU Corp or a TXU Corp subsidiary for the
services performed by them for those companies. During 1998 all persons
performing the functions of executive officers of TXU Europe were directors of
that company.
RELATIONSHIPS OF MANAGEMENT TO FUNDING AND
TXU EUROPE AND RELATED TRANSACTIONS
Mr. Wooldridge is a partner in Worsham, Forsythe & Wooldridge, L.L.P.,
which provides legal services to Funding and TXU Europe, as well as TXU Corp and
other subsidiaries of TXU Corp. These legal services were provided on terms at
least as favorable to those companies as could have been obtained from others
for comparable services.
MANAGEMENT OF EASTERN GROUP PLC
The following table lists information with respect to the management
of Eastern as of September 30, 1999:
NAME AGE POSITION
---- --- --------
H. Jarrell Gibbs 61 Director
David J.H. Huber 49 Director
Edward B. Hyams 48 Director
Paul C. Marsh 41 Director
David W. Owens 47 Director
Philip G. Turberville 48 Director
James Whelan 47 Director
H. Jarrell Gibbs has served as a director of Eastern since July 2,
1998. He is Vice Chairman of TXU Corp and a director and Vice Chairman of the
Board of TXU Gas Company. Before that, Mr. Gibbs was the President of TXU
Electric Company and Vice President and Principal Financial Officer of TXU Corp.
Mr. Gibbs is also a director of Funding and TXU Europe.
David J.H. Huber has been the Human Resources Director of Eastern
since September 1, 1997. Before that, Dr. Huber was the Human Resources Director
of Safeway Stores plc from 1988; before that, Dr. Huber was the Senior Personnel
Director at Burton Group plc from 1985.
Edward B. Hyams has served as a director of Eastern since September
13, 1996, first as the Managing Director of its networks business and, since May
1998, as the Managing Director, Generation. Before that, Mr. Hyams served as
Director of Engineering at Southern Electric plc from 1992.
Paul C. Marsh has been with Eastern since October 1992 and has served
as Finance Director of Eastern since February 24, 1997. Before that, Mr. Marsh
worked in Ernst & Young's Corporate Advisory Services Division. Before that, Mr.
Marsh served as Finance Director in two medium sized private sales and trading
groups. Mr. Marsh has also served as a director of TXU Europe since May 1999.
David W. Owens has been the Managing Director, Networks, since May 18,
1998. Before that, Mr. Owens served as Managing Director at ABB Power T&D
Limited from 1994. Before that, Mr. Owens held a number of senior positions at
GEC Alstom and GEC.
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Philip G. Turberville has served as a director and the Chairman of the
Board and Chief Executive Officer of Eastern since January 4, 1999. Before that,
Mr. Turberville was President of the Europe Oil Products division of The Royal
Dutch Shell Group, where he had worked in a variety of roles providing him with
extensive international experience since 1976. Mr. Turberville has also served
as a director of TXU Europe since May 1999.
James Whelan has been the Managing Director, Power and Energy Trading
since July 1, 1997. Before that, Mr. Whelan led Eastern's acquisitions of the
National Power and PowerGen interests in 1996. Mr. Whelan joined Eastern in
1993. Mr. Whelan has also served as a director of TXU Europe since May 1999.
There is no family relationship among any of the above-named
directors.
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EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Funding issued and sold interests in the senior notes on May 13, 1999
to the initial purchasers in a private offering, and the initial purchasers
later sold interests in the senior notes to qualified institutional buyers in
reliance on Rule 144A or in offshore transactions in accordance with Regulation
S under the Securities Act. At the same time, Funding and TXU Europe agreed in a
registration rights agreement with the initial purchasers to proceed with
efforts to exchange the senior notes for exchange senior notes registered under
the Securities Act.
As of the date of this prospectus, all of the outstanding interests in
senior notes are in book-entry form. It is not expected that any senior notes or
exchange senior notes will be in registered certificated form at the time of the
exchange. It is expected that all senior notes before the exchange, and exchange
senior notes and any senior notes outstanding after the exchange, will be
represented by global certificates for notes in bearer form held by The Bank of
New York as depositary and that DTC will have a book-entry interest in those
notes. Beneficial interests in those notes will be held through participants in
DTC acting as securities intermediaries. Therefore, references in this section
to senior notes or exchange senior notes are references to beneficial interests
in the senior notes or exchange senior notes in bearer form except where the
discussion is explicitly about certificated notes, and references to owners are
to owners of those beneficial interests.
Owners of senior notes should instruct the brokers, dealers,
commercial banks or trust companies with whom they have securities accounts or
their nominees to tender for them. Exchanges by owners will be represented by an
exchange of global certificates for senior notes held by the depositary for
global certificates for exchange senior notes. If fewer than all senior notes
are tendered for exchange, the depositary will hold global certificates for both
senior notes and exchange senior notes representing the appropriate aggregate
amounts.
In the registration rights agreement, Funding and TXU Europe agreed to
use their reasonable best efforts to register notes and guarantees of those
notes with the SEC for issuance in the exchange offer. Funding and TXU Europe
will use their reasonable best efforts to keep the exchange offer open for at
least 30 days after the date of this prospectus. An owner that tenders senior
notes in accordance with the exchange offer and does not withdraw them will
receive exchange senior notes in the same principal amount as the tendered
senior notes. Interest on exchange senior notes will accrue from the date of the
last interest payment on the senior notes tendered. If no interest has been paid
on the senior notes, interest will accrue from the date of issuance of the
senior notes. The description of the terms of the registration rights agreement
in this prospectus is not complete. A copy of the registration rights agreement
has been filed as an exhibit to the registration statement that includes this
prospectus.
Based on existing interpretations of the Securities Act by the staff
of the SEC's Division of Corporation Finance (Staff) described in several
no-action letters requested by other issuers of securities, Funding and TXU
Europe believe that the exchange senior notes issued in accordance with the
exchange offer may be offered for resale, resold and otherwise transferred by
their owners, other than owners who are broker-dealers, without further
compliance with the registration and prospectus delivery provisions of the
Securities Act. However, any purchaser of senior notes:
o Who is an affiliate of Funding and TXU Europe;
o Who did not acquire the exchange senior notes to be received in
the ordinary course of business; or
o Who intends to participate in the exchange offer for the purpose
of distributing exchange senior notes, or who is a broker-dealer
who purchased senior notes to resell under Rule 144A or any other
available exemption under the Securities Act;
cannot rely on the interpretation of the Staff in those no-action letters, will
not be entitled to tender its senior notes in the exchange offer, and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or transfer of the senior notes
unless that sale or transfer is exempt from those requirements.
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Funding and TXU Europe do not intend to seek their own no-action
letter, and there can be no assurance that the Staff would make a similar
determination with respect to the exchange senior notes as it has in those
no-action letters to other issuers of securities. In November 1998, the SEC
proposed changes to the regulatory structure for offerings registered under the
Securities Act. The SEC has stated that, if these proposals are adopted, the
Staff will repeal its interpretations described in the no-action letters
mentioned above. Funding and TXU Europe cannot predict whether these proposals
will be adopted or, if they are adopted, when and in what form they will be
adopted and how they will affect resales of the exchange senior notes.
Except for those owners described above, each owner of senior notes
that wants to exchange senior notes for exchange senior notes in the exchange
offer will be required to represent that:
o It is not an affiliate of Funding and TXU Europe, within the
meaning of Rule 405 of the Securities Act;
o The exchange senior notes to be received by it were acquired in
the ordinary course of its business;
o At the time of the exchange offer, it has no arrangement or
understanding with any person to participate in the distribution,
within the meaning of the Securities Act, of the exchange senior
notes; and
o If the owner is not a broker-dealer, it is not engaged in, and
does not intend to engage in, a distribution, within the meaning
of the Securities Act, of the exchange senior notes.
In addition, in connection with any resales of exchange senior notes,
any Participating Broker-Dealer, a broker-dealer that acquired the exchange
senior notes, other than directly from Funding, for its own account as a result
of market-making or other trading activities, must deliver a prospectus meeting
the requirements of the Securities Act. Applying the Staff's position in the
no-action letters mentioned above, such a Participating Broker-Dealer may
fulfill its prospectus delivery requirements with respect to exchange senior
notes by using this prospectus, except if they are reselling an unsold allotment
from the original sale of senior notes. Under the registration rights agreement,
Funding and TXU Europe therefore must allow those Participating Broker-Dealers
and other persons that have similar prospectus delivery requirements to use this
prospectus in connection with the resale of exchange senior notes.
The information detailed above concerning interpretations of and
positions taken by the Staff is not intended to constitute legal advice, and
owners of senior notes should consult their own legal advisors with respect to
these matters.
TERMS OF THE EXCHANGE OFFER
Subject to the terms and conditions described in this prospectus and
in the Letter of Transmittal that has been prepared for delivery with this
prospectus to owners of senior notes, Funding and TXU Europe will accept any and
all senior notes validly tendered and not withdrawn before 5:00 p.m., New York
City time, on ___________, 1999, or the expiration date for any extension of the
exchange offer. Funding will issue 6.15% exchange senior notes, 6.45% exchange
senior notes and 6.75% exchange senior notes in exchange for equal principal
amounts of 6.15% senior notes, 6.45% senior notes and 6.75% senior notes,
respectively, that are properly surrendered in accordance with the exchange
offer. Senior notes may be tendered only in denominations of $10,000 and in
multiples of $1,000 for amounts over $10,000.
As of the date of this prospectus, there were outstanding $350,000,000
aggregate principal amount of 6.15% senior notes, $650,000,000 aggregate
principal amount of 6.45% senior notes and $500,000,000 aggregate principal
amount of 6.75% senior notes, all of which are held in book-entry form. This
prospectus, together with the Letter of Transmittal, is being sent to securities
intermediaries for all owners of the senior notes.
If any certificates for senior notes are issued before the exchange and
registered on the books of Funding, a Letter of Transmittal will be sent to
registered holders of those certificates with specific instructions for delivery
of certificates and the interests they represent.
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Funding and TXU Europe intend to conduct the exchange offer in
accordance with the provisions of the registration rights agreement and the
applicable requirements of the Exchange Act. The terms of the exchange senior
notes of each series will be the same as the terms of the senior notes of the
related series except that the exchange senior notes will not have transfer
restrictions or any terms relating to registration rights. The exchange senior
notes of each series will evidence the same debt as the senior notes of the
related series. The exchange senior notes of each series will be issued under
and entitled to the benefits of the indenture under which the related senior
notes were issued.
Senior notes that are not tendered for exchange in the exchange offer
will remain outstanding and also will be entitled to the rights and benefits
that the owners have under the indenture. Unless they are Participating
Broker-Dealers, they will no longer have any rights under the registration
rights agreement. They will, however, remain subject to transfer restrictions,
and the market for secondary resales is likely to be minimal.
Funding and TXU Europe will be deemed to have accepted properly
tendered senior notes when, as and if Funding has given oral or written notice
that they have accepted the tender to the exchange agent for the exchange offer.
Owners who tender senior notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange in
accordance with the exchange offer. Funding and TXU Europe will pay all charges
and expenses, other than applicable taxes described below, in connection with
the exchange offer. See -- "Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date," means 5:00 p.m., New York City time on o,
1999, unless Funding and TXU Europe, in their sole discretion, extend the
exchange offer, in which case the term "Expiration Date" will mean the latest
date and time to which the exchange offer is extended. In any event, Funding and
TXU Europe will not extend the exchange offer beyond six months from [effective
date of registration statement].
In order to extend the exchange offer, Funding and TXU Europe will
notify the exchange agent of any extension by oral or written notice and by
public announcement, which may be in the form of a news release. Public
announcement of an extension will be made before 9:00 a.m., New York City time,
on the next business day after the then Expiration Date.
Funding and TXU Europe reserve the right, in their sole discretion:
o To delay accepting any senior notes, to extend the exchange offer
or to terminate the exchange offer if any of the conditions
described below under -- "Conditions" will not have been
satisfied, by giving oral or written notice of that delay,
extension or termination to the exchange agent; or
o To amend the terms of the exchange offer in any manner consistent
with the registration rights agreement.
Any delay in acceptances, extension, termination or amendment will be followed
as promptly as practicable by oral or written notice of the extension,
termination or amendment to the depositary and to DTC for delivery to its
participants. If the exchange offer is amended in a manner determined by Funding
and TXU Europe to constitute a material change, Funding and TXU Europe will
promptly disclose that amendment by means of a prospectus supplement that will
be made available to owners of senior notes. If the exchange offer is amended in
a manner determined by Funding and TXU Europe to constitute a fundamental
change, Funding and TXU Europe will promptly file a post-effective amendment to
the registration statement and will make an amended prospectus available to
owners of senior notes when the post-effective amendment is declared effective
by the SEC. In either case, Funding and TXU Europe will extend the exchange
offer for five to ten business days, depending upon the significance of the
amendment and the manner of disclosure to the owners, if the exchange offer
would otherwise expire during that five to ten business day period.
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Without limiting the manner in which Funding and TXU Europe may choose
to make a public announcement of any delay, extension, amendment or termination
of the exchange offer, Funding and TXU Europe will have no obligation to
publish, advertise, or otherwise communicate any public announcement, other than
by making a timely release to an appropriate news agency.
Upon satisfaction or waiver of all the conditions to the exchange
offer, Funding and TXU Europe will accept, promptly after the Expiration Date,
all senior notes properly tendered and will issue exchange senior notes promptly
after acceptance of the senior notes. See -- "Conditions." The exchange senior
notes issued will be represented by global certificates in bearer form to be
held by The Bank of New York as depositary. For purposes of the exchange offer,
Funding and TXU Europe will be deemed to have accepted properly tendered senior
notes for exchange when, as and if Funding and TXU Europe have given oral or
written notice to the exchange agent that they have accepted the tender.
In all cases, issuance of exchange senior notes for senior notes that
are accepted for exchange in accordance with the exchange offer will be made
only after timely receipt by the exchange agent of a confirmation of tender by
book-entry of those senior notes into the exchange agent's account at DTC in
accordance with the Letter of Transmittal; provided, however, that Funding and
TXU Europe reserve the absolute right to waive any defects or irregularities in
the tender or conditions of the exchange offer. If any tendered senior notes are
not accepted for any reason detailed in the terms and conditions of the exchange
offer, then those unaccepted senior notes evidencing the unaccepted portion will
be credited to an account maintained at DTC without expense to the tendering
owner as promptly as practicable after the expiration or termination of the
exchange offer.
CONDITIONS
Regardless of any other term of the exchange offer, Funding and TXU
Europe will not be required to exchange any exchange senior notes for any senior
notes of any series and may terminate the exchange offer before the acceptance
of senior notes for exchange, if, with respect to that series, the exchange
offer violates any applicable law or interpretation of the staff of the SEC.
If Funding and TXU Europe determine in their sole discretion that
there is that kind of violation, Funding and TXU Europe may:
o Terminate the exchange offer or refuse to accept any senior notes
and have all tendered notes credited to the appropriate account
at DTC. No termination will affect the remaining obligations of
Funding and TXU Europe under the registration rights agreement;
o Extend the exchange offer and retain all senior notes tendered
before the expiration of the exchange offer, subject, however, to
the rights of owners who tendered those senior notes to withdraw
their tendered senior notes; or
o Waive any unsatisfied conditions with respect to the exchange
offer and accept all properly tendered senior notes which have
not been withdrawn. If that waiver constitutes a material change
to the exchange offer, Funding and TXU Europe will promptly
disclose that waiver by means of a prospectus supplement that
will be distributed to the owners of senior notes, and Funding
and TXU Europe will extend the exchange offer for five to ten
business days, depending upon the significance of the waiver and
the manner of disclosure to the holders, if the exchange offer
would otherwise expire during the five to ten business day
period.
PROCEDURES FOR TENDERING
To tender senior notes in the exchange offer, an owner must instruct
its securities intermediary by use of the Letter of Transmittal, or any other
means acceptable to its securities intermediary. A timely confirmation of tender
by book-entry of the beneficial interests in the senior notes into the exchange
agent's account at DTC under the procedure for tender by book-entry described
below must be received by the exchange agent before the Expiration Date. The
same Letter of Transmittal may be used for senior notes of any or all series.
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A tender by an owner which is not withdrawn prior to the Expiration
Date will constitute an agreement between that owner and Funding and TXU Europe
in accordance with the terms and subject to the conditions in this prospectus.
THE METHOD OF DELIVERY OF THE SENIOR NOTES AND THE LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE SECURITIES INTERMEDIARY IS
AT THE ELECTION AND RISK OF THE OWNER. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT TENDERING OWNERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY OF CONFIRMATION
OF TENDER BY BOOK-ENTRY BY THE SECURITIES INTERMEDIARY TO DTC AND BY DTC TO THE
EXCHANGE AGENT BEFORE THE EXPIRATION DATE. OWNERS OF SENIOR NOTES SHOULD
INSTRUCT THE BROKERS, DEALERS, COMMERCIAL BANKS OR TRUST COMPANIES WITH WHOM
THEY HAVE SECURITIES ACCOUNTS OR THEIR NOMINEES TO EFFECT TENDERS FOR THEM.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered senior notes and withdrawal of tendered senior
notes will be determined by Funding and TXU Europe in their sole discretion,
which determination will be final and binding. Funding and TXU Europe reserve
the absolute right to reject any and all senior notes not properly tendered or
senior notes the acceptance of which would, in the opinion of counsel for
Funding and TXU Europe, be unlawful. Funding and TXU Europe also reserve the
right to waive any defects, irregularities or conditions of tender as to
particular senior notes. Funding's and TXU Europe's interpretation of the terms
and conditions of the exchange offer, including the instructions in the Letter
of Transmittal, will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of senior notes must be
cured within a period of time as Funding and TXU Europe will determine. Although
Funding and TXU Europe intend to notify owners of defects or irregularities with
respect to tenders of senior notes, none of Funding, TXU Europe, the exchange
agent or any other person will incur any liability for failure to give that
notification. Tenders of senior notes will not be deemed to have been made until
the defects or irregularities have been cured or waived.
In addition, Funding and TXU Europe reserve the right in their sole
discretion to purchase or make offers for any senior notes that remain
outstanding after to the Expiration Date or, as described above under --
"Conditions," to terminate the exchange offer and, to the extent permitted by
applicable law, purchase senior notes in the open market, in privately
negotiated transactions or otherwise. The terms of any of those purchases or
offers could differ from the terms of the exchange offer.
By tendering, each owner will be deemed to have represented to Funding
and TXU Europe that, among other things:
o The exchange senior notes acquired in accordance with the
exchange offer are being obtained in the ordinary course of
business of the person receiving beneficial ownership in the
exchange senior notes, whether or not interests are held in the
name of another person, such as a participant in DTC;
o Neither the owner nor any such other person is engaging in or
intends to engage in a distribution of the beneficial interests
in the exchange senior notes;
o Neither the owner nor any such other person has an arrangement or
understanding with any person to participate in the distribution
of the exchange senior notes; and
o Neither the owner nor any such other person is an "affiliate," as
defined in Rule 405 of the Securities Act, of Funding or TXU
Europe.
In all cases, issuance of exchange senior notes for senior notes
tendered in accordance with the exchange offer will be made only after timely
receipt by the exchange agent of confirmation of tender by book-entry of those
beneficial interests in the senior notes into the exchange agent's account at
DTC. If any tendered senior notes are not accepted for any reason described in
the terms and conditions of the exchange offer, the non-exchanged beneficial
interests in the senior notes will be credited to an account maintained with DTC
as promptly as practicable after the expiration or termination of the exchange
offer without expense to the tendering owner.
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TENDER BY BOOK-ENTRY
The exchange agent will make a request to establish an account with
respect to the beneficial interests in the senior notes at DTC for purposes of
the exchange offer within two business days after the date of this prospectus,
and any financial institution that is a participant in DTC's systems may make
book-entry delivery of beneficial interests in the senior notes by causing DTC
to transfer the beneficial interests in the senior notes into the exchange
agent's account in accordance with DTC's procedures for transfer.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, tenders of senior
notes may be withdrawn at any time before 5:00 p.m., New York City time, on the
Expiration Date.
To withdraw a tender of senior notes in the exchange offer, an owner
should notify its securities intermediary. A withdrawal will be effective upon
notice received by the exchange agent from DTC, before 5:00 p.m., New York City
time on the Expiration Date by telegram, facsimile transmission, letter or
withdrawal by book-entry noting:
o The series and principal amount of senior notes, delivered for
exchange; and
o A statement that the owner is withdrawing the senior notes for
exchange.
All questions as to the validity, form and eligibility (including time
of receipt) of those notices will be determined by Funding and TXU Europe, and
their determination will be final and binding on all parties. Any senior notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the exchange offer and the non-exchanged beneficial interests in the senior
notes will be credited to an account maintained with DTC as promptly as
practicable after the expiration or termination of the exchange offer without
expense to the tendering owner unless the senior notes so withdrawn are validly
retendered. Properly withdrawn senior notes may be retendered by following one
of the procedures described above under -- "Procedures for Tendering" at any
time before the Expiration Date.
EXCHANGE AGENT
The Bank of New York has been appointed exchange agent of the exchange
offer. Questions and requests for assistance and requests for additional copies
of this prospectus or of the Letter of Transmittal should be directed to the
exchange agent addressed as follows:
By Registered Mail or Certified Mail: By Overnight Courier:
The Bank of New York The Bank of New York
101 Barclay Street, 7E 101 Barclay Street
New York, New York 10286 Corporate Trust Services Window
Attention: Reorganization Section, Ground Level
Gertrude Jean Pierre New York, New York 10286
Attention: Reorganization Section,
Gertrude Jean Pierre
By Telephone: By Facsimile:
(212) 815-6920 (212) 815-6339
LUXEMBOURG STOCK EXCHANGE
The senior notes are listed, and Funding and TXU Europe have applied
to list the exchange senior notes, on the Luxembourg Stock Exchange. Funding and
TXU Europe will use their reasonable best efforts to effect this listing. As
long as the exchange senior notes are listed on that Exchange:
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o The exchange of certificated senior notes, if any, for the
exchange senior notes may be done through Kredietbank, the
Luxembourg paying agent;
o Funding and TXU Europe will provide Kredietbank SA
Luxembourgeoise, the Luxembourg paying agent, with necessary
documentation regarding the exchange offer;
o All of the necessary documentation regarding the exchange offer
will be made available at the offices of Kredietbank SA
Luxembourgeoise, the Luxembourg paying agent; and
o Funding and TXU Europe will cause the publication of a notice in
a daily leading newspaper with general circulation in Luxembourg
and will submit that notice to the Luxembourg Stock Exchange:
- before the exchange offer, announcing the offer and
indicating procedures to be followed; and
- after the exchange offer, giving the results of the
exchange.
FEES AND EXPENSES
The expenses of soliciting tenders will be paid by Funding and TXU
Europe. The principal solicitation is being made by mail; however, additional
solicitation may be made by telecopier, telephone or in person by officers and
regular employees of Funding and TXU Europe and their affiliates.
Funding and TXU Europe have not retained any dealer-manager in
connection with the exchange offer and will not make any payments to
brokers-dealers or others soliciting acceptances of the exchange offer. Funding
and TXU Europe will pay the exchange agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection with the exchange offer.
The cash expenses to be incurred in connection with the exchange offer
will be paid by Funding and TXU Europe and are estimated in the aggregate to be
approximately $o. The expenses include registration fees, fees and expenses of
the exchange agent, accounting and legal fees and printing costs, among others.
Funding and TXU Europe will pay all transfer taxes, if any, applicable
to the exchange of the senior notes in accordance with the exchange offer.
The exchange offer is being made to satisfy Funding's and TXU Europe's
obligations under the registration rights agreement. Funding and TXU Europe will
not receive any proceeds from the exchange offer. In consideration of issuing
global exchange senior notes in bearer form to the depositary in the exchange
offer, Funding and TXU Europe will receive an equal principal amount of global
senior notes in bearer form. Global senior notes in bearer form that are
properly tendered in the exchange offer and not validly withdrawn will be
accepted, canceled and retired and cannot be reissued.
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DESCRIPTION OF THE EXCHANGE SENIOR NOTES
The following description applies only to exchange senior notes, but
all of the terms will also apply to any senior notes outstanding after the
exchange offer. However, those senior notes will not be registered under the
Securities Act and will remain subject to transfer restrictions.
The senior notes were and the exchange senior notes will be issued
under an indenture dated as of May 1, 1999 among Funding, TXU Europe and The
Bank of New York, as trustee. The indenture includes a full, unconditional and
irrevocable guarantee of the senior notes and the exchange senior notes by TXU
Europe.
Global certificates for the exchange senior notes in bearer form will
be held by The Bank of New York as depositary under a deposit agreement.
Beneficial interests in the exchange senior notes will trade through DTC.
Specific terms of each series of the exchange senior notes will be described in
an officer's certificate delivered to the trustee. Material terms of the
exchange senior notes and the indenture are summarized below. You should read
the indenture, the Trust Indenture Act, the officer's certificates and the
deposit agreement for a more complete description. Copies of the indenture, the
officer's certificates and the deposit agreement are available upon request to
the trustee or depositary. Whenever particular provisions or defined terms in
the indenture are referred to under this DESCRIPTION OF THE EXCHANGE SENIOR
NOTES, those provisions or defined terms are incorporated by reference in this
prospectus. For your convenience, we indicate sections of the indenture where
they are described.
Each series of debt securities issued under the indenture will be
unsecured and unsubordinated obligations of Funding. Funding is a financing
company whose sole source of funds is payment on loans it makes to TXU Europe.
The exchange senior notes will be fully, unconditionally and irrevocably
guaranteed by TXU Europe as to payment of principal, premium, if any, and
interest and any Additional Amounts (as described below), and the guarantee will
be an unsecured and unsubordinated obligation of TXU Europe. See -- "Guarantee
of TXU Europe; Effective Priority of Subsidiary Obligations." The indenture does
not limit the aggregate amount of indebtedness that Funding, TXU Europe or TXU
Europe's subsidiaries may issue or the number of series or amount of debt
securities that may be issued under the indenture.
The covenants contained in the indenture will not afford beneficial
owners of the exchange senior notes protection in the event of a
highly-leveraged transaction involving Funding or TXU Europe.
PAYMENT OF INTEREST AND PRINCIPAL
Interest on each series of exchange senior notes will:
o Be payable in US dollars at the rate per annum specified in the
title of the series;
o Be computed on the basis of a 360-day year of twelve 30-day
months, and for any period shorter than a month, on the basis of
the actual number of days elapsed;
o Be payable semi-annually in arrears on May 15 and November 15 of
each year, beginning November 15, 1999;
o Originally accrue from, and include May 13, 1999, the date of
initial issuance; and
o Be payable on overdue interest to the extent permitted by law at
the same rate as interest is payable on principal.
If any payment date is not a business day, payment will be made on the
next business day, and no interest or other payment will result from the delay.
With respect to payments, a business day is a day, other than a Saturday, Sunday
or a day on which banking institutions and trust companies are generally
authorized or required to remain closed in the place of payment.
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The record date for any exchange senior notes in certificated form
will be the fifteenth day of the calendar month before the relevant interest
payment date, whether or not it is a business day in The City of New York.
The Bank of New York is paying agent for the exchange senior notes in
The City of New York. So long as the exchange senior notes are listed on the
Luxembourg Stock Exchange, Funding will maintain a paying agent in Luxembourg.
Initially that paying agent will be Kredietbank SA Luxembourgeoise.
Interest on each exchange senior note will be paid on each interest
payment date to the bearer or, if the exchange senior notes are in certificated
form, to the holder in whose name that exchange senior note is registered as of
the close of business on the related record date, except that interest payable
at maturity or upon redemption will be paid to the holder to whom principal is
paid. If interest has not been paid when due on any exchange senior note, the
defaulted interest may be payable to the bearer or, if the exchange senior notes
are in certificated form, to the registered owner as of the close of business on
a date selected by the trustee which may be not more than 15 days and not less
than 10 days before the date proposed by Funding or TXU Europe for payment
(Indenture, Section 307).
The 6.15% exchange senior notes will mature on May 15, 2002. The 6.45%
exchange senior notes will mature on May 15, 2005. The 6.75% exchange senior
notes will mature on May 15, 2009.
The principal of and interest on the exchange senior notes at maturity
will be payable, at their principal amount, upon presentation of the exchange
senior notes at the office of a paying agent. Funding may change the place of
payment on the exchange senior notes, appoint one or more additional paying
agents, including Funding, and may remove any paying agent, all at its
discretion so long as there is a paying agent in The City of New York and, while
the exchange senior notes are listed on the Luxembourg Stock Exchange, in
Luxembourg.
GUARANTEE OF TXU EUROPE; EFFECTIVE PRIORITY OF SUBSIDIARY OBLIGATIONS
TXU Europe has fully, unconditionally and irrevocably agreed to make
the guarantee payments listed below in full to the holders of the exchange
senior notes if they are not made by Funding, as and when due, regardless of any
defense, right of set-off or counterclaim, except the defense of payment, that
TXU Europe may have or assert. The following payments will be subject to the
guarantee, without duplication:
o Any accrued and unpaid interest required to be paid on the
exchange senior notes;
o Principal and premium, if any, plus all accrued and unpaid
interest and Additional Amounts, if any, required to be paid on
the exchange senior notes at maturity, upon acceleration or upon
redemption (Indenture, Section 1401).
TXU Europe's obligation to make a guarantee payment may be satisfied
by direct payment of the required amounts by TXU Europe to the holders of
exchange senior notes or The Bank of New York, as paying agent, or other paying
agent for the exchange senior notes or by causing Funding to pay those amounts
to those holders.
The guarantee will remain in effect until all exchange senior notes
and senior notes are paid. It will rank equally in right of payment to
guarantees of other series of debt securities issued under the indenture
(Indenture, Section 1401). The guarantee will also rank equally with any other
senior debt obligations of TXU Europe except as described under -- "Limitation
on Liens."
TXU Europe is a holding company that derives substantially all of its
income from Eastern and its subsidiaries. Substantially all of TXU Europe's
consolidated assets are held by Eastern and its subsidiaries. Accordingly, the
ability of TXU Europe to service its debt, including its obligations under the
guarantee, is largely dependent on the earnings of Eastern and its subsidiaries
and the payment of those earnings to TXU Europe in the form of dividends, loans
or advances, and through repayment of loans or advances from TXU Europe to those
subsidiaries. The subsidiaries of TXU Europe, except for Funding, have no
obligation to pay any amounts due on the exchange senior notes.
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The guarantee therefore is effectively subordinated to debt and
preference share capital at the subsidiary level. The financial statements of
TXU Europe and its predecessors included in this prospectus show the aggregate
amount of subsidiary debt and preference share capital as of the date of those
statements. This includes trade payables, guarantees and leases, letters of
credit and other obligations of TXU Europe's subsidiaries. Upon liquidation or
reorganization of a subsidiary of TXU Europe, the claims of that subsidiary's
creditors will be superior to the claims of the holders of exchange senior notes
or other creditors of TXU Europe. Although some debt instruments limit the
amount of debt TXU Europe and its subsidiaries may incur, both TXU Europe and
its subsidiaries retain the ability to incur substantial additional indebtedness
and other obligations such as those under leases, letters of credit and other
instruments.
DENOMINATIONS
The exchange senior notes will be payable only in US dollars. The
exchange senior notes and beneficial interests in them will be issued, and may
be transferred, only in principal amounts of $10,000 and in multiples of $1,000
for amounts in excess of $10,000.
FORM, BOOK-ENTRY PROCEDURES AND TRANSFER
INTRODUCTION
Beneficial interests in the exchange senior notes will trade through
DTC. The exchange senior notes of each series in which beneficial interests are
sold will be issued in the form of one or more global exchange senior notes in
bearer form. Upon issuance, the trustee will authenticate and deliver the global
exchange senior notes of each series to The Bank of New York, which will hold
those global exchange senior notes as depositary for the benefit of DTC under to
the deposit agreement. The depositary will issue to DTC or its nominee, in
respect of each global exchange senior note, one or more certificateless
book-entry interests, which together will represent a 100% beneficial interest
in the global exchange senior notes of that series. The exchange senior notes
will be held in global bearer form by the depositary and certificateless
book-entry interests representing beneficial ownership of these exchange senior
notes will be held by, or on behalf of, DTC.
The depositary will record Cede & Co., as nominee of DTC, on its books
as the initial registered owner of the book-entry interests and will also record
any later registration and transfer of the book-entry interests. Unless and
until the global exchange senior notes are exchanged in whole for certificated
registered exchange senior notes, the depositary may not register the transfer
of the book-entry interests except as a whole by DTC or its nominee to DTC or
another nominee of DTC or a successor of DTC or a nominee of that successor.
Upon the issuance by the depositary of the book-entry interests to DTC,
DTC will credit the participants' accounts with the interests owned on its
book-entry registration and transfer system. Ownership of beneficial interests
in the book-entry interests will be shown on DTC's records or the records of
direct or indirect participants of DTC. Transfer of beneficial interests in the
book-entry interests will be effected only through records maintained by DTC or
its direct or indirect participants. The beneficial interests in the exchange
senior notes are governed by the terms and conditions of the indenture, the
deposit agreement and the letters of representations from Funding to DTC.
Under the deposit agreement, the global bearer exchange senior notes
may be transferred only as a whole and, with Funding's consent, by the
depositary or its nominee to the depositary or to a successor depositary or
nominee.
For so long as the depositary or its nominee is the holder of the
global exchange senior notes, the depositary or its nominee will be considered
the sole owner of the exchange senior notes for all purposes under the
indenture. Except as explained below under -- "Certificated Registered Exchange
Senior Notes," owners of beneficial interests in the exchange senior notes will
not be entitled to have exchange senior notes registered in their names and will
not receive physical delivery of exchange senior notes in certificated form.
They will not be considered the owners or holders of the exchange senior notes
under the indenture or the deposit agreement. Accordingly, each person owning a
beneficial interest must rely on the procedures of the depositary and DTC and,
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if that person is not a participant in DTC, on the procedures of the participant
through which that person owns its beneficial interest, to exercise its rights
and perform its obligations under the indenture or the deposit agreement. Those
beneficial interests held through Euroclear or Cedelbank may also be subject to
the procedures and requirements of that system.
Regardless of any statement in this prospectus, Funding reserves the
right to require any legends on the exchange senior notes as it may determine
are necessary to ensure compliance with the securities laws of the US and the
individual states and with any other applicable laws.
DTC
DTC is a New York clearing corporation and a clearing agency
registered under Section 17A of the Exchange Act. DTC holds securities for its
participants. DTC facilitates settlement transactions among its participants
through electronic computerized book-entry changes in participants' accounts.
This eliminates the need for physical movement of securities certificates. The
participants include securities brokers and dealers, banks, trust companies and
clearing corporations. DTC is owned by a number of its participants and by the
New York Stock Exchange, Inc., the American Stock Exchange, Inc., and the
National Association of Securities Dealers, Inc. Others who maintain a custodial
relationship with a participant can use the DTC system. The rules that apply to
DTC and those using its systems are on file with the SEC.
DTC management is aware that some computer applications, systems, and
the like for processing data (systems) that are dependent upon calendar dates,
including dates before, on, or after January 1, 2000, may encounter "Year 2000
Problems." DTC has informed its participants and other members of the financial
community that it has developed and is implementing a program so that its
systems, as the same relate to the timely payment of distributions (including
principal and income payments) to securityholders book-entry deliveries, and
settlement of trades within DTC, continue to function appropriately. This
program includes a technical assessment and a remediation plan, each of which is
complete, and a testing phase, which is expected to be completed within
appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including, but not limited to, issuers and their
agents, as well as third party vendors from whom DTC licenses software and
hardware, and third party vendors on whom DTC relies for information or the
provision of services, including telecommunication and electric utility service
providers, among others. DTC has informed the industry that it is contacting,
and will continue to contact, third party vendors from which DTC acquires
services to: (1) impress upon them the importance of such services being Year
2000 compliant; and (2) determine the extent of their efforts for Year 2000
remediation, and, as appropriate, testing, of their services. In addition, DTC
is in the process of developing such contingency plans as it deems appropriate.
DTC has established a Year 2000 Project Office and will provide
information concerning DTC's Year 2000 compliance to persons requesting that
information. The address is as follows: The Depository Trust Company, Year 2000
Project Office, 55 Water Street, New York, New York 10041. Telephone numbers for
the DTC Year 2000 Project Office are (212) 855-8068 and (212) 855-8881. In
addition, information concerning DTC's Year 2000 compliance can be obtained from
its web site at the following address: www.dtc.org.
According to DTC, the foregoing information with respect to DTC has
been provided to the industry for informational purposes only and is not
intended to serve as a representation, warranty, or contract modification of any
kind.
EUROCLEAR AND CEDELBANK
Euroclear and Cedelbank each holds securities for its account holders
and facilitates the clearance and settlement of securities transactions by
electronic book-entry transfer between its respective account holders. In that
way, they eliminate the need for physical movements of certificates and any risk
that transfers of securities will not be simultaneous.
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Euroclear and Cedelbank provide various services including
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Euroclear and Cedelbank also
deal with residential securities markets in several countries through
established depositary and custodial relationships. Euroclear and Cedelbank have
established an electronic link between their two systems which allows their
respective account holders to settle trades with each other.
Account holders in Euroclear and Cedelbank are worldwide financial
institutions, including underwriters, securities brokers and dealers, banks,
trust companies and clearing corporations. Indirect access to Euroclear and
Cedelbank is available to other institutions that clear through or maintain a
custodial relationship with an account holder of either system.
Account holders' overall contractual relations with Euroclear and
Cedelbank are governed by the respective rules and operating procedures of
Euroclear and Cedelbank and any applicable laws. Euroclear and Cedelbank act
under those rules and operating procedures only on behalf of their respective
account holders and have no record of or relationship with persons holding
through their account holders.
TRANSFERS AND SETTLEMENT
All transfers of beneficial interests in book-entry interests will be
recorded on the book-entry system maintained by DTC, will be effected in
accordance with DTC's procedures, and will be settled in same-day funds.
Transfers between account holders in Euroclear and Cedelbank will be effected in
the ordinary way in accordance with the respective rules and operating
procedures of Euroclear and Cedelbank.
Subject to compliance with the transfer restrictions applicable to the
beneficial interests, cross-market transfers between participants in DTC, on the
one hand, and Euroclear or Cedelbank account holders, on the other hand, will be
effected through DTC, in accordance with DTC's rules, on behalf of Euroclear or
Cedelbank, as the case may be, through a depositary. Cross-market transfers will
require delivery of instructions to Euroclear or Cedelbank, as the case may be,
by the counterparty in that system in accordance with the rules and procedures
and within the established deadlines of that system. Euroclear account holders
and Cedelbank account holders may not deliver instructions directly to the
depositaries for Euroclear or Cedelbank.
Because of time zone differences, the securities account of a
Euroclear or Cedelbank account holder purchasing a book-entry interest from a
participant in DTC will be credited, and any crediting will be reported to the
relevant Euroclear or Cedelbank account holder, during the securities settlement
processing day immediately following the DTC settlement date. This must be a
business day for Euroclear and Cedelbank. Cash received in Euroclear or
Cedelbank as a result of sales of a book-entry interest by or through a
Euroclear or Cedelbank account holder to a DTC participant will be received with
value on the DTC settlement date but will be available in the relevant Euroclear
or Cedelbank cash account only as of the business day for Euroclear or Cedelbank
following the DTC settlement date.
Although the foregoing sets out the procedures of DTC, Euroclear and
Cedelbank in order to facilitate the transfer of interests in the exchange
senior notes among participants of DTC, Euroclear and Cedelbank, none of DTC,
Euroclear and Cedelbank are under any obligation to perform or continue to
perform those procedures, and those procedures may be discontinued at any time.
Funding, TXU Europe, the trustee, the depositary and any of the agents
will not have any responsibility for the performance by DTC, Euroclear and
Cedelbank or their respective participants of their respective obligations under
the rules and procedures governing their operation.
PAYMENTS ON THE EXCHANGE SENIOR NOTES
Payments on the global exchange senior notes will be made by Funding
through the trustee or other paying agent to the depositary as the holder of
global exchange senior notes. The depositary will, in turn, make payments in the
same amounts to DTC. DTC will immediately credit participants' accounts with
those payments in amounts proportionate to their interests in the book-entry
interests as shown on the records of DTC. Payments by participants to owners of
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beneficial interests will be made according to standing customer instructions
and customary practices. DTC will have no responsibility for payments by its
participants.
Neither Funding, TXU Europe, the trustee nor any paying agent will
have any responsibility for payments made or to be made by the depositary to DTC
in respect of the exchange senior notes or the book-entry interests in them,
including any payments of Additional Amounts. Only DTC and its direct and
indirect participants will be responsible for maintaining records of beneficial
interests in book-entry interests and making payments related to those
beneficial interests.
REDEMPTION OF BOOK-ENTRY INTERESTS
If any global exchange senior notes are redeemed, the depositary will
deliver the amount received by it to DTC. In the event of a partial redemption,
selection of interests in the related book-entry interest to be redeemed will be
made by DTC proportionately or on any other basis that DTC deems fair and
appropriate.
If all the exchange senior notes of any series are redeemed, the
depositary will surrender the global exchange senior notes of that series to the
trustee or the paying agent in Luxembourg for cancellation. The depositary will
cancel the book-entry interests issued with respect to those exchange senior
notes. If there is a partial redemption, the depositary will surrender the
related global exchange senior note to the trustee or the paying agent in
Luxembourg for reduction of principal amount by endorsement on the reverse of
the global exchange senior note or in exchange for a substitute global exchange
senior note in a reduced principal amount. The depositary will record on its
books a corresponding reduction in the principal amount of the book-entry
interests issued with respect to the global exchange senior note.
ACTION BY HOLDERS OF EXCHANGE SENIOR NOTES
Funding understands that DTC, under its current practices, would
authorize its participants owning interests to take any action holders are
entitled to take under the indenture. Those participants would authorize
indirect participants to take that action or would otherwise act upon the
instructions of owners of beneficial interests holding through them.
Within 10 days after receipt by the depositary of notice of any
request for consents or similar action relating to the global exchange senior
notes under the deposit agreement or the indenture, the depositary will mail to
DTC a notice containing:
o Information contained in the notice to the depositary;
o The record date for response to the request or other action;
o A statement that, on or before a specified date no later than 180
days after the record date, DTC may instruct the depositary as to
the request or other action; and
o The manner in which those instructions may be given.
The depositary will try to act in accordance with DTC's instructions, provided
that the depositary has been offered security or indemnity satisfactory to it
against the costs, expenses and liabilities that might be incurred by it in
compliance with these instructions. The depositary will not itself exercise any
discretion in the granting of consents or the taking of any other action in
respect of book-entry interests or global exchange senior notes. DTC is expected
to follow its customary practices and procedures with respect to soliciting
instructions from its participants.
REPORTS AND NOTICES
Notices to holders of the exchange senior notes listed on the
Luxembourg Stock Exchange will be published in a leading daily newspaper having
general circulation in Luxembourg, probably the Luxemburger Wort. The depositary
will promptly send to DTC a copy of any notices, reports and other
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communications received by it relating to Funding, the senior notes or the
book-entry interests. In the case of certificated registered exchange senior
notes, all notices regarding the exchange senior notes will also be mailed to
the last known addresses of the holders shown on the security register for the
exchange senior notes.
AMENDMENT AND TERMINATION OF DEPOSIT AGREEMENT
The deposit agreement may be amended by Funding and the depositary
without the consent of DTC or the beneficial owners of the exchange senior
notes:
o To cure any defect, omission, inconsistency or ambiguity;
o To add covenants and agreements of Funding or the depositary;
o To assign the depositary's rights and duties to a qualified
successor;
o To conform the deposit agreement to the requirements of the
Securities Act, the Exchange Act, the Investment Company Act of
1940 or the Trust Indenture Act or any other applicable
securities laws;
o To modify the deposit agreement in connection with an amendment
to the indenture that does not require the consent of DTC; or
o To amend or supplement the deposit agreement in any way which, in
the opinion of counsel acceptable to Funding, is not materially
adverse to DTC or beneficial owners of an interest in the
book-entry interests or inconsistent with the deposit agreement
itself.
Otherwise, no amendment that materially adversely affects DTC or any beneficial
owner of an exchange senior note may be made to the deposit agreement without
the consent of DTC or the beneficial owner.
The deposit agreement will cease to be of further effect when the
indenture has been satisfied and discharged or:
o Certificated registered exchange senior notes have been issued
and the global exchange senior notes have been canceled;
o All sums payable by Funding under the deposit agreement have been
paid; and
o The deposit agreement has been satisfied and discharged.
RESIGNATION OF DEPOSITARY
The depositary may resign upon 60 days' written notice to Funding and
DTC. The resignation of the depositary will become effective upon acceptance of
a successor depositary to similar arrangements. If no successor has been
appointed by Funding within 120 days, then DTC may request issuance of the
certificated registered exchange senior notes in the names and denominations as
DTC instructs in writing. The depositary will then surrender the global exchange
senior notes to the trustee for cancellation and the trustee will distribute the
certificated registered exchange senior notes in accordance with the
instructions of DTC.
OBLIGATION OF DEPOSITARY
The depositary will undertake to perform only those duties
specifically described in the deposit agreement and, subject to exceptions
described in the deposit agreement, will assume no obligation under the deposit
agreement other than for its own bad faith, negligence or willful misconduct in
the performance of its duties under the deposit agreement.
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CERTIFICATED REGISTERED EXCHANGE SENIOR NOTES
Owners of beneficial interests in the exchange senior notes will be
entitled to receive certificated registered exchange senior notes only in the
limited circumstances listed below:
o DTC will not continue to hold the book-entry interests related to
the global exchange senior notes or is no longer a clearing
agency registered under the Exchange Act and Funding does not
replace DTC within 120 days;
o The depositary will not continue as depositary and no successor
is appointed within 120 days; or
o Funding, in its sole discretion, determines that the global
exchange senior notes will be so exchangeable.
In addition, if an Event of Default under the indenture occurs and is continuing
with respect to one or more series of exchange senior notes, any owner of a
beneficial interest in the global exchange senior notes in default will, upon
written request, be entitled to receive certificated registered exchange senior
notes in exchange for the interest. In no event will an owner of beneficial
interests be entitled to receive certificated exchange senior notes in bearer
form.
Certificated registered exchange senior notes will be issued only in
principal amounts of $10,000 and additional multiples of $1,000 for amounts over
$10,000. They will be issued in registered form only, without coupons, and will
have the same interest rate, terms, maturity and be in the same aggregate
principal amount as the related global exchange senior note. These certificated
registered exchange senior notes will be registered in the names of which the
depositary notifies the trustee based on the instructions of DTC. It is expected
that those instructions may be based upon directions received by DTC from its
participants with respect to ownership of beneficial interests.
Holders of certificated registered exchange senior notes will be paid
interest by check, except that registered owners of certificated registered
exchange senior notes in an aggregate principal amount in excess of $50,000,000
may request payment of interest by wire transfer. Checks will be mailed to those
holders at their last address known to the Security Registrar.
BENEFICIAL OWNERS SHOULD BE AWARE THAT, UNDER CURRENT UK TAX LAW,
FOLLOWING THE ISSUANCE OF CERTIFICATED REGISTERED EXCHANGE SENIOR NOTES, UK
INCOME TAX (CURRENTLY AT THE RATE OF 20%) WILL BE WITHHELD ON ANY PAYMENTS OF
INTEREST. SEE MATERIAL INCOME TAX CONSIDERATIONS -- "UK TAX CONSIDERATIONS." IF
CERTIFICATED REGISTERED EXCHANGE SENIOR NOTES ARE ISSUED FOLLOWING AN EVENT OF
DEFAULT AT THE REQUEST OF BENEFICIAL OWNERS OF INTERESTS IN THE GLOBAL EXCHANGE
SENIOR NOTES, FUNDING WILL NOT PAY ANY ADDITIONAL AMOUNTS TO THOSE REQUESTING
BENEFICIAL OWNERS, OR THEIR SUCCESSORS, IN RESPECT OF THOSE CERTIFICATED
REGISTERED EXCHANGE SENIOR NOTES. SEE -- "ADDITIONAL AMOUNTS."
However, payment of interest may be made free of deduction of UK
income tax or subject to a reduced deduction by virtue of relief being available
to the holder of certificated registered exchange senior notes under a double
taxation treaty between the UK and the country of which that holder is resident.
See MATERIAL INCOME TAX CONSIDERATIONS -- "UK Tax Considerations." In some
cases, if an owner of a beneficial interest receives a certificated registered
exchange senior note that it did not request, that owner will be entitled to
receive Additional Amounts with respect to that certificated registered senior
note. See -- "Additional Amounts."
REGISTRATION AND TRANSFER
The transfer of certificated exchange senior notes may be registered,
and exchange senior notes may be exchanged for other exchange senior notes of
the same series of authorized denominations with the same terms and principal
amounts at the corporate trust office of The Bank of New York in The City of New
York or at the office of the paying agent in Luxembourg while the exchange
senior notes are listed on the Luxembourg Stock Exchange. Funding may change the
place for registration of transfer of the certificated exchange senior notes and
may designate one or more additional places for that registration and exchange,
all at its discretion. No service charge will be made for any registration of
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transfer or exchange of the exchange senior notes, but Funding may require
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed in connection with any registration of transfer or exchange of
the exchange senior notes. Funding will not be required to execute or to provide
for the registration of transfer of, or the exchange of:
o Any exchange senior notes during a period of 15 days before
giving any notice of redemption; or
o Any exchange senior notes selected for redemption in whole or in
part, except the unredeemed portion of any exchange senior notes
being redeemed in part (Indenture, Section 305).
REDEMPTION
o If Funding or TXU Europe is required to pay any Additional
Amounts on any series of exchange senior notes or its related
guarantee, Funding may redeem all exchange senior notes of the
affected series at any time at the principal amount plus accrued
interest and any accrued Additional Amounts. Required payments of
Additional Amounts are described in detail below.
o Funding may redeem all or part of the 6.45% exchange senior notes
and 6.75% exchange senior notes at any time before maturity at a
redemption price equal to:
- the greater of:
- 100% of the principal amount of the exchange senior
notes to be redeemed, and
- the sum of the present values of all interest and
principal payments scheduled from the redemption
date to the maturity date calculated as described
below
- plus, in each case, accrued interest to the date of
redemption and any accrued Additional Amounts.
For purposes of determining this redemption price, future payments
will be calculated on a semi-annual basis for 360-day years of twelve 30-day
months. The present value will be determined by discounting each future payment
at the "Treasury Rate" plus 20 basis points, in the case of the 6.45% exchange
senior notes, and 25 basis points, in the case of the 6.75% exchange senior
notes.
The "Treasury Rate" used to calculate the redemption price for any
redemption date will equal the semi-annual equivalent yield to maturity of the
Comparable Treasury Security.
The "Comparable Treasury Security" will be a United States Treasury
security selected by an independent investment banker because (1) it has a
maturity comparable to the remaining term of the exchange senior notes to be
redeemed and (2) is a security that would ordinarily be used to price new issues
of corporate debt securities of comparable maturity to the remaining term of the
exchange senior notes to be redeemed. The independent investment banker that
selects the Comparable Treasury Security will be one of the Reference Treasury
Dealers appointed by the trustee after consultation with Funding.
In determining the yield to maturity of the Comparable Treasury
Security, a price will be assumed for that security for any redemption date that
is equal to:
o The average of the bid and asked prices for the Comparable
Treasury Security, expressed in each case as a percentage of its
principal amount, on the third business day before the redemption
date, as listed in the daily statistical release, or any
successor release, published by the Federal Reserve Bank of New
York and designated "Composite 3:30 p.m. Quotations for US
Government Securities," or
o If those prices are not published that day, the average of the
Reference Treasury Dealer Quotations actually obtained by the
trustee for that redemption date.
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"Reference Treasury Dealer Quotations" means, for each Reference
Treasury Dealer and any redemption date, the average, as determined by the
trustee, of the bid and asked prices for the Comparable Treasury Security,
expressed in each case as a percentage of its principal amount, quoted in
writing to the trustee by that Reference Treasury Dealer at 5:00 p.m. on the
third business day before the redemption date.
"Reference Treasury Dealer" means Lehman Brothers Inc. and Morgan
Stanley & Co. Incorporated and their respective successors; provided, however,
that if either of them is no longer a primary US Government securities dealer in
The City of New York, Funding will substitute a dealer that is.
If the exchange senior notes are in global form, Funding will give
notice to the holder of the exchange senior notes to be redeemed 30 to 60 days
before the redemption date. If the exchange senior notes are in certificated
form, Funding will mail notice to each holder of exchange senior notes to be
redeemed 30 days to 60 days before the redemption date. In addition, if the
exchange senior notes are listed on the Luxembourg Stock Exchange, notice of the
redemption will also be published in a leading daily newspaper with general
circulation in Luxembourg, probably the Luxemburger Wort, 30 to 60 days before
the redemption date. At the time notice is given or mailed, the redemption may
be made subject to receipt of redemption moneys by the trustee on or before the
redemption date (Indenture, Section 404).
No further interest or Additional Amounts will accrue after the
redemption date upon payment by Funding or TXU Europe to the trustee of the
redemption price on the exchange senior notes.
ADDITIONAL AMOUNTS
All payments made under the guarantee or on the exchange senior notes
will be made without withholding or deduction for any taxes or other
governmental charges imposed by a jurisdiction in which Funding or TXU Europe
was organized or is managed or has a place of business, or any political
subdivision or taxing authority of that jurisdiction (each a Taxing
Jurisdiction), unless the withholding or deduction is required by law. If any
required withholding or deduction is made (Gross-Up Taxes), Funding or TXU
Europe will pay to each holder of exchange senior notes as an Additional Amount
the amount as may be necessary so that the net amount received by each holder of
exchange senior notes after the withholding or deduction equals the amount that
the holder would have received absent that withholding or deduction, except that
no Additional Amounts will be payable:
o To or for a holder who is liable for Gross-Up Taxes because of
the holder's connection with the relevant jurisdiction, whether
as a citizen, a resident or a national of the jurisdiction or
because the holder carries on a business or maintains a permanent
establishment there or is physically present there;
o To or for a holder who presents an exchange senior note required
to be presented for payment more than 30 days after the date on
which payment first becomes due, unless that holder would have
been entitled to those Additional Amounts by presenting an
exchange senior note on the last day of the 30 day period;
o To or for a holder who presents an exchange senior note, when
presentation is required, at any place other than in The City of
New York, or, so long as the exchange senior notes are listed on
the Luxembourg Stock Exchange, in Luxembourg;
o To or for a holder who would not be liable for the Gross-Up Tax
by making a declaration of non-residence or similar claim for
exemption to the relevant tax authority; or
o To or for a holder of a certificated exchange senior note issued
following and during the continuance of an Event of Default at
the request of that holder, or its predecessor holder.
No Additional Amounts will be payable with respect to any exchange
senior note if the beneficial owner would not have been entitled to that payment
if that beneficial owner had been a holder.
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References in this prospectus to any payments under the guarantee will
include any Additional Amounts payable in connection with them.
OPTIONAL REDEMPTION TO AVOID ADDITIONAL AMOUNTS
Funding will have the right to redeem all but not fewer than all of
the exchange senior notes of a series at the principal amount plus accrued
interest and any accrued Additional Amounts upon not less than 30 nor more than
60 days' notice if Funding or TXU Europe certifies to the trustee that it would
be required to pay Additional Amounts with respect to that series because of:
o An amendment to, clarification of, change in, or announced change
to occur in the future in, the laws or regulations of a Taxing
Jurisdiction or any political subdivision or taxing authority of
the Taxing Jurisdiction;
o The issuance of certificated registered exchange senior notes:
- at the request of beneficial owners of the exchange senior
notes, following an Event of Default;
- because DTC will not or cannot continue to hold the
interests in the exchange senior notes in book-entry form
and Funding does not replace DTC within 120 days; or
- because The Bank of New York will not or cannot continue to
act as depositary for the exchange senior notes and Funding
does not replace it within 120 days;
and if Funding or TXU Europe further certifies to the trustee that Funding or
TXU Europe cannot avoid the requirement to pay Additional Amounts by taking
reasonable steps available to it.
DEFEASANCE
Funding and TXU Europe will be discharged from their obligations on
the exchange senior notes or any other series of debt securities issued under
the indenture when either of them deposits with the trustee cash or government
securities sufficient to pay the principal, interest, any premium and any other
sums when due on or before the stated maturity date or a redemption date for
that series of debt securities (Indenture, Section 701). Funding and TXU Europe
will continue to be liable for any shortfall in the funds deposited unless they
have provided an opinion of counsel that the discharge of their obligations will
not create an adverse US tax effect for the holders.
LIMITATION ON LIENS
So long as any exchange senior notes remain outstanding and subject to
the exceptions noted below, neither Funding nor TXU Europe nor any subsidiary of
TXU Europe may secure any debt with a lien on any of its coal, gas or
electricity properties or gas or electricity contracts, or on shares of stock or
on any debt of any subsidiary of TXU Europe that owns any of those properties or
contracts, unless all exchange senior notes and the guarantee are secured by an
equal or prior lien.
Exceptions include the following permitted liens:
o Liens on property or shares of stock existing at the time they
were acquired or which secured their purchase price, or debt
incurred within 270 days for the purpose of financing the cost of
acquisition, improvement or construction of or on the property;
o Liens existing at the date of the indenture;
o Liens on property or on shares of stock or indebtedness of any
entity existing at the time it is merged into or consolidated
with Funding, TXU Europe or a subsidiary;
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o Liens arising by operation of law, other than by reason of
default;
o Liens to secure short-term debt incurred in the ordinary course
of business;
o Mechanic's liens, worker's compensation or similar liens;
o Liens to secure project finance debt;
o Liens arising in connection with some securities, commodities, or
currency contracts;
o Liens securing TXU Europe's or Funding's debt to some of its
subsidiaries;
o Liens for taxes or governmental charges which are not yet
delinquent or are being disputed in good faith by appropriate
proceedings;
o A lien on any gas or electricity contracts that the Board of
Directors of TXU Europe has determined are not material to the
business of TXU Europe and its subsidiaries taken as a whole;
o A lien on property or shares of stock or indebtedness of an
entity existing at the time it becomes a subsidiary, if the lien
was not created in contemplation of the entity becoming a
subsidiary;
o Liens relating to the cash management facilities of TXU Europe or
its subsidiaries;
o Liens in favor of Funding or TXU Europe from any of their
subsidiaries;
o Any extension, renewal or replacement of a permitted lien; and
o A Lien with respect to debt in an aggregate amount which,
together with all other secured debt of Funding or TXU Europe and
the value of its properties sold and leased back, excluding
permitted sale and leaseback transactions, does not at the time
exceed 10% of TXU Europe's consolidated tangible assets net of
current liabilities (Indenture, Section 608).
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS
So long as any debt securities remain outstanding, neither Funding nor
TXU Europe will, and they will not permit any subsidiary of TXU Europe that owns
coal, gas or electricity properties or gas or electricity contracts or shares of
a subsidiary owning them, to sell and lease back for more than three years,
including renewals, any of these properties, contracts or shares which it has
owned for more than 270 days unless, after giving effect to the sale and
leaseback, the lesser of (x) the aggregate value of all properties of Funding,
TXU Europe and those TXU Europe subsidiaries subject to sale and leaseback
transactions and (y) the present value of the total rent to be paid during the
remaining term of the lease plus all debt of Funding, TXU Europe and those TXU
Europe subsidiaries secured by liens does not exceed 10% of TXU Europe's
consolidated tangible assets net of current liabilities. Liens which are
exceptions to the limitation on liens noted above will not be included in that
calculation.
Sale and leasebacks will also be permitted with respect to any
property:
o If a lien on the property to be leased would be excepted from the
limitation on liens noted above;
o If Funding, TXU Europe or a TXU Europe subsidiary will have
expended, within the time periods and for one or more of the
purposes noted below, an amount equal to the greater of (a) the
net proceeds received from the sale and leaseback and (b) the
fair market value of the property to be leased at the time of
entering into the sale and leaseback:
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- within the period beginning a year before and ending a year
after the receipt of proceeds from the sale and leaseback,
for other property, including capital improvements on the
property, subject to the limitation on liens noted above, or
shares of a subsidiary owning that property;
- within a year following the receipt of proceeds from the
sale and leaseback, for the repayment of either long-term
debt of TXU Europe which ranks equally with the senior notes
or long-term debt of some TXU Europe subsidiaries, but,
unless the payment is required because of the sale and
leaseback, not if the debt repayment is at maturity or under
any mandatory prepayment or sinking fund provision
(Indenture, Section 609).
CONSOLIDATION, MERGER, AND SALE OF ASSETS
Under the terms of the indenture, neither Funding nor TXU Europe may
consolidate with or merge into any other entity or convey, transfer or lease its
properties and assets substantially as an entirety to any entity, unless:
o The surviving or successor entity is organized under the laws of
any jurisdiction and validly existing under the laws of that
jurisdiction and it expressly assumes the obligations of Funding
or TXU Europe, as the case may be, on all debt securities, the
guarantee and under the indenture;
o Immediately after giving effect to the transaction, no Event of
Default and event which, after notice or lapse of time or both,
would become an Event of Default, will have occurred and be
continuing; and
o Funding or TXU Europe, as the case may be, will have delivered to
the trustee a certificate of an officer and an opinion of counsel
as provided in the indenture (Indenture, Section 1101).
The indenture does not restrict Funding or TXU Europe from entering
into a merger in which Funding or TXU Europe, as the case may be, is the
surviving entity (Indenture, Section 1103).
EVENTS OF DEFAULT
"Event of Default," when used in the indenture with respect to each
series of the exchange senior notes, means any of the following has occurred:
o Failure to pay interest on any exchange senior note of that
series within 30 days after it is due;
o Failure to pay the principal of or any premium on any exchange
senior note of that series when due;
o Failure to perform or remedy any breach of any other covenant in
the indenture, other than a covenant that does not relate to that
series of debt securities, that continues for 90 days after
Funding or TXU Europe receives written notice from the trustee,
or Funding or TXU Europe and the trustee receive a written notice
from the holders of 25% or more in principal amount of the debt
securities of that series;
o The guarantee of that series becomes ineffective or is
disaffirmed by TXU Europe;
o Specified events in bankruptcy or insolvency of Funding or TXU
Europe;
o Specified events in bankruptcy or insolvency of a subsidiary of
TXU Europe whose gross assets are 25% or more of TXU Europe's
consolidated gross assets or whose gross revenues are 25% or more
of TXU Europe's consolidated gross revenues;
o Default in the payment when due of indebtedness for money
borrowed exceeding $50,000,000 of Funding, TXU Europe or any
subsidiary of TXU Europe whose gross assets are 25% or more of
TXU Europe's consolidated gross assets or whose gross revenues
are 25% or more of TXU Europe's consolidated gross revenues; or
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o Failure to pay Additional Amounts on any exchange senior note of
that series within 30 days after it is due (Indenture, Section
801).
An Event of Default for a particular series of debt securities does
not necessarily constitute an Event of Default for any other series of debt
securities issued under the indenture. The trustee will give notice to the
holders of debt securities of the relevant series of any default known to the
trustee in the manner and to the extent required by the Trust Indenture Act,
unless cured or waived, in respect to payment of the exchange senior notes,
effectiveness of the guarantee, payment of indebtedness of Funding, TXU Europe
or a subsidiary of TXU Europe, or bankruptcy or insolvency of Funding, TXU
Europe or any subsidiary of TXU Europe. The trustee will not give notice to the
holders of debt securities of any other default known to the trustee until at
least 45 days after the occurrence of the default (Indenture, Section 902).
REMEDIES
If an Event of Default with respect to fewer than all the series of
debt securities occurs and continues, the trustee or the holders of at least 25%
in principal amount of the debt securities of the affected series may declare
the entire principal amount of all the debt securities of that series, together
with accrued interest, to be due and payable immediately. However, if the Event
of Default applies to all outstanding debt securities under the indenture, only
the trustee or holders of at least 25% in principal amount of all outstanding
debt securities of all series, voting as one class, and not the holders of any
one series, may make that declaration of acceleration (Indenture, Section 802).
At any time after a declaration of acceleration with respect to the
debt securities of any series has been made and before a judgment or decree for
payment of the money due has been obtained by the trustee, the Event of Default
giving rise to the declaration of acceleration will be considered waived, and
the declaration and its consequences will be considered rescinded and annulled,
if Funding or TXU Europe has paid or deposited with the trustee a sum sufficient
to pay:
o All overdue interest on all debt securities of the series;
o The principal of and premium, if any, on any debt securities of
the series which have otherwise become due and interest that is
currently due;
o To the extent permitted by law, interest on overdue interest;
o All amounts due to the trustee under the indenture; and
o Any other Event of Default with respect to the debt securities of
that series has been cured or waived as provided in the indenture
(Indenture, Section 802).
There is no automatic acceleration, even in the event of bankruptcy,
insolvency or reorganization of Funding or TXU Europe.
Other than its duties in case of an Event of Default, the trustee is
not obligated to exercise any of its rights or powers under the indenture at the
request, order or direction of any of the holders, unless the holders offer the
trustee a reasonable indemnity. If they provide this reasonable indemnity, the
holders of a majority in principal amount of any series of debt securities will
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the trustee, or exercising any power conferred upon
the trustee. However, if the Event of Default relates to more than one series,
only the holders of a majority in aggregate principal amount of all affected
series will have the right to give this direction. The trustee is not obligated
to comply with directions that conflict with law or other provisions of the
indenture (Indenture, Section 812).
No holder of debt securities of any series will have any right to
institute any proceeding under the indenture, or any remedy under the indenture,
unless:
o The holder has previously given to the trustee written notice of
a continuing Event of Default;
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o The holders of a majority in aggregate principal amount of the
outstanding debt securities of all series in respect of which an
Event of Default has occurred and is continuing have made a
written request to the trustee, and have offered reasonable
indemnity to the trustee, to institute proceedings;
o The trustee has failed to institute any proceeding for 60 days
after notice; and
o The holders of a majority in aggregate principal amount of all
series in default have not given the trustee direction
inconsistent with the written request within that 60 day period
(Indenture, Section 807).
However, these limitations do not apply to a suit by a holder of a debt security
for payment of the principal, premium, if any, or interest or Additional
Amounts, if any, due on the debt security on or after the applicable due date
(Indenture, Section 808).
TXU Europe will provide to the trustee an annual statement by an
appropriate officer as to compliance with all conditions and covenants under the
indenture (Indenture, Section 606).
MODIFICATION AND WAIVER
Without the consent of any holder of debt securities, Funding, TXU
Europe and the trustee may enter into one or more supplemental indentures for
any of the following purposes:
o To evidence the assumption by any permitted successor of the
covenants of Funding or TXU Europe in the indenture and in the
debt securities;
o To add additional covenants of Funding or TXU Europe or to
surrender any right or power of Funding or TXU Europe under the
indenture;
o To add additional Events of Default;
o To change or eliminate or add any provision to the indenture;
provided, however, if the change, elimination or addition will
adversely affect the interests of the holders of debt securities
of any series in any material respect, that change, elimination
or addition will become effective only:
(1) when the consent of the holders of debt securities of that
series has been obtained in accordance with the indenture;
or
(2) when no debt securities of the affected series remain
outstanding under the indenture;
o To provide collateral security for all but not part of the debt
securities;
o To establish the form or terms of debt securities of any other
series or any guarantees as permitted by the indenture;
o To provide for the issuance of additional bearer securities and
related coupons, if any;
o To evidence and provide for the acceptance of appointment of a
separate or successor trustee;
o To provide for the procedures required for use of a
noncertificated system of registration for the debt securities of
all or any series;
o To change any place where principal, premium, if any, and
interest will be payable, debt securities may be surrendered for
registration of transfer or exchange and notices to Funding and
TXU Europe may be served; or
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o To cure any ambiguity or inconsistency or to make any other
provisions with respect to matters and questions arising under
the indenture; provided that the action will not adversely affect
the interests of the holders of debt securities of any series in
any material respect (Indenture, Section 1201).
The holders of a majority in aggregate principal amount of the debt
securities of all series then outstanding may waive compliance by Funding and
TXU Europe with some restrictive provisions of the indenture (Indenture, Section
607). The holders of a majority in aggregate principal amount of the debt
securities of one or more but less than all series or tranches then outstanding
may waive compliance by Funding and TXU Europe with some restrictive provisions
of the indenture with respect to those series or tranches (Indenture, Section
607). The holders of not less than a majority in principal amount of the
outstanding debt securities of any series may waive any past default under the
indenture with respect to that series, except a default in the payment of
principal, premium, if any, or interest or Additional Amounts, if any, and some
covenants and provisions of the indenture that cannot be modified or amended
without the consent of the holder of each outstanding debt security of the
series affected (Indenture, Section 813).
If the Trust Indenture Act of 1939 is amended after the date of the
indenture to require changes to the indenture, the indenture will be deemed to
be amended so as to conform to that amendment of that Act. Funding, TXU Europe
and the trustee may, without the consent of any holders of any debt securities,
enter into one or more supplemental indentures to evidence the amendment
(Indenture, Section 1201).
The consent of the holders of a majority in aggregate principal amount
of the debt securities of all series then outstanding is required for all other
modifications to the indenture. However, if less than all of the series of debt
securities outstanding are directly affected by a proposed supplemental
indenture, then the consent only of the holders of a majority in aggregate
principal amount of all series that are directly affected will be required. No
amendment or modification may:
o Change the stated maturity of the principal of, or any
installment of principal of or interest on, any debt security, or
reduce the principal amount of any debt security or its rate of
interest or change the method of calculating the interest rate or
reduce any premium payable upon redemption, or change the
currency in which payments are made, or impair the right to
institute suit for the enforcement of any payment on or after the
stated maturity of any debt security, without the consent of the
holder;
o Reduce the percentage in principal amount of the outstanding debt
securities of any series whose consent is required for any
supplemental indenture or any waiver of compliance with a
provision of the indenture or any default under the indenture and
its consequences, or reduce the requirements for quorum or
voting, without the consent of all the holders of the series; or
o Modify some of the provisions of the indenture relating to
supplemental indentures, waivers of specified covenants and
waivers of past defaults with respect to the debt securities of
any series, without the consent of the holder of each outstanding
debt security affected by the modification or waiver (Indenture,
Section 1202).
A supplemental indenture which changes the indenture solely for the
benefit of one or more particular series of debt securities, or modifies the
rights of the holders of debt securities of one or more series, will not affect
the rights under the indenture of the holders of the debt securities of any
other series (Indenture, Section 1202).
The indenture provides that debt securities owned by Funding, TXU
Europe or anyone else required to make payment on the debt securities will be
disregarded and considered not to be outstanding in determining whether the
required holders have given a request or consent.
Funding or TXU Europe may fix in advance a record date to determine
the holders entitled to give any request, demand, authorization, direction,
notice, consent, waiver or other act of the holders, but neither Funding or TXU
Europe will have any obligation to do so. If a record date is fixed for that
purpose, the request, demand, authorization, direction, notice, consent, waiver
or other act of the holders may be given before or after the record date, but
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only the holders of record at the close of business on that record date will be
considered holders for the purposes of determining whether holders of the
required percentage of the outstanding debt securities have authorized or agreed
or consented to the request, demand, authorization, direction, notice, consent,
waiver or other act of the holders. For that purpose, the outstanding debt
securities will be computed as of the record date. Any request, demand,
authorization, direction, notice, consent, election, waiver or other act of a
holder will bind every future holder of the same debt securities and the holder
of every debt security issued upon the registration of transfer of or in
exchange of these debt securities. A transferee will be bound by acts of the
trustee, Funding or TXU Europe taken in reliance on those requests or
directions, whether or not notation of the action is made upon the debt security
(Indenture, Section 104).
RESIGNATION OF A TRUSTEE
A trustee may resign at any time by giving written notice to Funding
and TXU Europe or may be removed at any time by act of the holders of a majority
in principal amount of all outstanding series of debt securities and notice of
that act has been delivered to the trustee, Funding and TXU Europe. No
resignation or removal of a trustee and no appointment of a successor trustee
will be effective until the acceptance of appointment by a successor trustee. So
long as no Event of Default or event which, after notice or lapse of time, or
both, would become an Event of Default has occurred and is continuing and except
with respect to a trustee appointed by act of the holders, if Funding and TXU
Europe deliver to the trustee resolutions of their Boards of Directors
appointing a successor trustee and that successor has accepted the appointment
in accordance with the terms of the indenture, the trustee will be deemed to
have resigned and the successor will be deemed to have been appointed as trustee
in accordance with the indenture (Indenture, Section 910).
NOTICES
Notices to holders of global bearer exchange senior notes will be
given as provided for in the exchange senior notes. The depositary will forward
these notices to DTC. These notices will then be forwarded to owners of
beneficial interests in accordance with DTC's procedures. If certificated
registered exchange senior notes are issued, notices will be given by mail to
the addresses of the holders as they may appear in the security register for
those exchange senior notes (Indenture, Section 106). So long as the exchange
senior notes are listed on the Luxembourg Stock Exchange, notices will also be
published in a leading daily newspaper with general circulation in Luxembourg,
probably the Luxemburger Wort.
TITLE
Funding, TXU Europe, the trustee, and any agent of Funding, TXU Europe
or the trustee, will treat the bearer as the absolute owner of the global bearer
exchange senior note. If certificated notes are issued, Funding, TXU Europe, the
trustee, and any agent of Funding, TXU Europe or the trustee may treat the
person in whose name certificated exchange senior notes are registered as the
absolute owner of the certificated exchange senior notes, whether or not the
exchange senior notes may be overdue, for the purpose of making payments and for
all other purposes irrespective of notice to the contrary (Indenture, Section
308).
GOVERNING LAW
The indenture, the deposit agreement, the exchange senior notes and
the guarantee will be governed by, and construed in accordance with, the laws of
the State of New York (Indenture, Section 112).
REGARDING THE TRUSTEE
The trustee under the indenture is The Bank of New York. The Bank of
New York is also depositary under the deposit agreement. TXU Europe and some of
its affiliates also maintain various banking and trust relationships with The
Bank of New York. One of the initial purchasers of the senior notes, BNY Capital
Markets, Inc., is an affiliate of the trustee.
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STATUS
The exchange senior notes will be unsecured and unsubordinated
obligations of Funding and will rank equally without any preference among
themselves. Funding is a special purpose entity whose sole source of funds is
payment on loans it makes to TXU Europe.
MEETINGS OF HOLDERS OF SENIOR NOTES
The indenture contains provisions for the calling of meetings of
holders of one or more series of the exchange senior notes to consider matters
affecting their interest, including consents or waivers or other actions by the
holders. See -- "Modification and Waiver" and "Remedies." The trustee may call a
meeting of holders of one or more series at any time. The trustee will call a
meeting at the request of Funding, TXU Europe or the holders of 33% in aggregate
principal amount of the exchange senior notes of one or more series, considered
as one class. Notice of the meeting will be given to the holders of the exchange
senior notes of the affected series not less than 21 nor more than 180 days
before the date of the meeting. The holders of a majority in principal amount of
the exchange senior notes of the affected series, considered as one class, will
constitute a quorum at the meeting. Attendance at a meeting may be in person or
by proxy.
MATERIAL INCOME TAX CONSIDERATIONS
UK TAX CONSIDERATIONS
The following is a summary of current law and practice in the UK
relating to the taxation of the exchange senior notes. The summary applies only
to persons who are beneficial owners of the exchange senior notes, and may not
apply to special situations such as dealers in securities and persons connected
with Funding.
Prospective noteholders who may be subject to tax in a jurisdiction
other than the UK or who may be unsure as to their tax position should seek
their own professional advice.
For the purposes of this summary, references to noteholders are
references to the holders of interests in exchange senior notes and the holders
of certificated registered exchange senior notes.
INTEREST AND OTHER PROFITS, GAINS AND LOSSES IN RELATION TO THE EXCHANGE SENIOR
NOTES
Interest on the Bearer Exchange Senior Notes - Withholding Tax
- --------------------------------------------------------------
The exchange senior notes will constitute "quoted Eurobonds" as long
as they continue to be in bearer form and listed on a "recognised stock
exchange." The Luxembourg Stock Exchange is a "recognised stock exchange" for
these purposes. Accordingly, payments of interest on the exchange senior notes
may be made without withholding or deduction for, or on account of, UK income
tax:
(a) where payment is made by or through a person outside the UK; or
(b) where the payment is made by or through a person in the UK and
either:
(1) the beneficial owner of the exchange senior notes and of the
interest on those notes is not resident in the UK, or
(2) the exchange senior notes are held in a "recognised clearing
system"; DTC, on whose behalf the exchange senior notes will
be held by the depositary, is designated as a "recognised
clearing system" for this purpose;
and a declaration to that effect in the required form has been
given to the paying agent and the UK Inland Revenue has not
issued a direction that it considers that no exemption from the
requirement to withhold or deduct applies.
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In all other cases, whether or not payment is made through a paying
agent, interest on the exchange senior notes will be paid after deduction of UK
income tax at the lower rate, which is, currently, 20%, unless the Inland
Revenue has previously directed, in relation to a particular holder of exchange
senior notes, that payment should be made free of that deduction or subject to a
reduced deduction by virtue of relief being available to the holder of those
exchange senior notes under the provisions of any applicable double taxation
treaty.
A person, referred to in this summary as a collecting agent, in the UK
who, in the course of a trade or profession, either:
(a) acts as custodian of the exchange senior notes and receives
interest on the exchange senior notes, or directs that interest
on the exchange senior notes be paid to another person, or
consents to payment of interest on the exchange senior notes
being made to another person;
(b) collects or secures payment of, or receives interest on, the
exchange senior notes for another person, including the holder of
such exchange senior notes; or
(c) acts for another person in arranging to collect or secure payment
of interest on the exchange senior notes;
except by means solely of clearing a check or arranging for the clearing of a
check, will be required to withhold UK income tax at the lower rate unless:
(1) the relevant exchange senior notes are held in a "recognised
clearing system" and the collecting agent either:
(A) pays or accounts for the interest directly or indirectly to
the "recognised clearing system;" or
(B) is acting as a depositary for the "recognised clearing
system";
(2) the beneficial owner of the exchange senior notes and of the
interest on those notes is not resident in the UK; or
(3) one of a number of other exceptions to the requirement to
withhold applies by reference to the status of the recipient;
those exceptions include cases where the exchange senior notes
are held by a discretionary trust not having UK resident
beneficiaries, a foreign government, a UK bank, a charity or a
tax-exempt pension fund.
In the case of most of the above exceptions, conditions imposed by
regulations, including, where so required, the making of a declaration in the
required form, may have to be satisfied. The collecting agent will be required
to withhold if the Inland Revenue, having reason to believe that no exception
applies, issues a direction to that effect.
Interest on Certificated Registered Exchange Senior Notes - Withholding Tax
- ---------------------------------------------------------------------------
Interest on certificated registered exchange senior notes will be
payable subject to deduction of UK income tax at the lower rate, which is,
currently, 20%, unless the Inland Revenue has previously directed, in relation
to a particular holder of certificated registered exchange senior notes, that
payment should be made free of that deduction or subject to a reduced deduction
by virtue of relief available to the holder of those certificated exchange
senior notes under the provisions of any applicable double taxation treaty.
Taxation of Interest and Other Profits, Gains and Losses in relation to the
- ---------------------------------------------------------------------------
Exchange Senior Notes
- ---------------------
Unless otherwise stated, the following summary applies to noteholders
who are UK resident persons and non-UK resident persons who hold exchange senior
notes, including interests in bearer exchange senior notes, for the purposes of
a business carried on in the UK through a branch or agency.
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(1) Corporate noteholders
A corporate noteholder will, in any accounting period, normally
bring into account, for the purposes of UK corporation tax on
income, debits and credits in that accounting period relating to
interest on the exchange senior notes and fluctuations in the
value of the exchange senior notes, including fluctuations as a
result of changes in the US dollar/sterling exchange rate,
broadly in accordance with the noteholder's statutory accounting
treatment. If any UK income tax is deducted from interest paid to
such noteholder, the sterling equivalent at the time of deduction
of that income tax will either be offset against any income tax
payable by the noteholder in respect of any payments made by the
noteholder which are of the kind specified in the legislation as
payments from which a company is required to deduct UK income tax
or be available for credit against the noteholder's liability to
corporation tax.
The exchange of senior notes for exchange senior notes under the
exchange offer may constitute a disposal of the senior notes by
corporate noteholders. However, depending on the accounting
treatment, such a disposal is unlikely to result in a charge to
corporation tax which is greater than if no exchange had taken
place.
(2) Non-corporate noteholders
Non-corporate noteholders will generally be liable for UK income
tax on the gross amount of any interest received in respect of
the exchange senior notes; the taxable amount will be calculated
by reference to the US dollar/sterling exchange rate at the date
of receipt. If any income tax is deducted from interest paid to
such a noteholder, credit will be available for its sterling
equivalent at the time of deduction.
The disposal of all or some of the exchange senior notes,
including disposal on redemption, by a non-corporate noteholder
would generally be treated, for the purposes of UK capital gains
tax, as a disposal or part disposal of those exchange senior
notes by that noteholder. A disposal or part disposal could,
depending on that noteholder's individual circumstances, give
rise to a liability for capital gains tax. Taper, or graduated,
relief may be available to reduce any gain arising on a disposal
or part disposal, depending on the length of time for which the
exchange senior notes disposed of have been held at the time of
disposal. However, under the "accrued income scheme," a transfer
of exchange senior notes could also give rise to a charge to UK
income tax in respect of an amount representing interest on the
exchange senior notes which has accrued since the preceding
interest payment date or since issue; any amount charged to
income tax in that way would be deducted from the disposal
proceeds for the purposes of capital gains tax. The exchange of
senior notes for exchange senior notes pursuant to the exchange
offer should constitute a conversion of securities, and,
therefore, should not be treated as a disposal for the purposes
of UK capital gains tax.
(3) Other noteholders
A noteholder who is neither a UK resident person nor a non-UK
resident person holding exchange senior notes for the purposes of
a business carried on in the UK through a branch or agency will
not be subject to UK tax on any interest received on the exchange
senior notes or any fluctuations in value of the exchange senior
notes, except to the extent that UK income tax is deducted at
source. As mentioned above, a noteholder of that kind should be
able to obtain payment of interest on the exchange senior notes
without deduction of tax.
STAMP DUTY AND STAMP DUTY RESERVE TAX
No stamp duty or stamp duty reserve tax will be payable on the issue
of the bearer exchange senior notes or the certificated exchange senior notes.
97
<PAGE>
No stamp duty will be payable on the transfer by delivery of bearer
exchange senior notes. No stamp duty reserve tax will be payable on an agreement
to transfer bearer exchange senior notes.
No stamp duty reserve tax or stamp duty will be payable on an
agreement for the transfer of, or on the transfer of, certificated exchange
senior notes.
US INCOME TAX CONSIDERATIONS
The following summary describes material US federal income tax
consequences of the acquisition, ownership and disposition of the exchange
senior notes. Except where noted, it deals only with exchange senior notes held
as capital assets within the meaning of section 1221 of the US Internal Revenue
Code of 1986, as amended, and does not deal with special situations, such as
those of dealers in securities or currencies, financial institutions, life
insurance companies, persons holding the exchange senior notes as part of a
hedging or conversion transaction or a straddle, persons who have a functional
currency other than the US dollar, or persons who are not US holders, as defined
below. In addition, this discussion does not address the tax consequences to
persons who purchased the senior notes other than in their initial issuance and
distribution, and who acquire the exchange senior notes other than in the
exchange offer. Furthermore, the discussion below is based upon the Code,
existing and proposed Treasury regulations promulgated under the Code, and
current administrative rulings and judicial decisions under the Code and
regulations, all of which are subject to change, possibly on a retroactive
basis, so as to result in US federal income tax consequences different from
those discussed below.
As used in this prospectus, a US holder means a holder of a beneficial
interest in an exchange senior note that is:
o A citizen or resident of the US;
o A corporation, partnership or other entity created or organized
in or under the laws of the US or any political subdivision of
the US;
o An estate the income of which is subject to US federal income
taxation regardless of its source, or
o A trust the administration of which is subject to the primary
supervision of a court within the US and for which one or more US
persons have the authority to control all substantial decisions.
Prospective holders of beneficial interests in the exchange senior
notes are advised to consult with their tax advisors as to the US federal income
tax consequences of the purchase, ownership and disposition of the exchange
senior notes in light of their particular circumstances, as well as the effect
of any state, local or other tax laws.
EXCHANGE OF SENIOR NOTES FOR EXCHANGE SENIOR NOTES
An exchange of beneficial interests in senior notes for beneficial
interests in exchange senior notes in the exchange offer should not constitute a
taxable event for US federal income tax purposes. An exchange of property for
other property that is not materially different in kind or extent is not a
taxable exchange for US federal income tax purposes. As a result, no gain or
loss is realized upon the exchange. The exchange senior notes are identical to
the senior notes, except that the exchange senior notes will be registered
under the Securities Act, cannot have Additional Interest and will not bear
legends restricting their transferability. While there is no authority
directly addressing transactions like the exchange offer, these differences
should not be considered to be economically significant. As a result, the
exchange senior notes should not be considered materially different in kind or
extent from the senior notes. Beneficial interests in exchange senior notes
should be treated as a continuation of beneficial interests in senior notes in
the hands of a US holder. As a result, US holders who effect an exchange should
not recognize any income, gain or loss for US federal income tax purposes with
respect to the exchange. In addition, a US holder's tax basis in an exchange
senior note will be the same as that holder's basis in the senior note which is
exchanged, and a US holder's holding period in an exchange senior note will
include that holder's holding period in the senior note which is exchanged.
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<PAGE>
PAYMENTS OF INTEREST
Stated interest on an exchange senior note, including any Additional
Amounts and any Gross-Up Taxes in respect of which those Additional Amounts are
paid, will generally be taxable to a US holder as ordinary income at the time it
is paid or accrued in accordance with the US holder's method of accounting for
tax purposes.
For purposes of computing the US foreign tax credit limitation,
interest income received from Funding and payments received from TXU Europe in
respect of the guarantee will generally be treated as foreign source income and,
in general, passive income or financial services income, or, if subject to a
withholding tax of 5% or more, high withholding tax income.
SALE, EXCHANGE OR REDEMPTION OF THE EXCHANGE SENIOR NOTES
Upon the sale, exchange or redemption of beneficial interests in the
exchange senior notes, a US holder will recognize gain or loss equal to the
difference between (1) the amount realized upon the sale, exchange or
redemption, excluding any accrued and unpaid interest not previously included in
income, and (2) that US holder's adjusted tax basis in the exchange senior
notes. A US holder's adjusted tax basis in the exchange senior notes generally
will be the initial purchase price it paid for the senior notes it is
exchanging, net of accrued interest. The gain or loss will be capital gain or
loss and will be long-term capital gain or loss if, at the time of sale,
exchange or redemption, the exchange senior notes are treated as having been
held for more than one year. Under current law, the deductibility of capital
losses is subject to limitations. The net capital gains of individuals are taxed
at lower rates than ordinary income.
Any gain or loss realized by a US holder on the sale, exchange or
redemption of the exchange senior notes generally will be treated as from
sources within the US for purposes of computing the US foreign tax credit
limitation.
INFORMATION REPORTING AND BACKUP WITHHOLDING
To the extent required by law, income on the exchange senior notes
will be reported to US holders on Form 1099, which should be mailed to the
holders by January 31 following each calendar year.
Payment of the proceeds from the disposition of the exchange senior
notes to or through the US office of a broker is subject to information
reporting unless the US holder establishes an exemption from information
reporting.
Payments made in respect of, and proceeds from the sale of, the
exchange senior notes may be subject to "backup withholding" tax of 31% if the
US holder fails to comply with identification requirements prescribed by the
Code and regulations, or has previously failed to report in full dividend and
interest income, or does not otherwise establish its entitlement to an
exemption. Any withheld amounts will be refunded or allowed as a credit against
that US holder's US federal income tax liability, provided that information
required by the Code and regulations is furnished to the US Internal Revenue
Service.
99
<PAGE>
PLAN OF DISTRIBUTION
Except as described below, a broker-dealer may not participate in the
exchange offer in connection with a distribution of the exchange senior notes,
which, for the purposes of this PLAN OF DISTRIBUTION section, generally means
beneficial interests in exchange senior notes. Each broker-dealer that receives
exchange senior notes for its own account in the exchange offer must acknowledge
that it will deliver a prospectus in connection with any resale of the exchange
senior notes. Based on SEC staff interpretations, a broker-dealer could use this
prospectus, as it may be amended or supplemented from time to time, in
connection with resales of exchange senior notes received in the exchange offer
where the beneficial interests in senior notes for which they were exchanged
were acquired as a result of market-making activities or other trading
activities. Funding and TXU Europe have agreed that for a period not to exceed
90 days, they will make this prospectus, as amended or supplemented, available
to any broker-dealer for use in connection with any such resale. In addition,
until ____________ ___, 1999 all dealers effecting transactions in the exchange
senior notes may be required to deliver a prospectus.
The information described above concerning SEC staff interpretations
is not intended to constitute legal advice, and broker-dealers should consult
their own legal advisors with respect to these matters.
Funding and TXU Europe will not receive any proceeds from the exchange
offer or any sale of exchange senior notes by broker-dealers. Exchange senior
notes received by broker-dealers for their own account in the exchange offer may
be sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the
exchange senior notes or a combination of those methods of resale, at market
prices prevailing at the time of resale, at prices related to those prevailing
market prices or negotiated prices. Any resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any broker-dealer and/or the
purchasers of any exchange senior notes. Any broker-dealer that resells exchange
senior notes that were received by it for its own account in the exchange offer
and any broker or dealer that participates in a distribution of the exchange
senior notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any resale of exchange senior notes and any
commissions or concessions received by any of those persons may be deemed to be
underwriting compensation under the Securities Act. Any broker or dealer
registered under the Exchange Act who holds senior notes that were acquired for
its own account as a result of market-making activities or other trading
activities, other than senior notes acquired directly from Funding and TXU
Europe, may exchange those senior notes in the exchange offer; however, that
broker or dealer may be deemed to be an "underwriter" within the meaning of the
Securities Act and must, therefore, deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of the
exchange senior notes received by the broker or dealer in the exchange offer.
This prospectus delivery requirement may be satisfied by the delivery by that
broker or dealer of this prospectus. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
Funding and TXU Europe have agreed to pay the expenses of registration
of the exchange senior notes and will indemnify the holders of the exchange
senior notes, including any broker-dealers, against liabilities detailed in the
registration rights agreement, including liabilities under the Securities Act.
Before the exchange offer, there has been no public market for the
senior notes. Funding and TXU Europe do not intend to apply for listing of the
exchange senior notes on any securities exchange other than the Luxembourg Stock
Exchange. There can be no assurance that an active market for the exchange
senior notes will develop. To the extent that a market for the exchange senior
notes does develop, the market value of the exchange senior notes will depend on
market conditions (including yields on alternative investments), general
economic conditions, Funding's and TXU Europe's financial condition and other
conditions. Those conditions might cause the exchange senior notes, to the
extent that they are actively traded, to trade at a significant discount from
face value. Funding and TXU Europe have not entered into any arrangement or
understanding with any person to distribute the exchange senior notes to be
received in the exchange offer.
Funding and TXU Europe have not agreed to compensate broker-dealers
who effect the exchange of senior notes on behalf of holders.
100
<PAGE>
EXPERTS
The consolidated financial statements of Eastern and TXU Europe and
the financial statements of Overseas included in this prospectus have been
audited by PricewaterhouseCoopers, independent auditors, as stated in their
reports included in this prospectus, and have been included in this prospectus
in reliance upon the reports of PricewaterhouseCoopers given upon their
authority as experts in accounting and auditing.
The statements made as to matters of law and legal conclusions in this
prospectus under MATERIAL INCOME TAX CONSIDERATIONS -- "UK Tax Considerations"
have been reviewed by Norton Rose, London, England, and are included in this
prospectus in reliance upon the opinion of that firm given upon their authority
as experts. The statements made as to matters of law and legal conclusions in
this prospectus under MATERIAL INCOME TAX CONSIDERATIONS -- "US Income Tax
Considerations" have been reviewed by Thelen Reid & Priest LLP, New York, New
York, and are included in this prospectus in reliance upon the opinion of that
firm given upon their authority as experts.
LEGALITY
The validity of the exchange senior notes is being passed upon for
Funding and TXU Europe by Worsham, Forsythe & Wooldridge, L.L.P., Dallas, Texas,
by Thelen Reid & Priest LLP and by E.J. Lean, General Counsel to Funding and TXU
Europe. However, all matters concerning the incorporation of Funding and TXU
Europe and all other matters of UK law relating to Funding and TXU Europe will
be passed upon only by E.J. Lean. At June 30, 1999, members of the firm of
Worsham, Forsythe & Wooldridge, L.L.P. owned approximately 41,000 shares of the
common stock of TXU Corp.
NATURE OF FINANCIAL INFORMATION
The financial information in this prospectus in respect of TXU Europe
and Eastern included in SUMMARY -- "Selected Financial Information,"
CAPITALIZATION and MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS does not constitute statutory accounts under Section
240 of the UK Companies Act 1985. Statutory accounts of Eastern for the fiscal
year ended March 31, 1998 to which a portion of that financial information
relates have been delivered to the Registrar of Companies in England and Wales.
The auditors of Eastern have made a report under Section 236 of the Companies
Act on the statutory accounts for that fiscal year which was not qualified
within the meaning of Section 262 of the Companies Act and did not contain a
statement made under Section 237(2) or 237(3) of the Companies Act.
WHERE YOU CAN FIND MORE INFORMATION
TXU Europe will be required to file reports under the Exchange Act of
1934 and will file those reports with the SEC. These SEC filings will be
available to the public over the Internet at the SEC's website at
http://www.sec.gov. You will also be able to read and copy any of these SEC
filings at the SEC's public reference rooms in Washington, D.C., New York, New
York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. In addition, these filings will be
available at the offices of the paying agent in Luxembourg.
No separate financial statements of Funding are included or
incorporated by reference in this prospectus. TXU Europe and Funding do not
consider that those financial statements would be material to holders of
beneficial interests in the exchange senior notes because (1) Funding is a newly
incorporated company that has no operating history and no independent
operations, and (2) Funding was formed for the sole purpose of providing
financing for the operations of TXU Europe and its subsidiaries. In addition,
Funding does not expect to file reports under the Exchange Act as a result of
the registration of the exchange senior notes under the Securities Act. See TXU
EASTERN FUNDING COMPANY.
Copies of the indenture and the deposit agreement with respect to the
exchange senior notes will be available at the offices of the paying agents for
the exchange senior notes.
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<PAGE>
LUXEMBOURG STOCK EXCHANGE AND OTHER INFORMATION
LISTING
A notice relating to the issue (Notice Legale) as well as the
Memorandum and Articles of Association of Funding and the Memorandum and
Articles of Association of TXU Europe have been lodged with the Chief Registrar
of the District Court of Luxembourg (Greffier en chef du Tribunal
d'Arrondissement de et a Luxembourg) where these documents may be examined and
copies obtained.
EUROCLEAR AND CEDELBANK
The exchange senior notes have been accepted for clearance through
Cedelbank and Euroclear. For the 6.15% exchange senior notes, the Common Code
number is o and the ISIN number is o. For the 6.45% exchange senior notes, the
Common Code number is o and the ISIN number is o. For the 6.75% exchange senior
notes, the Common Code number is o and the ISIN number is o.
AUTHORIZATION
Funding was authorized to issue the exchange senior notes by
resolution of its Board of Directors on February 19, 1999. TXU Europe was
authorized to issue the guarantee by resolution of its Board of Directors on
February 19, 1999.
SIGNIFICANT OR MATERiAL CHANGE
Except as disclosed in this prospectus, there has been no significant
change in the financial or trading position of (1) Funding since its
incorporation, (2) TXU Europe since its incorporation and (3) Eastern and its
consolidated subsidiaries since March 31, 1998, the date of the last published
consolidated accounts of those companies. Since those dates, except as disclosed
in this prospectus, there has been no material adverse change in the financial
position or prospects of Funding, TXU Europe or Eastern and its subsidiaries.
LITIGATION
Neither Funding nor TXU Europe is involved in any litigation or
arbitration proceedings which are material in the context of the issue of the
exchange senior notes nor, so far as Funding or TXU Europe is aware, is any such
litigation or arbitration pending or threatened.
AUDITORS
Funding has not published any financial statements since its date of
incorporation.
TXU Europe produced its first audited financial statements on March 3,
1999.
The following additional audited financial statements for TXU Europe
are included in this prospectus:
(1) for the period from formation through December 31, 1998; and
(2) for the period from formation through March 31, 1999.
The financial information in respect of Eastern and its subsidiaries
as of March 31, 1998 and for the two year period then ended, that is contained
in this document does not constitute statutory accounts within the meaning of
Section 240 of the Companies Act. Statutory accounts for each of the two years
in the two year period ended March 31, 1998 have been delivered to the Registrar
of Companies in England and Wales, and Price Waterhouse gave an unqualified
report on those accounts, without any statement under Section 237(2) or (3) of
the Companies Act.
102
<PAGE>
DOCUMENTS AVAILABLE
Copies of the following documents may be inspected at, and, in the
case of the financial statements referred to in clause (iii) below, obtained
from, the offices of the paying agent for the exchange senior notes in
Luxembourg during usual business hours on any weekday (Saturdays and public
holidays excepted) so long as any of the exchange senior notes remain
outstanding:
(i) the Memorandum and Articles of Association of Funding;
(ii) the Memorandum and Articles of Association of TXU
Europe;
(iii) the latest annual consolidated financial statements of
TXU Europe and interim financial statements of TXU
Europe, which are expected to be available on a
quarterly basis; financial statements of Funding are not
prepared or published, nor are they expected to be
prepared or published in the future (if, in the future,
Funding is required to prepare and publish financial
statements, those financial statements will be also be
available at the offices of the paying agent for the
exchange senior notes in Luxembourg); and
(iv) the indenture and each officer's certificate (which
contains the forms of a series of the exchange senior
notes), the deposit agreement and the letters of
representations.
103
<PAGE>
INDEX TO FINANCIAL STATEMENTS
TXU EUROPE LIMITED (formerly known as TXU EASTERN HOLDINGS LIMITED) AND
SUBSIDIARIES
(Successor Company)
Page
----
Report of Independent Accountants ........................................F-3
Financial Statements:
Consolidated balance sheets as of December 31, 1998
and as of March 31, 1999 ...............................F-4
Statements of consolidated income for the period from
formation through December 31, 1998 and for the
period from formation through March 31, 1999 .............F-6
Statements of consolidated comprehensive income for
the period from formation through December 31,
1998 and for the period from formation through
March 31, 1999 ...........................................F-7
Statements of consolidated common stock equity for
the period from formation through December 31,
1998 and for the period from formation through
March 31, 1999 ...........................................F-8
Statements of consolidated cash flows for the period
from formation through December 31, 1998 and
for the period from formation through March 31, 1999 .....F-9
Notes to the consolidated financial statements ..................F-11
EASTERN GROUP plc AND SUBSIDIARIES (Predecessor Company)
Report of Independent Accountants ........................................F-35
Financial Statements:
Consolidated balance sheet as of March 31, 1998 .................F-36
Statements of consolidated income for the years ended
March 31, 1997 and 1998 and for the period from
April 1, 1998 through May 18, 1998 .......................F-38
Statements of consolidated comprehensive income for
the years ended March 31, 1997 and 1998 and for
the period from April 1, 1998 through May 18, 1998 .......F-39
Statements of consolidated common stock equity for
the years ended March 31, 1997 and 1998 and for
the period from April 1, 1998 through May 18, 1998 .......F-40
Statements of consolidated cash flows for the
years ended March 31, 1997 and 1998 and for
the period from April 1, 1998 through May 18, 1998 .......F-41
Notes to the consolidated financial statements ..................F-42
ENERGY GROUP OVERSEAS B.V.
Report of Independent Accountants ........................................F-62
Financial Statements:
Balance Sheet as of March 31, 1998 ..............................F-63
Statements of income for the periods from
formation through March 31, 1998 and from
April 1, 1998 through May 18, 1998 .......................F-64
Statements of comprehensive income for the periods
from formation through March 31, 1998 and from
April 1, 1998 through May 18, 1998 .......................F-65
Statements of common stock equity for the periods
from formation through March 31, 1998 and from
April 1, 1998 through May 18, 1998 .......................F-66
Statements of cash flows for the periods from
formation through March 31, 1998 and from
April 1, 1998 through May 18, 1998 .......................F-67
Notes to the financial statements ...............................F-68
F-1
<PAGE>
TXU EUROPE LIMITED AND SUBSIDIARIES
Financial Statements:
Unaudited condensed consolidated balance sheet as
of June 30, 1999 .........................................F-71
Unaudited condensed statements of consolidated
income of the Predecessor Company for the
period from January 1, 1998 through May 18, 1998
and of the Successor Company for the period from
formation through June 30, 1998 and of the
Successor Company for the six months ended
June 30, 1999 ............................................F-73
Unaudited condensed statements of consolidated
comprehensive income of the Predecessor Company
for the period from January 1, 1998 through
May 18, 1998 and of the Successor Company for
the period from formation through June 30, 1998
and of the Successor Company for the six months
ended June 30, 1999 ......................................F-74
Unaudited condensed statements of consolidated
cash flows of the Predecessor Company for the
period from January 1, 1998 through May 18, 1998
and of the Successor Company for the period from
formation through June 30, 1998 and of the
Successor Company for the six months ended
June 30, 1999 ............................................F-75
Notes to the unaudited condensed consolidated
financial statements .....................................F-76
TXU EUROPE LIMITED
Unaudited condensed combined pro forma statement of
income from continuing operations for the year
ended December 31, 1998 ..................................P-1
Notes to unaudited condensed combined pro forma
statement of income ......................................P-3
The financial statement schedules are omitted because of the absence of the
conditions under which they are required or because the information is included
in the consolidated financial statements or the notes thereto.
F-2
<PAGE>
PRICEWATERHOUSECOOPERS
- --------------------------------------------------------------------------------
PRICEWATERHOUSECOOPERS
1 Embankment Place
London WC2N 6NN
Telephone +44 (0) 171 583 5000
Facsimile +44 (0) 171 822 4652
Report of Independent Accountants
---------------------------------
To the Board of Directors and Shareholders of TXU Europe Limited (formerly
known as TXU Eastern Holdings Limited) and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the related
statements of consolidated income, of comprehensive income, of common stock
equity and of cash flows present fairly, in all material respects, the financial
position of TXU Europe Limited (formerly known as TXU Eastern Holdings Limited)
and Subsidiaries at December 3l, 1998 and March 31, 1999, and the results
of their operations and their cash flows for the periods from formation
(February 5, 1998) to December 31, 1998 and from formation to March 31, 1999 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards in the United Kingdom which do not
differ significantly with those in the United States and which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
London, England
June 30, 1999
PricewaterhouseCoopers is the successor partnership to the UK firms of Price
Waterhouse and Coopers & Lybrand. The principal place of business of
PricewaterhouseCoopers and its associate partnerships, and of Coopers & Lybrand,
is 1 Embankment Place, London WC2N 6NN. The principal place of business of Price
Waterhouse is Southwark Towers, 32 London Bridge Street, London SE1 9SY. Lists
of the partners' names are available for inspection at those places.
All partners in the associate partnerships are authorised to conduct business as
agents of, and all contracts for services to clients are with,
PricewaterhouseCoopers. PricewaterhouseCoopers is authorised by the Institute of
Chartered Accountants in England and Wales to carry on investment business.
F-3
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
CONSOLIDATED BALANCE SHEETS
((pound) million)
<TABLE>
<CAPTION>
As of As of
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Assets
Property, plant and equipment, net 2,676 2,516
----- -----
Current assets
Cash and cash equivalents 467 414
Accounts receivable (net of allowance for uncollectible accounts
of (pound)22 million and (pound)17 million at December 31, 1998 and
March 31, 1999, respectively) 585 619
Inventories:
Materials and supplies 25 23
Fuel stock 116 97
Prepayments 40 22
ACT recoverable 30 30
Other current assets 40 29
----- -----
Total current assets 1,303 1,234
----- -----
Investments
Restricted cash 717 730
Other 233 284
----- -----
Total investments 950 1,014
----- -----
Deferred debits
Goodwill (net of accumulated amortization of (pound)52 million and (pound)73
million at December 31, 1998 and March 31, 1999, respectively) 3,209 3,451
Prepayments for pensions 257 259
Other deferred debits 134 109
----- -----
Total deferred debits 3,600 3,819
----- -----
Total assets 8,529 8,583
===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
CONSOLIDATED BALANCE SHEETS
((pound) million, except for number of shares and par value)
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Capitalization and liabilities
Capitalization
Common stock (3,000,000,000 shares at US$1 par and 100 deferred
shares at (pound)1 par authorized) 2,455,705,299 shares and 100
deferred shares issued and outstanding 1,467 1,467
Retained earnings 76 125
Accumulated other comprehensive loss (8) (11)
------ ------
Total common stock equity 1,535 1,581
------ ------
Minority interest 190 200
------ ------
Note payable to TXU Corp 682 682
Long-term debt, less amounts due currently 3,629 3,754
------ ------
Total long-term debt 4,311 4,436
------ ------
Total capitalization 6,036 6,217
------ ------
Current liabilities
Notes payable - banks 238 53
Long-term debt due currently 382 486
Short-term loans on accounts receivable 300 300
Accounts payable:
Affiliates 7 7
Other 532 403
Taxes accrued 162 213
Interest accrued 53 16
Other current liabilities 17 56
------ ------
Total current liabilities 1,691 1,534
------ ------
Deferred credits and other noncurrent liabilities
Deferred income taxes, net 321 334
Provision for unfavorable contracts 250 248
Due to affiliates 33 45
Other deferred credits and noncurrent liabilities 198 205
------ ------
Total deferred credits and other noncurrent liabilities 802 832
------ ------
Commitments and contingencies (Notes 12 and 13) -- --
Total capitalization and liabilities 8,529 8,583
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
STATEMENTS OF CONSOLIDATED INCOME
((pound) million)
<TABLE>
<CAPTION>
Period from formation Period from formation
through through
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Operating revenues 2,165 3,338
Costs and expenses
Purchased power 961 1,480
Gas purchased for resale 367 646
Operation and maintenance 379 526
Depreciation and amortization 144 202
----- -----
Total operating expenses 1,851 2,854
----- -----
Operating income 314 484
Other income - net 46 47
----- -----
Income before interest, income taxes and minority interest 360 531
Interest income 64 78
Interest expense, net of capitalized interest of (pound)4
million and (pound)5 million for the periods from formation
through December 31, 1998 and March 31, 1999,
respectively 269 356
----- -----
Income before income taxes and minority interest 155 253
Income tax expense 67 106
----- -----
Income before minority interest 88 147
Minority interest 11 21
----- -----
Net income 77 126
===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
((pound) million)
<TABLE>
<CAPTION>
Period from formation Period from formation
through December 31, 1998 through March 31, 1999
------------------------- ----------------------
<S> <C> <C>
Net income 77 126
Other comprehensive income
Unrealized loss on securities classified as available for sale (8) (11)
Cumulative translation adjustment -- --
---- ----
Comprehensive income 69 115
==== ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY
((pound) million)
<TABLE>
<CAPTION>
Period from formation through December 31, 1998
-----------------------------------------------
Common Retained Accumulated Other
Stock Earnings Comprehensive Loss
------------ -------- ------------------
<S> <C> <C> <C>
Balance at February 5, 1998 -- -- --
Net income -- 77 --
Cash dividends -- (1) --
Stock issued (2,456 million shares) 1,467 -- --
Unrealized loss on securities classified as available for sale -- -- (8)
Cumulative translation adjustment -- -- --
----- ----- -----
Balance at December 31, 1998 1,467 76 (8)
===== ===== =====
<CAPTION>
Period from formation through March 31, 1999
-----------------------------------------------
Common Retained Accumulated Other
Stock Earnings Comprehensive Loss
------------ -------- ------------------
<S> <C> <C> <C>
Balance at February 5, 1998 -- -- --
Net income -- 126 --
Cash dividends -- (1) --
Stock issued (2,456 million shares) 1,467 -- --
Unrealized loss on securities classified as available for sale -- -- (11)
Cumulative translation adjustment -- -- --
----- ----- -----
Balance at March 31, 1999 1,467 125 (11)
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
STATEMENTS OF CONSOLIDATED CASH FLOWS
((pound) million)
<TABLE>
<CAPTION>
Period from formation Period from formation
through through
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Cash flows - operating activities
Net income 77 126
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 144 202
Amortization of discount on long-term debt (5) (6)
Deferred income taxes 24 35
Net gain on sale of businesses (13) (12)
Minority interest 11 21
Undistributed equity in earnings of TEG (2) (2)
Changes in operating assets and liabilities:
Accounts receivable (138) (173)
Inventories (26) (7)
Prepayments and other assets (7) (16)
Accounts payable
Affiliates 7 7
Other 198 73
Interest accrued 40 1
Taxes accrued (95) (77)
Other liabilities (211) (173)
Due to affiliates 33 45
------ ------
Cash provided by operating activities 37 44
------ ------
Cash flows - investing activities
Acquisition of TEG, net of cash acquired of (pound)2,011 million (1,432) (1,444)
Capital expenditures (207) (230)
Purchase of Citigen (London) Ltd and BG Cogen Ltd (14) (14)
Proceeds from sale of businesses 60 63
Investment in Svartisen (124) (124)
Investment in marketable securities (36) (36)
Other investments (14) (73)
------ ------
Cash used in investing activities (1,767) (1,858)
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
STATEMENTS OF CONSOLIDATED CASH FLOWS (continued)
((pound) million)
<TABLE>
<CAPTION>
Period from formation Period from formation
through through
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Cash flows - financing activities
Net borrowings under the:
Acquisition facility 1,821 1,821
Interim facility 243 243
Other long-term debt 66 360
Issuance of common stock to parent 1,467 1,467
Retirements of :
Acquisition facility (1,071) (1,071)
Interim facility (243) (243)
Loan notes (9) (9)
Other long-term debt (174) (242)
Change in notes payable - banks 168 (27)
Change in minority interest 166 166
Retirements of advances from TXU Corp (200) (200)
Debt financing cost (36) (36)
Dividends paid (1) (1)
------ ------
Cash provided by financing activities 2,197 2,228
------ ------
Net change in cash and cash equivalents 467 414
Cash and cash equivalents - beginning balance -- --
------ ------
Cash and cash equivalents - ending balance 467 414
====== ======
Supplemental cash flow disclosures:
Cash paid for interest 223 310
Cash paid for income taxes 137 148
Non-cash transactions
Investment received in consideration for sale of EG
Telecoms 22 22
Consolidation of debt and related investment on
cross-border leases 170 170
Issuance of loan notes upon acquisition of TEG 85 85
Advances from TXU Corp upon acquisition of TEG 882 882
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
The business and operations of TXU Europe Limited (formerly known as TXU
Eastern Holdings Limited) and Subsidiaries (the Company) are divided into
three principal segments, as follows:
(i) The energy retail business which supplies electricity and gas to
national domestic, industrial and commercial customers in the United
Kingdom;
(ii) The energy management and generation business which manages an
integrated portfolio of generation assets, physical gas assets and
contracts; and
(iii) The networks business which owns, manages and operates the
electricity distribution system.
These businesses are carried out primarily in the United Kingdom with
interests increasingly being developed throughout the rest of Europe.
Formation
The Company is a holding company that owns 90% of the outstanding common
stock of TXU Finance (No. 2) Limited (TXU Finance) which in turn owns 100%
of the common stock of TXU Acquisitions Limited (TXU Acquisitions).
The Company was incorporated as a private limited company on February 5,
1998. Through a series of restructurings and capital transactions
subsequent to its formation, the Company became an indirect, wholly owned
subsidiary of Texas Utilities Company, doing business as TXU Corp (TXU).
The "period from formation through December 31, 1998" referred to in these
financial statements represents February 5, 1998 through December 31, 1998,
inclusive. The "period from formation through March 31, 1999" referred to
in these financial statements represents February 5, 1998 through March 31,
1999, inclusive. From March 1998 to May 18, 1998 the Company, through TXU
Acquisitions, had acquired an equity interest in The Energy Group PLC (TEG)
of approximately 22%, which resulted in the recognition of equity income of
(pound)2 million, which is reflected in "Other Income-net" in the Statement
of Consolidated Income.
The Company has two classes of shares outstanding, ordinary and deferred.
Both classes are held by wholly owned subsidiaries of TXU. Ordinary shares
have voting rights.
In May 1998, the Company's share capital was redenominated from pounds
sterling into US dollars. The sterling-denominated ordinary shares were
reclassified as deferred shares and the new US dollar denominated
ordinary shares were issued. The deferred shares have no rights to vote or
receive dividends. Upon liquidation, holders of deferred shares are
entitled to receive (pound)1 per share only after holders of ordinary
shares are paid (pound)100 million per share. In addition, all of the
deferred shares may be repurchased for the sum of (pound)1.
Purchase Accounting
As of May 19, 1998, TXU Acquisitions acquired control of TEG. This business
combination was accounted for as a purchase. Substantially all of TEG's
continuing operations are conducted through Eastern Group plc (Eastern),
one of the largest integrated electricity and gas groups in the United
Kingdom. Also on May 19, 1998, TEG sold its United States and Australian
coal businesses and United States energy marketing operations (Peabody
Sale). The "TEG Businesses Acquired" refers to TEG, exclusive of the
operations sold in the Peabody Sale.
The total purchase consideration for the TEG Businesses Acquired was
approximately (pound)4.4 billion. The excess of the purchase consideration
plus acquisition costs over the net fair value of tangible and identifiable
F-11
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Description of Business (continued)
intangible assets acquired and liabilities assumed resulted in goodwill of
(pound)3.5 billion, which is being amortized over 40 years.
In addition to the cash offer, shareholders of TEG were offered a share
alternative, which gave them the option to exchange their TEG shares for
shares of TXU common stock and a loan note option. TXU Acquisitions
exchanged 37,316,884 shares of TXU common stock for the 105,117,980 TEG
shares tendered by those who elected the share alternative, and paid cash
or issued loan notes in exchange for the remainder of TEG shares. TXU
Acquisitions acquired from TXU the shares of TXU common stock exchanged for
TEG shares by issuing a term note to TXU for (pound)882 million, the value
of the TXU common stock.
The allocation of the TEG purchase price to the assets and liabilities
assumed is as follows:
((pound) million)
Assets:
Property plant and equipment 2,624
Cash 2,011
Current assets 751
Investments 593
Deferred debits 565
Liabilities
Long-term debt (2,898)
Current liabilities (1,386)
Deferred credits and other non-current (1,060)
Minority interest (13)
-------
Net assets acquired 1,187
Goodwill 3,261
-------
Total purchase price 4,448
=======
2. Basis of Presentation and Significant Accounting Policies
The consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States (US GAAP).
Consolidation - The consolidated financial statements include the accounts
of the Company and all majority owned subsidiaries. Minority interest
represents the minority shareholders' proportionate share in the equity or
income of the Company's majority-owned subsidiaries.
All significant intercompany items and transactions have been eliminated in
consolidation. Investments in significant unconsolidated affiliates are
accounted for by the equity method.
Use of estimates - The preparation of the Company's consolidated financial
statements, in conformity with US GAAP, requires management to make
estimates and assumptions about future events that affect the reporting and
disclosure of assets and liabilities at the balance sheet dates and the
reported amounts of revenue and expense during the period covered by the
consolidated financial statements. In the event estimates and/or
assumptions prove to be different from actual amounts, adjustments are made
in subsequent periods to reflect more current information.
F-12
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Basis of Presentation and Significant Accounting Policies (continued)
Presentation - Certain December 31, 1998 amounts have been restated to
conform to the March 31, 1999 presentation.
Cash and cash equivalents - Cash equivalents consist of highly liquid
investments, which are readily convertible into cash and have maturities of
three months or less.
Accounts receivable - A provision for uncollectible accounts of (pound)11
million and (pound)13 million was recorded during the period from formation
through December 31, 1998 and the period from formation through March 31,
1999, respectively. The Company did not realize any material recoveries
during the period from formation through December 31, 1998 or the period
from formation through March 31, 1999. The Company wrote-off accounts
receivable of (pound)3 million and (pound)10 million during the period from
formation through December 31, 1998 and the period from formation through
March 31, 1999, respectively.
Inventories - Inventories consist of fuel stock, material and supplies, and
are stated at the lower of cost or net realizable value. The cost of
inventories is determined using a weighted average cost method.
Capitalized interest - Interest is capitalized on major capital
expenditures during the period of construction.
Property, plant and equipment - Property, plant and equipment are stated at
cost less accumulated depreciation. The cost of additions, improvements,
and interest on construction are capitalized, while maintenance and repairs
are charged to expense when incurred.
Leased generating stations meeting certain criteria and related equipment
are capitalized and the present value of the related lease payments is
recorded as a liability. Depreciation of capitalized lease assets is
computed on the straight-line basis over the shorter of the estimated
remaining useful life of the asset or the lease term.
Depletion of gas reserves is charged on a unit-of-production basis, based
on an assessment of proven reserves. Depreciation of all other property,
plant and equipment, is determined on the straight-line method over
estimated useful lives of the assets as follows:
Electricity generating station assets 30 years
Electricity generating station Shorter of Lease period or
assets under capital lease estimated remaining useful life
Electricity distribution system assets 40 years (3% per annum for first
20 years and 2% per annum for
last 20 years)
Buildings Up to 60 years
Leasehold improvements Shorter of remaining lease term
or estimated useful life
Plant and equipment Up to 10 years
Customer contributions to the construction of electricity distribution
system assets are amortized to income over a forty-year period, at a rate
of 3% per year for the first 20 years and 2% per year for the last 20
years. The unamortized amount of these contributions is deducted from
property, plant and equipment.
Upon sale, retirement, abandonment or other disposition of property, the
cost and related accumulated depreciation are eliminated from the accounts
and any gain or loss is reflected in income.
The United Kingdom Government is entitled to claim a portion of any gain
realized by the Company on certain property disposals made up to March 31,
2000. Provisions for such claims are made when an actual disposal occurs.
F-13
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Basis of Presentation and Significant Accounting Policies (continued)
Provision is made for abandonment costs relating to gas fields. Such
provisions are determined in accordance with local conditions and
requirements, and on the basis of costs estimated at the respective balance
sheet date. These costs are expensed on a unit-of-production basis.
The Company early adopted Statement of Position 98-1, "Accounting for the
costs of computer software developed or obtained for internal use" (SOP
98-1) beginning on May 19, 1998. Their costs are being amortized over a
five year period.
Valuation of long-lived assets - The Company periodically evaluates the
carrying value of long-lived assets to be held and used, including
goodwill, when events and circumstances warrant such a review. The carrying
value of a long-lived asset is considered impaired when the projected
undiscounted cash flows from such asset is separately identifiable and is
less than its carrying value. In that event, a loss is recognized based on
the amount by which the carrying value exceeds the fair market value of the
long-lived asset. Fair market value is determined primarily utilizing the
anticipated cash flows discounted at a rate commensurate with the risk
involved.
Goodwill - Goodwill is capitalized and amortized over 40 years using the
straight-line method. The Company reviews the goodwill recoverability
period on a regular basis.
Derivative financial instruments - In order to qualify for hedge
accounting, the following criteria must be met: the item being hedged
exposes the Company to price risk, it is probable that the hedge will
substantially offset this risk, and it has been designated as a hedge by
management.
Gains and losses on hedges of existing assets or liabilities are included
in the carrying amounts of those assets or liabilities and are ultimately
recognized in income. Gains and losses related to qualifying hedges of firm
commitments or anticipated transactions are deferred and are recognized in
income or as adjustments of carrying amounts when the hedged transactions
occurs. The cash flows related to derivative financial instruments are
recorded in the same manner as the cash flow related to the item being
hedged. In the event that an overall analysis of the firm commitments
being hedged indicates that the Company is in a net loss position, a
provision is made for these anticipated losses. Transactions that are
entered into that do not meet the criteria for hedge accounting are marked
to market on the balance sheet at the period end, and the unrealized gain
or loss is recognized in the Statement of Consolidated Income for that
period.
Revenue recognition - Electricity and gas sales revenues are recognized
when services are provided to customers and include an estimate for
unbilled revenues, or the value of electricity and gas consumed by
customers between the date of their last meter reading and the period-end
date. Operating revenues are stated exclusive of value added tax, but
inclusive of the fossil fuel levy.
Other income - net consists of the following for the periods indicated:
Formation through Formation through
December 31, 1998 March 31, 1999
----------------- -----------------
((pound) million)
Dividends from cost investments 5 6
Gain on the sale of Eastern Group
Telecoms 13 13
Dividends from marketable securities
purchased and sold during the
period from formation through
December 31, 1998 26 26
Undistributed equity in earnings of
TEG 2 2
-- --
Total 46 47
== ==
F-14
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Basis of Presentation and Significant Accounting Policies (continued)
Restructuring costs - Restructuring costs relate to voluntary termination
benefits and are recorded in Operation and Maintenance expense in the
Statement of Consolidated Income in the period in which the employee
accepts the offer and the amount can be reasonably estimated. The Company
has established voluntary retirement plans to progressively reduce manpower
levels.
Foreign currencies - Assets and liabilities of foreign subsidiaries are
translated at the exchange rate on the balance sheet date. Revenues, costs
and expenses are translated at average rates of exchange prevailing during
the period. Translation adjustments resulting from this process are charged
or credited to the cumulative currency translation adjustment account in
common stock equity. Gains and losses on foreign currency transactions are
included in nonoperating expenses on the Statement of Consolidated Income.
Income taxes - Income tax expense includes United Kingdom and other
national income taxes. The Company intends to reinvest the earnings of its
foreign subsidiaries into those businesses. Accordingly, no provision has
been made for taxes which would be payable if such earnings were
distributed to the Company.
Advance Corporation Tax (ACT) recoverable represents the amount of tax paid
or payable on outgoing dividends paid and proposed which can be set off
against a corporation tax liability arising currently or in the future,
thereby reducing current tax expense.
Deferred income taxes are determined under the liability method. Deferred
income taxes represent liabilities to be paid or assets to be received in
the future and reflect the tax consequences on future years of temporary
differences between the tax bases of assets and liabilities and their
financial reporting amounts. Future tax rate changes would affect those
deferred tax liabilities or assets in the period when the tax rate change
is enacted.
Future tax benefits, such as net operating loss carryforwards, are
recognized to the extent that realization of such benefits is more likely
than not.
Marketable securities - The Company has classified all of its marketable
securities as available for sale. Available for sale securities are carried
at fair value with the unrealized gains and losses reported as a component
of accumulated other comprehensive income in common stock equity. Declines
in fair value that are other than temporary are reflected in the Statement
of Consolidated Income.
Appraisal and development expenditure of gas fields - Appraisal
expenditures are accounted for under the successful efforts method. General
seismic and other costs are expensed as incurred.
Ceiling test - The capitalized costs of gas fields under evaluation, under
development or in production are assessed each year on a field-by-field
basis. To the extent that the future net revenues from the remaining
commercial reserves, or, in the case of prospects under evaluation, the
estimated potential commercial reserves, are less than the net capitalized
costs of the field, a charge is made to the Statement of Consolidated
Income.
New accounting standards - Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was originally to be effective for fiscal years beginning
after June 15, 1999. This statement requires that all derivative financial
instruments be recognized as either assets or liabilities on the balance
sheet at their fair values and that accounting for the changes in their
fair values is dependent upon the intended use of the derivatives and their
resulting designations. The new standard will supersede or amend existing
F-15
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Basis of Presentation and Significant Accounting Policies (continued)
standards that deal with hedge accounting and derivatives. The Company has
not determined the effect that adopting this standard will have on its
consolidated financial statements. On May 19, 1999, the Financial
Accounting Standards Board decided that it would amend SFAS No. 133, and
defer its effective date to all fiscal quarters of all fiscal years
beginning after June 15, 2000.
The Emerging Issues Task Force (EITF) has issued No. 98-10 "Accounting for
Energy Trading and Risk Management Activities", which is effective for
fiscal years beginning after December 15, 1998. EITF 98-10 requires that
contracts for energy commodities which are entered into under trading
activities should be marked to market with the gains and losses shown net
in the income statement. As the Company's fiscal year ends on December 31,
the Company adopted EITF 98-10 effective January 1, 1999 for the fiscal
year ending December 31, 1999. As the Company is not primarily involved in
trading activities, EITF 98-10 has not had a material impact on the
consolidated financial statements upon adoption.
3. Property, Plant and Equipment
Property, plant and equipment, stated at cost less accumulated
depreciation, consisted of:
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
((pound)million) ((pound)million)
<S> <C> <C>
Electricity distribution system 1,143 1,142
Electricity generating stations 1,262 1,124
Upstream gas assets 35 35
Other land and buildings 100 102
Plant and equipment 225 239
Accumulated depreciation (89) (126)
----- -----
Net property, plant and equipment 2,676 2,516
===== =====
</TABLE>
Depreciation expense for the period from formation through December 31,
1998 was (pound)92 million and for the period from formation through March
31, 1999 was (pound)129 million.
Electricity generating stations and plant and equipment include assets
under capital leases as follows:
December 31, 1998 March 31, 1999
((pound)million) ((pound)million)
---------------- ---------------
Cost 913 835
Accumulated depreciation (25) (36)
----- -----
Net book value 888 799
===== =====
Capitalized software costs totalling (pound)14 million are included in
plant and equipment as of December 31, 1998 and March 31, 1999.
Amortization expense relating to software costs of (pound)1 million has
been recorded in the period from formation through March 31, 1999. No
amortization expense was recorded in the period to December 31, 1998.
4. Restricted Cash
At December 31, 1998 and at March 31, 1999, (pound)408 million of deposits
has been used to cash-collateralize existing future lease obligations to
certain banks related to the funding of the leases of three power stations
from National Power PLC (see Note 9). Additionally, (pound)309 million and
(pound)317 million at December 31, 1998 and March 31, 1999, respectively,
have been used to cash-collateralize existing future lease obligations
arising from a cross-border leasing arrangement on two other power stations
(Note 9). When the Company invested in Eastern Norge Kobbelv AS (Kobbelv)
(see Note 5), it was required to place on restricted deposit (pound)5
million, which is also included in restricted cash at March 31, 1999.
F-16
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments
Marketable investments are classified as available for sale, and are
considered non-current based upon management's intentions in holding the
investments. Marketable investments consisted of the following two
investments:
<TABLE>
<CAPTION>
Cost Fair market value Unrealized gain/(loss)
-------------------------- ------------------------- ---------------------------
December 31, March 31, December 31, March 31, December 31, March 31,
((pound)million) 1998 1999 1998 1999 1998 1999
------------ --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
SME 28 23 13 11 (15) (12)
HC 56 53 63 54 7 1
------ ------ ------ ------ ------ ------
84 76 76 65 (8) (11)
====== ====== ====== ====== ====== ======
</TABLE>
At December 31, 1998 and March 31, 1999, the Company held a 16% investment
in Severomoravska Energetika (SME), which is listed in the Czech Republic.
At December 31, 1998 and March 31, 1999, the Company held a 5% investment
in Hidroelectrica del Cantabrico (HC), which is listed in Spain. As the
Company does not have the ability to exercise significant influence over
either SME's or HC's operating and financial policies, these investments
have been accounted for as marketable securities and accordingly have been
marked to market at December 31, 1998 and March 31, 1999.
Non-marketable investments at December 31, 1998 and March 31, 1999 consist
principally of an investment of (pound)124 million in Eastern Norge
Svartisen AS (Svartisen) consisting of the offtake generated from water
rights in hydro-electric power plants in Norway over the next 55 years,
commencing in 1998. In February of 1999, the Company invested (pound)27
million in Kobbelv which also consists of the offtake generated from water
rights in hydro-electric power plants over the next 55 years. The carrying
value at December 31, 1998 and March 31, 1999 of an investment in the
preferred stock of NTL Incorporated (NTL Inc.), the acquiror of the
Company's telecoms business, which was received as a portion of the
consideration for the sale (Note 15) was (pound)22 million. The remaining
(pound)11 million at December 31, 1998 and (pound)46 million at March 31,
1999 consist of other investments.
There were no sales of marketable securities during the period from
formation through December 31, 1998 and March 31, 1999.
6. Pensions
The majority of Eastern employees are members of the Electricity Supply
Pension Scheme (ESPS) which provides pensions of a defined benefit nature
for employees throughout the England and Wales Electricity Supply Industry.
The ESPS operates on the basis that there is no cross-subsidy between
employers and the financing of Eastern's pension liabilities is therefore
independent of the experience of other participating employers. The assets
of the ESPS are held in a separate trustee-administered fund and consists
principally of United Kingdom and European equities, United Kingdom
property holdings and cash. The pension cost relating to the Eastern
portion of the ESPS is assessed in accordance with the advice of
independent qualified actuaries using the projected unit method. The
benefits under these plans are primarily based on years of service and
compensation levels as defined under the respective plan provisions.
As part of the purchase accounting for TEG, the accrued pension liabilities
were adjusted to recognize all previously unrecognized gains or losses
arising from past experience.
The Company determined the additional pension expense for the three months
from January 1, 1999 through March 31, 1999 based on forecasted expense
from the December 31, 1998 actuary report.
F-17
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Pensions (continued)
<TABLE>
<CAPTION>
Period from Period from
formation through formation through
December 31, 1998 March 31, 1999
----------------- --------------
Change in benefit obligation: ((pound) million)
- ----------------------------
<S> <C> <C>
Benefit obligation at beginning of period 882 882
Service cost 7 11
Interest cost 33 46
Plan participants' contributions 5 7
Plan amendment 7 7
Actuarial loss 82 23
Benefits paid (31) (44)
Net transfer of obligations to other plans -- (27)
---------- ----------
Ending benefit obligation 985 905
========== ==========
Change in plan assets:
- ---------------------
Fair value of plan assets at beginning of period 1,130 1,130
Actual return on plan assets (25) 38
Employer contribution 3 7
Plan participants contributions 5 7
Benefits paid (31) (44)
Net transfer of assets to other plans -- (28)
---------- ----------
Ending fair value of plan assets 1,082 1,110
========== ==========
Funded Status:
- --------------
Funded status 97 205
Unrecognized net actuarial loss 153 47
Unrecognized prior service cost 7 7
---------- ----------
Prepaid benefit cost 257 259
========== ==========
Weighted average assumptions:
- ----------------------------
Discount rate 5.5% 5.5%
Expected return on plan assets 6.0% 6.0%
Rate of compensation increase 3.5% 3.5%
Components of net periodic pension (benefit):
- --------------------------------------------
Service cost 7 11
Interest cost 33 46
Expected return on plan assets (45) (61)
Net amortization -- 1
---------- ----------
Net periodic pension benefit (5) (3)
========== ==========
</TABLE>
The transfer of assets of (pound)28 million in the period to March 31, 1999
and the related transfer of benefit obligations of (pound)27 million relate
to the sale of the contracting business which occurred in January of 1998.
F-18
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Taxation
The components of income tax expense are as follows:
Period from Period from
formation through formation through
December 31, 1998 March 31, 1999
----------------- --------------
((pound)million) ((pound)million)
Current:
United Kingdom 24 51
United States 18 19
Other Countries 1 1
------- -------
43 71
Deferred:
United Kingdom 24 35
------- -------
Total income tax expense 67 106
======= =======
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
((pound)million) ((pound)million)
<S> <C> <C>
Deferred tax assets:
Leased assets (353) (387)
Tax loss carryforwards (9) (9)
Provision for unfavorable contracts (75) (74)
Other (54) (85)
------ ------
Total deferred tax assets (491) (555)
Valuation allowance for deferred tax assets 138 187
------ ------
Net deferred tax assets (353) (368)
------ ------
Deferred tax liabilities:
Excess of book value over taxation value of fixed
assets 281 292
Leased assets 334 326
Other 59 84
------ ------
Total deferred tax liabilities 674 702
------ ------
Net deferred tax liabilities 321 334
====== ======
</TABLE>
The recognized deferred tax asset is based upon the expected future
utilization of net operating loss carryforwards and the reversal of other
temporary differences. For financial reporting purposes, the Company has
recognized a valuation allowance for those benefits for which realization
does not meet the more likely than not criteria. The valuation allowance
has been recognized in respect of leased assets. The Company continually
reviews the adequacy of the valuation allowance and is recognizing these
benefits only as reassessment indicates that it is more likely than not
that the benefits will be realized.
There was no valuation allowance at formation (February 5, 1998). At the
date of acquisition of TEG (May 19, 1998), a valuation allowance of
(pound)130 million, was established for the deferred tax asset for the
book/tax capital asset related to leased assets. The valuation allowance
was increased by (pound)8 million in the period from May 19, 1998 to
December 31, 1998, resulting in a balance of (pound)138 million at December
31,
F-19
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Taxation (continued)
1998. For the period from May 19, 1998 to March 31, 1999, the valuation
allowance increased by (pound)57 million, resulting in a balance of
(pound)187 million at March 31, 1999.
Income before income taxes:
<TABLE>
<CAPTION>
Period from Period from
formation through formation through
December 31, 1998 March 31, 1999
----------------- --------------
((pound)million) ((pound)million)
<S> <C> <C>
United Kingdom 103 198
United States 51 54
Other Countries 1 1
-------- --------
Total income before income taxes and minority interest 155 253
======== ========
</TABLE>
United Kingdom income tax expense at the statutory tax rate is reconciled
below to the actual income tax expense:
<TABLE>
<CAPTION>
Period from Period from
formation through formation through
December 31, 1998 March 31, 1999
----------------- --------------
((pound)million) ((pound)million)
<S> <C> <C>
Tax at United Kingdom statutory rate (31%) 48 78
Non-deductible goodwill 16 22
Effect of overseas tax rates 2 2
Effect of tax rate on United Kingdom dividends (4) (4)
Tax rate change (8) (8)
Movement in valuation allowance charged to expense 8 11
Non-deductible expenses 5 5
-------- --------
Income tax expense 67 106
======== ========
</TABLE>
As at December 31, 1998 and March 31, 1999, the Company has net operating
loss carryforwards of (pound)9 million that are available to offset future
taxable income. The net operating loss carryforwards have no expiration
date.
On July 31, 1998, legislation was enacted that decreased the United Kingdom
statutory income tax rate on companies by 1% with effect from April 1,
1999. In accordance with the provisions of Statement of Financial
Accounting Standards No. 109, the assets and liabilities for deferred
income taxes were adjusted to reflect the expected reversal of certain
temporary differences at the lower income tax rate.
The tax effect of the components included in accumulated other
comprehensive income for the period from formation through December 31,
1998 was a benefit of (pound)2 million and for the period from formation
through March 31, 1999 was a benefit of (pound)6 million.
F-20
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Related Party Transactions
As part of the funding for the acquisition of TEG, TXU provided shares of
its common stock in exchange for a two year term note from TXU Acquisitions
in the amount of (pound)882 million that matures in May 2000 with an
interest rate of 6.7% per annum. In December 1998, (pound)200 million of
this note was repaid, leaving an outstanding balance of (pound)682 million
at both December 31, 1998 and March 31, 1999 (see Note 19). The interest on
the two year term note is due at maturity, and the "Due to affiliates"
balance at December 31, 1998 and March 31, 1999 reflects (pound)33 million
and (pound)45 million, respectively, of accrued interest.
The 10% holding in TXU Finance of (pound)177 million and (pound)187 at
December 31, 1998 and March 31, 1999 respectively, which is held by a
wholly owned subsidiary of TXU, has been included in "Minority interest".
At December 31, 1998 and March 31, 1999 the balance of (pound)7 million in
the "Accounts payable - Affiliate" account arises from payments of amounts
by TXU on behalf of the Company.
9. Notes Payable and Long-term Debt
Weighted average interest rates at December 31, 1998 and March 31, 1999 on
notes payable to banks is 8.98% and 13.8%, respectively.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
((pound)million) ((pound)million)
<S> <C> <C>
Notes and Bonds:
$200 million 7.425% guaranteed notes due 2017 121 124
$300 million 7.55% guaranteed notes due 2027 181 186
(pound)350 million 8.375% bonds due 2004 363 362
(pound)200 million 8.5% bonds due 2025 237 237
(pound)200 million 8.75% bonds due 2012 229 229
Other:
Sterling Credit Agreement (See Note 10) 801 983
Rent factoring loans (weighted average interest rate of
7.35%, due 1999-2001) 649 595
Other unsecured loans, due in installments (weighted
average rates range from 4.95% - 10.8%) 139 164
Capital leases 982 1,043
Note payable to TXU, 6.7% term note due 2000 (see Note 19) 682 682
Cross-border leases 309 317
-------- --------
Total long-term debt 4,693 4,922
Less current portion 382 486
-------- --------
Long-term debt, less amounts due currently 4,311 4,436
======== ========
</TABLE>
The $200 million and $300 million notes due in 2017 and 2027, respectively,
are guaranteed by TEG and the Company.
Rent factoring loans - Certain subsidiaries of Eastern entered into an
agreement with commercial banks whereby future intra-group rental payments
receivable were assigned to these banks in return for a capital sum.
(pound)408 million of the capital sums at both December 31, 1998 and March
31, 1999 have been deposited to cash collateralize existing future lease
obligations to certain banks related to the funding of the leases of three
power stations leased from National Power (see Note 4).
F-21
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Notes Payable and Long-term Debt (continued)
Long-term debt balances are denominated in the following currencies:
December 31, March 31,
1998 1999
-------- --------
((pound)million) ((pound)million)
Sterling 4,044 4,232
United States dollars 611 627
Other 38 63
-------- --------
Total long-term debt 4,693 4,922
======== ========
(pound)100 million of the (pound)350 million 8.375% bonds included in
long-term debt has been converted into floating rate debt by way of
interest rate swaps, which expire in the year 2004.
Long-term debt, excluding capital lease balances, is repayable as follows:
Year Ending Year Ending
December 31, March 31,
------------ ---------
((pound)million) ((pound)million)
1999 222 --
2000 919 225
2001 190 924
2002 24 128
2003 801 1,004
2004 362 362
Thereafter 1,193 1,236
------- -------
3,711 3,879
Capital leases 982 1,043
------- -------
Total long-term debt 4,693 4,922
======= =======
F-22
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Notes Payable and Long-term Debt (continued)
Capital lease obligations - As at December 31, 1998 and March 31, 1999,
future minimum lease payments for assets under capital leases, together
with the present value of minimum lease payments, were:
<TABLE>
<CAPTION>
Year Ending Year Ending
December 31 March 31
----------- --------
((pound)million) ((pound)million)
<S> <C> <C>
1999 48 --
2000 50 53
2001 461 54
2002 17 465
2003 16 21
2004 16 19
Thereafter 67 204
------ ------
Total future minimum lease payments 675 816
Less amounts representing interest (105) (177)
------ ------
Present value of future minimum lease payments 570 639
------ ------
Current 46 50
Non-current 524 589
------ ------
Total 570 639
====== ======
</TABLE>
Substantially all of the capital lease obligations relate to coal-fired
power stations. Additional payments of approximately (pound)6 per megawatt
hour (indexed from 1996 prices) linked to output levels from the stations
are payable for the first seven years of their operation by Eastern
(operations commenced in 1996). In accounting for the acquisition of TEG, a
liability for the estimated probable additional payments linked to output
levels for coal-fired generating stations was established. At December 31,
1998 and March 31, 1999, the balance of the liability of (pound)412 million
and (pound)404 million, respectively, is included with capital lease
obligations, of which (pound)114 million and (pound)211 million are
classified as current, respectively.
The lease agreement for three of the coal-fired power stations contains a
purchase option of (pound)1 in 2046. The lease is for a total of
ninety-nine years.
In the period ended March 31, 1999, the Company entered into a capital
lease relating to the King's Lynn Power Station with a present value
obligation amount of (pound)68 million over the next 25 years.
Cross-border leases - Certain subsidiaries of Eastern have entered into
cross-border lease transactions in respect of two power stations that are
wholly owned by the Company. The Company has retained control of the power
stations and their output and is responsible for their operations. The debt
arising on the cross-border leases is fully collaterized by restricted cash
on deposit (see Note 4).
The Company's debt agreements contain certain covenants with which they
must comply, including leverage ratios, levels of net assets and interest
coverage covenants. At December 31, 1998 and March 31, 1999, the Company
was in compliance with all such covenants.
F-23
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Lines of Credit and Other Credit Facilities
Lines of credit - At December 31, 1998, the Company, TXU Finance, TXU
Acquisitions and TEG had a joint sterling-denominated line of credit with a
group of banking institutions under a credit facility agreement (Sterling
Credit Agreement). At December 31, 1998, the Sterling Credit Agreement
provided for borrowings of up to (pound)1,525 million, of which (pound)351
million was available for use. The Sterling Credit Agreement had two
facilities - Acquisition and Revolving Credit. The Sterling Credit
Agreement bears interest at LIBOR plus 1.25%. The Company has entered into
various interest rates swaps as required by the Sterling Credit Agreements.
The Acquisition Facility provides for borrowings aggregating (pound)825
million outstanding at any one time and terminates March 2, 2003.
Borrowings under this facility provided financing to acquire TEG and pay
acquisition-related expenses. As part of this facility, (pound)75 million
has been allocated to financing the repayment of outstanding loan notes
issued upon acquisition.
The Revolving Credit Facility provides for borrowings aggregating
(pound)450 million outstanding at any one time and terminates March 2,
2003. A separate Eastern Electricity Revolving Credit Facility provides for
borrowings of up to (pound)250 million which can be used by Eastern
Electricity plc for general corporate purposes.
At December 31, 1998, (pound)750 million was borrowed under the Acquisition
Facility, (pound)51 million was borrowed under the Revolving Credit
Facility and (pound)180 million was borrowed under the Eastern Electricity
Revolving Credit Facility. The amounts outstanding under the Acquisition
Facility and Revolving Credit Facility represent long-term debt. There are
letters of credit associated with the Sterling Credit Agreement.
Obligations of commercial banks under standby letters of credit totalled
(pound)118 million at December 31, 1998 which, together with the (pound)51
million of borrowings reduced the amounts available for use under the
Revolving Credit Facility to (pound)281 million at December 31, 1998.
Borrowings under the Eastern Electricity Revolving Credit Facility are
classified as short-term debt.
The Sterling Credit Agreement was amended in March 1999. The amended
Sterling Credit Agreement provides for borrowings of up to (pound)1.275
billion and has two facilities: a (pound)750 million term facility which
will terminate on March 2, 2003 and a (pound)525 million revolving credit
facility which has a (pound)200 million 364-day tranche (Tranche A) and a
(pound)325 million tranche which terminates March 2, 2003 (Tranche B). The
Company and TXU Finance currently are the only permitted borrowers under
the amended Sterling Credit Agreement. The amended Sterling Credit
Agreement allows for borrowings at various interest rates based on the
prevailing rates in effect in the countries in which the borrowings
originate. As of March 31, 1999, (pound)750 million of borrowings were
outstanding under the term facility, and approximately (pound)233 million
were outstanding under Tranche B (see Note 19). In addition, letters of
credit totalling $61 million ((pound)38 million) were issued under Tranche
A and letters of credit totalling $137 million ((pound)85 million) were
issued under Tranche B. The amended Sterling Credit Agreement is unsecured.
There were no borrowings outstanding at March 31, 1999 under the Eastern
Electricity Revolving Credit Facility.
Promissory note program - The Company has a one year promissory note
program issued within the Czech Republic which has been utilized to fund
its investment in SME and Teplarny Brno a.s. The note bears interest at an
annual rate determined on the date of issuance based on PRIBOR plus 0.7%,
which was 13.89%. At December 31, 1998 and March 31, 1999, (pound)58
million and (pound)52 million, respectively, was outstanding under the
promissory note program.
Short-term loan on accounts receivable - Eastern has facilities with a
financial institution whereby it may, from time to time, borrow funds from
the financial institution. Outstanding borrowings under the agreements may
not exceed certain levels and are collateralized by portions of Eastern
Group's trade accounts receivable. At December 31, 1998 and March 31, 1999,
Eastern had borrowed (pound)300 million
F-24
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Lines of Credit and Other Credit Facilities (continued)
under these facilities. The loan bears interest at an annual rate of based
on commercial paper rates plus 0.225%, which at December 31, 1998 and March
31, 1999 was 6.53% and 5.7%, respectively.
Letters of credit - At December 31, 1998 the Company had outstanding
letters of credit totalling (pound)121 million, (pound)118 million of which
was outstanding under the Revolving Credit Facility discussed above. At
March 31, 1999 the Company had outstanding letters of credit totalling
(pound)126 million, (pound)123 million of which was outstanding under the
amended Sterling Credit Agreement discussed above.
11. Provision for Unfavorable Contracts
As part of the purchase accounting for TEG, the Company has made provisions
for certain unfavorable long-term gas and electricity purchase contracts.
The electricity provision relates to two contracts that expire in 2009,
while the gas provision relates to eight contracts that expire in 2011.
During the period from formation through December 31, 1998 and the period
from formation through March 31, 1999, (pound)74 million and (pound)76
million, respectively, of the provision was released to offset expenses
recognized on purchases under unfavorable electricity and gas contacts. Of
the amounts recognized in the Statement of Consolidated Income, (pound)41
million, which is net of a release payment of (pound)24 million, was
related to one gas contract from which the Company negotiated in November
1998. Negotiations for release under the contract were not under
consideration at the purchase date.
12. Commitments
The Company evaluates its position relative to asserted and unasserted
claims, loss-making purchase commitments or future commitments and makes
provisions as needed.
The Company's investment in Svartisen (the offtake generated by water
rights in hydro-electric power plants in Norway) requires coverage of
approximately 31.2% of the costs incurred in relation to the operation of
the power plant, as well as a portion of the maintenance costs, property
tax, and feeding costs (defined as fixed charges such as connection and
capacity charges and volume related charges such as an energy charge) for
55 years, beginning in 1998. The electricity generated from the
hydro-electric plants will be sold into the Norwegian power pool, from
which the Company will receive income.
Gas take-or-pay contracts - The Company is party to various types of
contracts for the purchase of gas. Almost all include "take-or-pay"
obligations under which the buyer agrees to pay for a minimum quantity of
gas in a year. In order to help meet the expected needs of its wholesale
and retail customers, the Company has entered into a range of gas purchase
contracts. As at December 31, 1998 and March 31, 1999, the commitments
under long-term gas purchase contracts amounted to an estimated (pound)1.3
billion covering periods up to 16 years forward. Management does not
consider it likely, on the basis of the Company's current expectations of
demand from its customers as compared with its take-or-pay obligations
under such purchase contracts, that any material payments will become due
from the Company for gas not taken.
Coal contracts - In November 1998, the Company agreed to two coal purchase
agreements with a supplier, supplementing the 12 million tons the Company
had previously contracted to take from said supplier between 1998 and 2001.
The first agreement is for 25 million tons in total between 1998 and 2003.
The second agreement is for 21 million tons in total between 2003 and 2009.
Total committed purchases under these contracts were approximately
(pound)1.4 billion and (pound)1.3 billion at December 31, 1998 and March
31, 1999, respectively.
F-25
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Commitments (continued)
Rental commitments - The future minimum rental commitments under
non-cancellable operating leases were as follows:
Year ending Year Ending
December 31, March 31,
------------ ---------
((pound)million) ((pound)million)
1999 53 53
2000 36 36
2001 37 37
2002 34 34
2003 30 30
Thereafter 27 27
------- -------
Total 217 217
======= =======
The operating lease commitments relate to coal-fired power stations.
Additional variable payments of approximately (pound)6 per megawatt hour
(indexed to 1996 prices) linked to output levels from these stations are
payable through 2000, the first four years of the lease agreement, by the
Company.
Rental expense for operating leases amounted to (pound)16 million and
(pound)25 million for the periods ended December 31, 1998 and March 31,
1999, respectively. Rental expense for operating leases during the periods
ended December 31, 1998 and March 31, 1999 includes (pound)10 million and
(pound)14 million, respectively, of minimum lease payments and (pound)6
million and (pound)11 million, respectively, of variable lease payments.
Other commitments - In December 1998 the Company agreed to purchase various
assets in the North Sea from Monument Oil for (pound)20 million. The assets
comprise a 20% stake in the Johnston field plus a number of non-producing
gas discoveries and prospects. In November 1998, the Company reached an
agreement to purchase all of BHP Petroleum's assets in the North Sea for
(pound)102 million. The assets comprise a 30% stake in the Johnston field,
an 18% stake in Ravenspurn North field plus a number of non-producing gas
discoveries and prospects in a total of seven exploration licenses. Both
transactions are subject to approval from the Department of Trade and
Industry and consents from other parties participating in the fields.
13. Contingencies
The Company is subject to business risks that are actively managed to limit
exposures.
In February 1997, the official government representative of pensioners
(Pensions Ombudsman) made a 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 ESPS relating 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. These determinations were 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 have now
appealed against this decision and judgment has now been received although
a final order is awaited. The appeal was allowed endorsing the Pensions
Ombudsman's determination that the corporation was not entitled to
unilaterally deal with any surplus. If a similar complaint were to be made
against Eastern in relation to its use of actuarial surplus in its section
of the ESPS, it would vigorously defend the action, ultimately through the
courts. However, if a determination were finally to be made against it and
upheld by the courts, Eastern could have a potential liability to repay to
its section of the ESPS an amount estimated by the Company to be up to
(pound)45 million (exclusive of any future applicable interest charges).
F-26
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Contingencies (continued)
On May 19, 1998 a complaint was filed by Optimum Solutions Limited against
National Grid, Yorkshire Electricity Group plc, Eastern Electricity and
Logica Plc. Yorkshire Electricity and Eastern Electricity are both members
of the electricity trading market in England and Wales (the Pool). Optimum
Solutions Limited alleges breach of confidence in respect of information
supplied in the context of the development of the trading arrangements for
the 1998 liberalization of electricity supply in England and Wales, or
Trading Arrangements. Optimum Solutions Limited requests an unspecified
amount of damages relating to breach of contract, an unspecified amount of
equitable compensation for misuse of the confidential information and
return of material alleged to contain confidential information. It is
alleged that the Pool has made use of the confidential information in the
development of the Trading Arrangements and that Eastern Electricity made
use of it in using the system developed by Pool for trading purposes. The
action against Eastern Electricity is being strenuously defended. The
Company cannot predict the outcome of this proceeding.
On January 25, 1999, the Hindustan Development Corporation issued
proceedings in the Arbitral Tribunal in Delhi, India against TEG claiming
damages of US$413 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. The Company is vigorously defending this
claim. The Company cannot predict the outcome of this proceeding.
In November 1998, five complaints were filed against subsidiaries of
Eastern by five of their former sales agencies. The agencies claim a total
of (pound)104 million arising from the summary termination for the claimed
fundamental breach of their respective contracts in April 1998. The five
agencies are claiming damages for failure to give reasonable notice for
compensation under the UK Commercial Agents Regulations 1994. These actions
are all being defended strenuously, and counterclaims have been filed. The
Company cannot predict the outcome of these claims and counterclaims.
General - In addition to the above, the Company and its subsidiaries are
involved in various legal and administrative proceedings arising in the
ordinary course of its business. The Company believes that all such
lawsuits and resulting claims would not have a material effect on its
financial position, results of operation or cash flows.
Financial Guarantees - TEG has guaranteed up to $110 million ((pound)65
million at December 31, 1998 and (pound)68 million at March 31, 1999) of
certain liabilities that may be incurred and payable by the purchasers of
the businesses sold in the Peabody Sale with respect to the Peabody Holding
Company Retirement Plan for Salaried Employees, the Powder River Coal
Company Retirement Plan and the Peabody Coal UMWA Retirement Plan, subject
to certain specified conditions.
TEG entered into various guarantees of obligations of affiliates of its
former subsidiary Citizens Power LLC, arising under power purchase
agreements and note purchase agreements in connection with various Citizens
Power energy restructuring projects, as well as various indemnity
agreements in connection with such projects. The Company and TEG continue
to be the guarantor or the indemnifying party, as the case may be, under
these various agreements. In connection with the acquisition, letters of
credit were issued under the Sterling Credit Facility in the amount of $198
million ((pound)118 million at December 31, 1998 and (pound)123 million at
March 31, 1999) to support certain debt financings associated with these
restructuring projects (see Note 19).
As a consequence of a restructuring whereby a subsidiary of TXU
Acquisitions transferred Eastern to another wholly-owned subsidiary of TXU
Acquisitions, the Company and certain other affiliated United Kingdom
subsidiaries of TXU may be required to make certain adjustments to the
guarantees, which the Directors of the Company do not currently expect to
have a material adverse impact on the Company.
F-27
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Employee Share Plans
During 1998, the Company instituted the Eastern Group Long Term Incentive
Plan (LTIP) which is administered by a remuneration committee. Awards of
"phantom stock" in TXU under the LTIP may be made available to the
management group, senior managers and salaried directors of Eastern.
Participants of the LTIP receive awards based on the number of shares that
a specified percentage of their annual basic pay could purchase, using the
stock price of TXU at or around the date of grant. For grants during the
periods May 19, 1998 through December 31, 1998 and May 19, 1998 through
March 31, 1999, the stock price of TXU at May 19, 1998 was utilized. There
were no grants between February 5, 1998 and May 18, 1998, inclusive.
Awards are subject to achieving certain performance criteria. There is a
deferral period from the end of the financial period in which the awards
were granted for which the participants must remain with the Company before
becoming vested in their awards. For the awards granted in 1998, the
deferral period for directors is one year. For the management group and
senior managers, one-half of the awards will vest on January 1, 2000, with
the balance of the awards vesting on January 1, 2001. For the awards
granted in 1999, the deferral period for directors is one year and for the
management group and senior managers is two years.
At the end of the deferral period, the Company shall pay to the
participant, in cash, an amount equal to the higher of the stock price of
TXU at the end of the deferral period, or a guaranteed price. The
guaranteed price is the stock price used to calculate the awards granted,
adjusted for interest at 6% compounded annually up to the date of payment.
The Company granted 145,878 awards with an exercise price of (pound)0 on
September 1, 1998, of which 1,785 lapsed due to participants leaving the
Company prior to December 31, 1998, with an additional 8,216 lapses in the
period from January 1, 1999 through March 31, 1999. Additionally, the
Company granted 178,276 awards with an exercise price of (pound)0 on
January 1, 1999. None of the 144,093 or 314,153 awards outstanding at
December 31, 1998 or March 31, 1998, respectively, were exercisable due to
the vesting criteria. The weighted average remaining contractual life of
awards outstanding at December 31, 1998 was 17 months and at March 31, 1999
was 23 months. At December 31, 1998 and March 31, 1999, the closing market
price of TXU Corp common stock was $46.69 ((pound)28.13) and $42.00
((pound)26.09), respectively, per share.
Compensation expense recognized under the plan for the periods ended
December 31, 1998 and March 31, 1999 were (pound)1 million and (pound)2
million, respectively. The Company applies Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its employee share plans. Had
compensation costs for the LTIP been determined in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", there would be no difference in the compensation
expense recognized.
15. Disposal and Acquisitions
On December 22, 1998, the Company disposed of Eastern Group Telecoms. The
Company recorded a gain relating to the disposal of (pound)13 million. In
consideration for the business, the Company received cash of (pound)60
million and an investment in the preferred stock of the purchaser, NTL
Inc., with a carrying value of (pound)22 million. The investment is not
traded on any stock exchange and is not convertible into cash until July
2000, but the value has been guaranteed by NTL Inc.
On December 19, 1998, the Company acquired two combined heat and power
companies from British Gas plc for total consideration of (pound)14
million. Citigen (London) Limited is a cogeneration company using two 16
megawatt gas diesel engines to supply electricity, district heating and
chilled water to customers in the City of London. BG Cogen Limited uses a
15 megawatt cogeneration plant to supply steam and electricity to
Millennium Inorganic Chemicals.
F-28
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. Dividend Restrictions
Certain debt instruments of the Company contain provisions that, under
certain conditions, restrict distributions on or acquisitions of common
stock. At December 31, 1998 and March 31, 1999 retained earnings was not
restricted as a result of such provisions.
17. Segments
The segments have been identified on the basis of the underlying nature of
the business and its customer base and the corresponding skill sets
required, e.g., engineering, portfolio management and customer services.
The energy retail business segment provides electricity and gas to United
Kingdom national domestic, industrial and commercial users. It also has
commenced retailing joint ventures in continental Europe. The energy
management and generation business segment manages an integrated portfolio
of contracts and physical gas and generation assets. The contracts include
supplying the energy retail business with electricity and gas as well as
contracts with third party energy retailers, traders and wholesalers. The
networks business segment owns and manages the electricity distribution
system and its principal customer base is energy retail and other
electricity suppliers. The other category consists of two operating
segments, metering and telecoms which fall below the quantitative
thresholds for determining reportable segments.
As set out below, contribution for each segment is defined as operating
profit on a UK GAAP basis before exceptional and extraordinary items, but
after a notional charge for the cost of capital. Capital/investment
expenditure includes all items of capital and investment expenditures
including the European equity investment, but the figure excludes proceeds
on the sale of investments. The cost of capital is calculated as 0.5% per
month on working capital and is eliminated on consolidation. Overhead
costs, such as those incurred by the Company at head office and core costs
related to information technology, are not allocated amongst the segments.
<TABLE>
<CAPTION>
Period from formation through Period from formation through
December 31, 1998 March 31, 1999
----------------------------- ------------------------------
Capital/ Capital/
investment investment
Contribution expenditure Contribution expenditure
------------ ----------- ------------ -----------
((pound)million) ((pound)million)
<S> <C> <C> <C> <C>
Energy retail (13) 21 (31) 22
Energy management and generation 121 61 264 99
Networks 100 82 157 109
Other 18 17 20 18
-------- -------- -------- --------
226 181 410 248
Cost of capital elimination 86 -- 118 --
Unallocated corporate costs (17) 214 (40) 229
-------- -------- -------- --------
Total (UK GAAP) 295 395 488 477
-------- -------- -------- --------
Purchase accounting and US GAAP
adjustments 57 -- 35 --
Unallocated restructuring costs (22) -- (22) --
Unallocated investment income 30 -- 30 --
-------- -------- -------- --------
Income before interest, income
taxes and minority interest 360 -- 531 --
======== ======== ======== ========
</TABLE>
F-29
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Segments (continued)
Revenues are attributed to countries based on location of customers. There
are no revenues for transactions with a single external customer that are
10% or more of the Company's revenue. The Pool is not considered by the
Company to be an external customer, as all electricity generated is sold
into the Pool and is subsequently repurchased from the Pool for resale.
Revenues billed by energy retail for the other segments are presented as
revenues of the other segments.
Period from Period from
formation through formation through
December 31, 1998 March 31, 1999
Revenues Revenues
-------- --------
((pound) million)
Energy retail 1,036 1,609
Energy management and generation 845 1,322
Networks 253 374
Other 31 33
------ ------
Total 2,165 3,338
====== ======
<TABLE>
<CAPTION>
Period from formation through Period from formation through
December 31, 1998 March 31, 1999
---------------------------------- ----------------------------------
Revenues Long-lived assets Revenues Long-lived assets
-------- ----------------- -------- -----------------
((pound) million)
<S> <C> <C> <C> <C>
United Kingdom 2,150 2,606 3,303 2,455
Other countries 15 70 35 61
------- -------- -------- -------
Total 2,165 2,676 3,338 2,516
======= ======== ======== =======
</TABLE>
18. Derivative and Financial Instruments
The Company uses derivative financial instruments for purposes other than
trading and does so to reduce its exposure to fluctuations in electricity
prices, gas prices, interest rates and foreign exchange rates. Derivative
financial instruments used by the Company include contracts for
differences, electricity forward agreements, interest rate swaps, interest
forward rate agreements, options, gas swaps futures and foreign exchange
forward contracts.
Electricity price risk management - Electricity forward contracts are
primarily used by the Company to hedge future changes in electricity
prices. Almost all electricity generated in England and Wales must be sold
to the Pool, and electricity suppliers must likewise generally buy
electricity from the Pool for resale to their customers. The Pool is
operated under a Pooling and Settlement Agreement to which all licensed
generators and suppliers of electricity in Great Britain are party. These
trading arrangements are currently under review by the United Kingdom
government.
The Company enters into electricity forward contracts to assist in the
management of its exposure to fluctuations in electricity pool prices. The
contracts bought and sold are contracts for differences (CfDs) and
electricity forward agreements (EFAs) that fix the price of electricity for
an agreed quantity and duration by reference to an agreed strike price.
EFAs are similar in nature to CfDs, except that they tend to last for
shorter time periods and are based on standard industry terms rather than
being individually negotiated. Long-term CfDs are in place to hedge a
portion of the electricity to be purchased through to 2009. Such CfDs
represent an annual commitment of approximately five terawatt hours (TWh),
declining on a linear basis to approximately two TWh by 2005 and finally
expiring in 2010. There are no similar long-term commitments under EFAs.
The impact of changes in the market value of these contracts, which serve
as hedges, is deferred until the related transaction is completed.
F-30
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Derivative and Financial Instruments (continued)
The fair value of outstanding CfDs and EFAs at December 31, 1998 and March
31, 1999 was (pound)61 million and (pound)48 million, respectively,
calculated as the difference between the expected value of the CfDs or
EFAs, based on their known strike price and known volume, and the current
market value, based on an estimate of forward prices for the CfD or EFA
term. It should be noted that the market for the CfDs and EFAs has not been
liquid to date and there is no readily identifiable market through which
the majority of CfDs or EFAs could be realized through an exchange. No
easily definable forward price curve exists for the duration and shape of
the CfDs or EFAs that would be agreed generally.
Gas swaps and futures - In the gas retail business, the Company sells fixed
price contracts to customers and supplies the customer through a portfolio
of gas purchase contracts and other wholesale contracts. The overall net
exposure of the Company to the gas spot market is managed by using gas
swaps and futures.
Interest rate management - Interest rate swaps and forward rate agreements
are used by the Company to convert between fixed rates and floating rates
as required. Gains and losses from interest rate swaps and forward rate
agreements are accrued over the contract period. At December 31, 1998 and
March 31, 1999, the Company held two interest rate swaps which convert
(pound)100 million of the (pound)350 million 8.375% bonds due 2004 into
floating rate debt; (pound)35 million is based on LIBOR and (pound)65
million is based on LIBOR less 0.7625%.
At December 31, 1998 and March 31, 1999, the Company had various interest
rate swaps as required by the Sterling Credit Agreement. The Sterling
Credit Agreement requires that one-half of the borrowings under these
facilities be swapped from a floating to a fixed interest rate with a
maturity of at least two years from July 28, 1998. The aggregate notional
amount of these interest rate swaps entered into is (pound)800 million,
with an average maturity of six years and average fixed rates of 6.58% and
6.54% at December 31, 1998 and March 31, 1999, respectively.
In addition, the Company has various other interest rate swaps on
subsidiary borrowings with a notional amount of (pound)48 million to swap
floating rate interest to fixed rates, a portion of which matures in 2002
and the remaining portion matures in 2008.
Forward rate agreements totalling (pound)531 million and (pound)355 million
for a maximum duration of less than one year to swap floating rate deposits
into fixed rates were outstanding at December 31, 1998 and March 31, 1999,
respectively.
Foreign currency risk management - The Company has exposure to foreign
currency movements and uses derivative financial instruments to manage this
exposure (principally on US$ denominated debt interest payments and
investments in European countries). The instruments used are forward
purchase contracts and options. The policy with regard to any such
exposures is to match assets owned in foreign countries with borrowings in
that same currency. Where there are firm commitments to purchase goods in a
foreign currency then forward contracts or options are used to fix the
exchange rate. At December 31, 1998, there were US$ options outstanding of
$10 million (at put rates of $1.57) and US$ options outstanding of $10
million (at call rates of $1.60). All of these contracts matured in the
period ended March 31, 1999.
The Company has entered into contracts to fix the exchange rate on the
interest payments to be made under the US$ denominated debt. For the $200
million 7.425% notes due 2017, the Company has entered into a contract
which sets the exchange rate between sterling and US$ at 1.605 over the
life of the debt. For the $300 million 7.55% notes due 2027, the Company
has entered into a contract which sets the exchange rate between sterling
and US$ at 1.625 over the life of the debt.
Concentrations and credit risk - The Company's financial instruments that
are exposed to concentrations of credit risk consist primarily of cash
equivalents, trade receivables and derivative contracts.
F-31
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Derivative and Financial Instruments (continued)
The Company only deposits cash with banks that have a rating in excess of
AA or invests in commercial paper from issuers with ratings of A1 or P1.
Maximum limits are set for each bank based on their ratings and also
maximum limits are set for each country.
The Company's trade receivables result primarily from its gas and
electricity retail operations and reflect a broad customer base including
industrial, commercial and domestic customers.
Credit risk relates to the risk of loss that the Company would incur as a
result of non-performance by counterparties to their respective derivative
instruments. The Company maintains credit policies with regard to its
counterparties that management believes significantly minimize overall
credit risk. The Company generally does not obtain collateral to support
the agreements but establishes credit limits and monitors the financial
viability of counterparties and believes its credit risk is minimal on
these transactions. The extent of this exposure varies with the prevailing
interest and currency rates and was not material throughout the period.
Approximately 54% by volume of the Company's CfDs and EFAs traded in the
periods ended December 31, 1998 and March 31, 1999 were contracted with two
primary counterparties. The risk of loss to the Company arising from
non-performance by these counterparties is considered unlikely.
Fair value of financial instruments - The carrying amount and fair value of
the material financial instruments used by the Company are as follows:
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
---------------------- ----------------------
((pound)million) ((pound)million)
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Assets
Other investments 233 233 284 284
Cash and cash equivalents 467 467 414 414
Restricted cash 717 717 730 730
Liabilities
Notes payable - banks (current) 238 238 53 53
Note payable to TXU 682 682 682 682
Total long-term debt, excluding capital leases 3,029 3,096 3,197 3,272
Short term loans on accounts receivable 300 300 300 300
Other financial instruments -
favorable/(unfavorable)
Interest rate swaps -- (31) -- (42)
Foreign exchange contracts -- (18) -- (21)
Gas swaps -- (2) -- --
CfDs and EFAs -- 61 -- 48
Financial guarantees and letters of credit -- (186) -- (194)
</TABLE>
F-32
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Derivative and Financial Instruments (continued)
The following methods and assumptions were used to determine the above fair
values:
(i) The fair value of other investments is estimated based on quoted
market prices where available and other estimates.
(ii) The carrying amounts of cash and cash equivalents, restricted cash,
notes payable - banks, short term loans on accounts receivable and the
notes payable to TXU approximate their fair values because of the
short maturity of these instruments.
(iii) The fair value of long term debt varies with market conditions and is
estimated based on current rates for similar financial instruments
offered to the Company.
(iv) The fair value of the interest rate swaps is based on the cancellation
value of each swap agreement independently calculated by reference to
the forward sterling interest rate curve for the unexpired portion of
the swap.
(v) The fair value of foreign exchange contracts is based upon valuations
provided by the counterparty.
(vi) The fair value of the gas swaps is based on the net present value of
discounted future cash flows in accordance with underlying gas forward
curves.
(vii) The fair value of the CfDs and EFAs is based upon a discounted cash
flow analysis using an estimate of forward prices in the Pool.
(viii) The fair value of financial guarantees and letters of credit is
based upon fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations
with the counterparties at the reporting date.
19. Subsequent Events
On May 13, 1999, TXU Eastern Funding Company issued US$1.5 billion
((pound)915 million) worth of Senior Notes which are guaranteed by the
Company in three tranches; US$350 million ((pound)214 million), 6.15% due
May 15, 2002, US$650 million ((pound)396 million), 6.45% due May 15, 2005,
and US$500 million ((pound)305 million), 6.75% due May 15, 2009. The
proceeds of this issuance were used to repay the note payable to TXU and to
reduce borrowings under the Sterling Credit Agreement and for other
corporate purposes. Shortly thereafter, the Company entered into various
interest rate and currency swaps that in effect changed the interest rate
on the borrowings from fixed to variable based on LIBOR, and fixed the
principal amount to be repaid in sterling.
On May 5, 1999, the Company announced it is to pay (pound)42 million for
a 36% interest in Savon Voima Oy (SVO). This agreement includes an
option which allows the majority shareholders of SVO to require the
Company to purchase the remaining 64% interest in SVO at prices
that are based upon a multiple of the original purchase price for the
first three years. After three years the purchase price is based
upon a calculation which considers SVO's results of operations, as
well as cash and cash equivalents and long-term debt balances on hand
at the date the option is exercised. The option may be exercised at
any time by the majority shareholders and does not expire.
On May 18, 1999, $198 million in letters of credit issued under the
Sterling Credit Agreement/Revolving Credit Facility matured and were not
renewed.
Eastern has facilities with Citibank N.A. to provide financing through
trade accounts receivable whereby Eastern Electricity may sell up to
(pound)300 million of its electricity receivables and, beginning June 11,
1999,
F-33
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. Subsequent Events (continued)
TXU Finance (No. 2) Limited may borrow up to an aggregate of (pound)275
million, collateralized by additional receivables of Eastern Electricity,
through a short-term note issue arrangement. The program has an overall
program limit of (pound)550 million. Through March 31, 1999, the
electricity receivable financings were in the form of short-term loans
collateralized by Eastern's trade accounts receivable. Subsequent to March
31, 1999, the program was restructured so that a portion of the receivables
are sold outright rather than being used to collateralize short-term
borrowings. Eastern Electricity continually sells additional receivables to
replace those collected. At June 30, 1999, accounts receivable of Eastern
were reduced by (pound)255 million to reflect the sales of the receivables
under the new program. An additional (pound)45 million of receivables
remain as collateral for short-term loans. At June 30, 1999, TXU Finance
(No. 2) Limited had borrowed (pound)150 million through the note issue
arrangement. The borrowings by Eastern Electricity and TXU Finance (No. 2)
Limited bear interest at an annual rate based on commercial paper rates
plus 0.225%, which was 5.225% at June 30, 1999.
F-34
<PAGE>
[LOGO] PRICEWATERHOUSECOOPERS
- --------------------------------------------------------------------------------
Report of Independent Accountants
---------------------------------
To the Board of Directors and Shareholders of Eastern Group plc and Subsidiaries
In our opinion, the accompanying consolidated balance sheet and the related
statements of consolidated income, of comprehensive income, of common stock
equity and of cash flows present fairly, in all material respects, the financial
position of Eastern Group plc and Subsidiaries at March 3l, 1998, and the
results of their operations and their cash flows for the years ended March 31,
1997 and March 31, 1998 and for the period from April 1, 1998 through May 18,
1998 in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards in the United Kingdom
which do not differ significantly with those in the United States and which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers
London, England
April 26, 1999
PricewaterhouseCoopers is the successor partnership to the UK firms of Price
Waterhouse and Coopers & Lybrand. The principal place of business of
PricewaterhouseCoopers and its associate partnerships, and of Coopers & Lybrand,
is 1 Embankment Place, London WC2N 6NN. The principal place of business of Price
Waterhouse is Southwark Towers, 32 London Bridge Street, London SE1 9SY. Lists
of the partners' names are available for inspection at those places.
All partners in the associate partnerships are authorised to conduct business as
agents of, and all contracts for services to clients are with,
PricewaterhouseCoopers. PricewaterhouseCoopers is authorised by the Institute of
Chartered Accountants in England and Wales to carry on investment business.
F-35
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
CONSOLIDATED BALANCE SHEET
((pound) million)
<TABLE>
<CAPTION>
As of
March 31, 1998
--------------
<S> <C>
Assets
Property, plant and equipment, net 2,365
-----
Current assets
Cash and cash equivalents 714
Accounts receivable (net of allowance for uncollectable accounts of (pound)13 million) 529
Inventories
Materials and supplies 23
Fuel stock 100
Prepayments 4
ACT recoverable 22
Other current assets 3
-----
Total current assets 1,395
-----
Investments
Restricted cash 547
Other 42
-----
Total investments 589
-----
Deferred debits
Goodwill (net of accumulated amortization of (pound)82 million) 1,222
Prepayments for pensions 150
Other deferred debits 105
-----
Total deferred debits 1,477
-----
Total assets 5,826
=====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
CONSOLIDATED BALANCE SHEET
((pound) million)
As of
March 31, 1998
--------------
Capitalization and liabilities
Capitalization
Contributed capital 2,603
Retained deficit (794)
Accumulated other comprehensive loss (7)
------
Total common stock equity 1,802
------
Minority interest 6
------
Long-term debt, less amounts due currently 1,976
------
Total capitalization 3,784
------
Current liabilities
Notes payable - banks 57
Long-term debt due currently 228
Short-term loans on accounts receivable 300
Accounts payable 218
Taxes accrued 182
Interest accrued 39
Other current liabilities 292
------
Total current liabilities 1,316
------
Deferred credits and other noncurrent liabilities
Deferred income taxes, net 434
Other deferred credits and noncurrent liabilities 292
------
Total deferred credits and other noncurrent liabilities 726
------
Commitments and contingencies (Notes 11 and 12) --
Total capitalization and liabilities 5,826
======
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
STATEMENTS OF CONSOLIDATED INCOME
((pound) million)
<TABLE>
<CAPTION>
Period from
April 1, 1998
Year ended Year ended through
March 31, 1997 March 31, 1998 May 18, 1998
-------------- -------------- ------------
<S> <C> <C> <C>
Operating revenues 2,984 3,475 425
Costs and expenses
Purchased power 1,600 1,703 202
Gas purchased for resale 368 514 85
Operation and maintenance 557 806 123
Depreciation and amortization 161 185 26
------ ------ ------
Total operating expenses 2,686 3,208 436
------ ------ ------
Operating income (loss) 298 267 (11)
Other income - net 5 10 1
------ ------ ------
Income (loss) before interest, income taxes and minority
interest 303 277 (10)
Interest income 40 76 12
Interest expense, net of capitalized interest 128 202 28
------ ------ ------
Income (loss) before income taxes and minority interest 215 151 (26)
Income tax expense (benefit) 304 189 (5)
------ ------ ------
Loss before minority interest (89) (38) (21)
Minority interest (1) -- --
------ ------ ------
Net loss (90) (38) (21)
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
((pound) million)
<TABLE>
<CAPTION>
Period from
April 1, 1998
Year ended Year ended through
March 31, 1997 March 31, 1998 May 18, 1998
-------------- -------------- ------------
<S> <C> <C> <C>
Net loss (90) (38) (21)
Other comprehensive loss:
Unrealized loss on securities classified as available
for sale (5) (2) (3)
-------- -------- --------
Comprehensive loss (95) (40) (24)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY
((pound) million)
<TABLE>
<CAPTION>
Accumulated
other
Contributed Retained comprehensive
capital deficit income
------- ------- ------
<S> <C> <C> <C>
Balance at April 1, 1996 2,518 (326) --
Net loss for year ended March 31, 1997 -- (90) --
Cash dividends for the year ended March 31, 1997 -- (140) --
Tax relief received from Parent 68 -- --
Unrealized loss on securities classified as available for
sale for the year ended March 31, 1997 -- -- (5)
----- ----- -----
Balance at March 31, 1997 2,586 (556) (5)
----- ----- -----
Balance at April 1, 1997 2,586 (556) (5)
Net loss for the year ended March 31, 1998 -- (38) --
Cash dividends for the year ended March 31, 1998 -- (200) --
Tax relief received from Parent 17 -- --
Unrealized loss on securities classified as available for
sale for the year ended March 31, 1998 -- -- (2)
----- ----- -----
Balance at March 31, 1998 2,603 (794) (7)
----- ----- -----
Balance at April 1, 1998 2,603 (794) (7)
Net loss for the period from April 1, 1998 through May 18, 1998 -- (21) --
Unrealized loss on securities classified as available for
sale for the period from April 1, 1998 through May 18, 1998 -- -- (3)
----- ----- -----
Balance at May 18, 1998 2,603 (815) (10)
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
STATEMENTS OF CONSOLIDATED CASH FLOWS
((pound) million)
<TABLE>
<CAPTION>
Period from
April 1, 1998
Year ended Year ended through
March 31, 1997 March 31, 1998 May 18, 1998
-------------- -------------- ------------
<S> <C> <C> <C>
Cash flows - operating activities
Net loss (90) (38) (21)
Adjustments to reconcile net loss to cash provided by
operating activities:
Gain on disposal of assets (8) (5) --
Depreciation and amortization 161 185 26
Minority interest 1 -- --
Deferred income taxes 251 (24) (7)
Changes in operating assets and liabilities:
Accounts receivable (126) 78 65
Inventories (81) (25) 10
Prepayments and other assets (9) 8 (4)
Accounts payable 106 (82) 6
Interest accrued 35 4 27
Taxes accrued (53) 101 2
Other liabilities 105 139 (30)
------- ------- -------
Cash provided by operating activities 292 341 74
------- ------- -------
Cash flows - investing activities
Capital expenditures (204) (254) (51)
Proceeds from sales of assets 25 30 --
Investment in marketable securities (29) (3) (27)
Other investments (21) (7) --
------- ------- -------
Cash used in investing activities (229) (234) (78)
------- ------- -------
Cash flows - financing activities
Borrowings under long-term debt 692 240 --
Retirements of long-term debt (468) (215) --
Change in notes payable - banks (389) (4) 16
Receivable financing -- 300 --
Debt financing cost (11) -- --
Dividends paid (140) (200) --
------- ------- -------
Cash (used in) provided by financing activities (316) 121 16
------- ------- -------
Net change in cash and cash equivalents (253) 228 12
------- ------- -------
Cash and cash equivalents - beginning balance 739 486 714
------- ------- -------
Cash and cash equivalents - ending balance 486 714 726
------- ------- -------
Supplemental cash flow disclosures:
Cash paid for interest 93 198 5
Cash paid for income taxes 18 90 --
Non-cash transactions:
Record capital lease and related obligations 705 -- --
Consolidation of debt and related investment on
cross-border leases 408 139 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
The business and operations of Eastern Group plc and Subsidiaries (Eastern)
are divided into three principal segments, as follows:
(i) The energy retail business which supplies electricity and gas to
national domestic, industrial and commercial customers in the United
Kingdom;
(ii) The energy management and generation business which manages an
integrated portfolio of generation assets, physical gas assets and
contracts; and
(iii) The networks business which owns, manages and operates the
electricity distribution system.
These businesses are carried out primarily in the United Kingdom with
interests increasingly being developed throughout the rest of Europe.
Prior to May 19, 1998, Eastern was owned by The Energy Group PLC (TEG). On
May 19, 1998, TXU Acquisitions Limited, a subsidiary of TXU Corp, acquired
control of TEG (see Note 17).
2. Basis of Presentation and Significant Accounting Policies
The consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States (US GAAP).
Consolidation - The consolidated financial statements include the accounts
of Eastern and all majority owned subsidiaries. Minority interest
represents the minority shareholders' proportionate share in the equity or
income of Eastern's majority-owned subsidiaries.
All significant intercompany items and transactions have been eliminated in
consolidation. Investments in significant unconsolidated affiliates are
accounted for by the equity method.
Use of estimates - The preparation of Eastern's consolidated financial
statements, in conformity with US GAAP, requires management to make
estimates and assumptions about future events that affect the reporting and
disclosure of assets and liabilities at the balance sheet dates and the
reported amounts of revenue and expense during the period covered by the
consolidated financial statements. In the event estimates and/or
assumptions prove to be different from actual amounts, adjustments are made
in subsequent periods to reflect more current information.
Cash and cash equivalents - Cash equivalents consist of highly liquid
investments, which are readily convertible into cash and have maturities of
three months or less.
Accounts receivable - A provision for uncollectible accounts of (pound)1
million, (pound)11 million and (pound)2 million was recorded during the
years ended March 31, 1997 and 1998 and the period from April 1, 1998
through May 18, 1998, respectively. Eastern did not realize any material
recoveries during the years ended March 31, 1997 and 1998 or the period
from April 1, 1998 through May 18, 1998. Eastern wrote-off accounts
receivable of (pound)1 million, (pound)10 million and (pound)1 million
during the years ended March 31, 1997 and 1998 and the period from April 1,
1998 through May 18, 1998, respectively.
Inventories - Inventories consist of fuel stock, material and supplies, and
are stated at the lower of cost or net realizable value. The cost of
inventories is determined using a weighted average cost method.
Capitalized interest - Interest is capitalized on major capital
expenditures during the period of construction.
F-42
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Basis of Presentation and Significant Accounting Policies (continued)
Property, plant and equipment - Property, plant and equipment are stated at
cost less accumulated depreciation. The cost of additions, improvements,
and interest on construction are capitalized, while maintenance and repairs
are charged to expense when incurred.
Leased generating stations meeting certain criteria and related equipment
are capitalized and the present value of the related lease payments is
recorded as a liability. Depreciation of capitalized lease assets is
computed on the straight-line basis over the shorter of the estimated
remaining useful life of the asset or the lease term.
Depletion of gas reserves is charged on a unit-of-production basis, based
on an assessment of proven reserves. Depreciation of all other property,
plant and equipment is determined on the straight-line method over
estimated useful lives of the assets as follows:
Electricity generating station assets 30 years
Electricity generating station Shorter of lease period or
assets under capital lease estimated remaining useful life
Electricity distribution 40 years (3% per annum for first
system assets 20 years and 2% per annum for last
20 years)
Buildings Up to 60 years
Leasehold improvements Shorter of remaining lease term or
estimated useful life
Plant and equipment Up to 10 years
Customer contributions to the construction of electricity distribution
system assets are amortized to income over a forty-year period, at a rate
of 3% per year for the first 20 years and 2% per year for the last 20
years. The unamortized amount of these contributions is deducted from
property, plant and equipment.
Upon sale, retirement, abandonment or other disposition of property, the
cost and related accumulated depreciation are eliminated from the accounts
and any gain or loss is reflected in income.
The United Kingdom Government is entitled to claim a portion of any gain
realized by Eastern on certain property disposals made up to March 31,
2000. Provisions for such claims are made when an actual disposal occurs.
Provision is made for abandonment costs relating to gas fields. Such
provisions are determined in accordance with local conditions and
requirements, and on the basis of costs estimated at the respective balance
sheet date. These costs are expensed on a unit-of-production basis.
Valuation of long lived assets - Eastern periodically evaluates the
carrying value of long-lived assets to be held and used, including
goodwill, when events and circumstances warrant such a review. The carrying
value of a long-lived asset is considered impaired when the projected
undiscounted cash flows from such asset is separately identifiable and is
less than its carrying value. In that event, a loss is recognized based on
the amount by which the carrying value exceeds the fair market value of the
long-lived asset. Fair market value is determined primarily utilizing the
anticipated cash flows discounted at a rate commensurate with risk
involved.
Goodwill - Goodwill is capitalized and amortized over 40 years using the
straight-line method. Eastern reviews the goodwill recoverability period on
a regular basis. Amortization expense for each of the years ended March 31,
1997 and 1998 was (pound)33 million and for the period from April 1, 1998
through May 18, 1998 was (pound)4 million.
Derivative financial instruments - In order to qualify for hedge
accounting, the following criteria must be met: the item being hedged
exposes Eastern to price risk, it is probable that the hedge will
substantially offset this risk, and it has been designated as a hedge by
management.
F-43
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Basis of Presentation and Significant Accounting Policies (continued)
Gains and losses on hedges of existing assets or liabilities are included
in the carrying amounts of those assets or liabilities and are ultimately
recognized in income. Gains and losses related to qualifying hedges of firm
commitments or anticipated transactions are deferred and are recognized in
income or as adjustments of carrying amounts when the hedged transaction
occurs. The cash flows related to derivative financial instruments are
recorded in the same manner as the cash flow related to the item being
hedged. In the event that an overall analysis of the firm commitments being
hedged indicates that Eastern is in a net loss position, a provision is
made for these anticipated losses. Transactions that are entered into that
do not meet the criteria for hedge accounting are marked to market on the
balance sheet at the period end, and the unrealized gain or loss is
recognized in the Statement of Consolidated Income for that period.
Revenue recognition - Electricity and gas sales revenues are recognized
when services are provided to customers and include an estimate for
unbilled revenues, or the value of electricity and gas consumed by
customers between the date of their last meter reading and the period-end
date. Operating revenues are stated exclusive of value added tax, but
inclusive of the fossil fuel levy.
Restructuring costs - Restructuring costs relate to voluntary termination
benefits and are recorded in Operation and Maintenance expense in the
Statement of Consolidated Income in the period in which the employee
accepts the offer and the amount can be reasonably estimated. Eastern has
established voluntary retirement plans to progressively reduce manpower
levels.
Foreign currencies - Assets and liabilities of foreign subsidiaries are
translated at the exchange rate on the balance sheet date. Revenues, costs
and expenses are translated at average rates of exchange prevailing during
the period. Translation adjustments resulting from this process are charged
or credited to the cumulative currency translation adjustment account in
common stock equity. Gains and losses on foreign currency transactions are
included in the Statement of Consolidated Income.
Income taxes - Income tax expense includes United Kingdom and other
national income taxes. Eastern intends to reinvest the earnings of its
foreign subsidiaries into those businesses. Accordingly, no provision has
been made for taxes which would be payable if such earnings were
distributed to Eastern.
Advance Corporation Tax (ACT) recoverable represents the amount of tax paid
or payable on outgoing dividends paid and proposed which can be set off
against a corporation tax liability arising currently or in the future,
thereby reducing current tax expense.
Deferred income taxes are determined under the liability method. Deferred
income taxes represent liabilities to be paid or assets to be received in
the future and reflect the tax consequences on future years of temporary
differences between the tax bases of assets and liabilities and their
financial reporting amounts. Future tax rate changes would affect those
deferred tax liabilities or assets in the period when the tax rate change
is enacted. Future tax benefits, such as net operating loss carryforwards,
are recognized to the extent that realization of such benefits is more
likely than not.
Marketable securities - Eastern has classified all of its marketable
securities as available for sale. Available for sale securities are carried
at fair value with the unrealized gains and losses reported as a component
of accumulated other comprehensive income in common stock equity. Declines
in fair value that are other than temporary are reflected in the Statement
of Consolidated Income.
Appraisal and development expenditure of gas fields - Appraisal
expenditures are accounted for under the successful efforts method. General
seismic and other costs are expensed as incurred.
Ceiling test - The capitalized costs of gas fields under evaluation, under
development or in production are assessed each year on a field-by-field
basis. To the extent that the future net revenues from the remaining
commercial reserves, or, in the case of prospects under evaluation, the
estimated potential commercial reserves, are less than the net capitalized
costs of the field, a charge is made to the profit and loss account.
F-44
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Basis of Presentation and Significant Accounting Policies (continued)
New accounting standards - Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was to be effective for fiscal years beginning after June 15,
1999. This statement requires that all derivative financial instruments be
recognized as either assets or liabilities on the balance sheet at their
fair values and that accounting for the changes in their fair values is
dependent upon the intended use of the derivatives and their resulting
designations. The new standard will supersede or amend existing standards
that deal with hedge accounting and derivatives. Eastern has not determined
the effect that adopting this standard will have on its consolidated
financial statements.
The Emerging Issues Task Force (EITF) has issued No. 98-10 "Accounting for
Energy Trading and Risk Management Activities" which is effective for
fiscal years beginning after December 15, 1998. EITF 98-10 requires that
contracts for energy commodities which are entered into under trading
activities should be marked to market with the gains and losses shown net
in the income statement. As Eastern is not primarily involved in trading
activities, EITF 98-10 should not have a material impact on the
consolidated financial statements upon adoption.
3. Property, Plant and Equipment
Property, plant and equipment, stated at cost less accumulated
depreciation, consisted of:
March 31, 1998
((pound) million)
-----------------
Electricity distribution system 1,567
Electricity generating stations 1,154
Upstream gas assets 45
Other land and buildings 102
Plant and equipment 360
Accumulated depreciation (863)
--------
Net property, plant and equipment 2,365
========
Depreciation expense for the years ended March 31, 1997 and 1998 was
(pound)128 million and(pound)152 million, respectively, and for the period
from April 1, 1998 through May 18, 1998 was (pound)22 million.
Electricity generating stations and plant and equipment include assets
under capital leases as follows:
March 31, 1998
((pound) million)
-----------------
Cost 839
Less accumulated depreciation (126)
--------
Net book value 713
========
4. Restricted Cash
At March 31, 1998, (pound)408 million of deposits has been used to
cash-collateralize existing future lease obligations to certain banks
related to the funding of the leases of three power stations from National
Power PLC (Note 9). Additionally (pound)139 million at March 31, 1998 has
been used to cash-collateralize existing future lease obligations arising
from a cross-border leasing arrangement on two other power stations (Note
9).
F-45
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments
Marketable investments are classified as available for sale, and are
considered non-current based upon management's intentions in holding the
investments. Marketable investments consisted of:
Fair market Unrealized
March 31, 1997 Cost value gain/(loss)
-------- ----------- ----------
((pound)million)
SME 29 24 (5)
----- ----- -----
29 24 (5)
===== ===== =====
Fair market Unrealized
March 31, 1998 Cost value gain/(loss)
-------- ----------- ----------
((pound)million)
SME 25 18 (7)
HC 3 3 -
----- ----- -----
28 21 (7)
===== ===== =====
Fair market Unrealized
May 18, 1998 Cost value gain/(loss)
-------- ----------- ----------
((pound)million)
SME 35 25 (10)
HC 20 20 -
----- ----- -----
55 45 (10)
===== ===== =====
At March 31, 1998 Eastern held an 11.8% investment in Severomoravska
Energetika (SME), which is listed in the Czech Republic. During the period
from April 1, 1998 through May 18, 1998, Eastern's Investment in SME
increased to 16%. During the year ended March 31, 1998, Eastern acquired a
1.8% investment in Hidroelectrica del Cantabrico (HC), which is listed in
Spain. As Eastern does not have the ability to exercise significant
influence over either SME's or HC's operating and financial policies, these
investments have been accounted for as marketable securities and
accordingly have been marked to market at March 31, 1997 and 1998 and May
18, 1998.
There were no sales of marketable securities in the two year period ended
March 31, 1998, or from April 1, 1998 through May 18, 1998.
At March 31, 1998 Eastern held an additional (pound)21 million in other
investments.
6. Pensions
The majority of Eastern's employees are members of the Electricity Supply
Pension Scheme (ESPS) which provides pensions of a defined benefit nature
for employees throughout the England and Wales Electricity Supply Industry.
The ESPS operates on the basis that there is no cross-subsidy between
employers and the financing of Eastern's pension liabilities is therefore
independent of the experience of other participating employers. The assets
of the ESPS are held in a separate trustee-administered fund and consists
principally of United Kingdom and European equities, United Kingdom
property holdings and cash. The pension cost relating to the Eastern
portion of the ESPS is assessed in accordance with the advice of
independent qualified actuaries using the projected unit method. The
benefits under these plans are primarily based on years of service and
compensation levels as defined under the respective plan provisions.
The assets of the Electricity Supply Pension Scheme are held in a separate
trustee administered fund and consist principally of United Kingdom and
European equities, United Kingdom property holdings and cash.
F-46
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Pensions (continued)
Eastern has adopted SFAS No. 132, "Employer's Disclosure about Pensions and
other Post-retirement Benefits" for the year ended March 31, 1998.
Year ended
Change in benefit obligations March 31, 1998
- ----------------------------- --------------
((pound) million)
Benefit obligation at beginning of year 702
Service cost 9
Interest cost 53
Plan participants' contributions 7
Termination liability 15
Actuarial loss 100
Benefits paid (51)
------
Benefit obligation at end of year 835
======
Change in plan assets:
- ---------------------
Fair value of plan assets at beginning of year 874
Actual return on plan assets 285
Employer contribution 14
Plan participants' contributions 7
Benefits paid (51)
------
Fair value of plan assets at end of year 1,129
======
Funded Status:
- -------------
Funded status 294
Unrecognized net actuarial gain (151)
Unrecognized prior service cost 7
------
Prepayments for pensions 150
======
F-47
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Pensions (continued)
Weighted average assumptions:
<TABLE>
<CAPTION>
Period from
April 1, 1998
Year ended Year ended through
March 31, 1997 March 31, 1998 May 18, 1998
-------------- -------------- ------------
% % %
<S> <C> <C> <C>
Expected long-term rate of return on assets 8.5 7.0 7.0
Rate of salary increases 5.0 4.0 4.0
Discount rate 8.0 7.0 6.5
</TABLE>
Components of net periodic pension benefit:
<TABLE>
<CAPTION>
Period from
April 1, 1998
Year ended Year ended through
March 31, 1997 March 31, 1998 May 18, 1998
-------------- -------------- ------------
((pound) million)
<S> <C> <C> <C>
Service cost-benefits earned during the period 9 9 1
Interest cost on projected benefit obligations 58 53 7
Expected return on plan assets (75) (69) (10)
Net amortization and deferral -- 1 --
------ ------ ------
Net periodic benefit (8) (6) (2)
====== ====== ======
</TABLE>
During 1997 and 1998 special retirement programs were offered to encourage
early retirements among certain employees which resulted in additional
pension cost of (pound)12 million and (pound)15 million in the years ended
March 31, 1997 and 1998, respectively.
7. Taxation
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Period from
April 1, 1998
Year ended Year ended through
March 31, 1997 March 31, 1998 May 18, 1998
-------------- -------------- ------------
((pound) million)
<S> <C> <C> <C>
Current:
United Kingdom 53 213 2
------- ------ ------
Deferred:
United Kingdom 251 (24) (7)
------- ------ ------
Total income tax expense/(benefit) 304 189 (5)
======= ====== ======
</TABLE>
F-48
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Taxation (continued)
Income/(loss) before income taxes is as follows:
<TABLE>
<CAPTION>
Period from
April 1, 1998
Year ended Year ended through
March 31, 1997 March 31, 1998 May 18, 1998
-------------- -------------- ------------
((pound) million)
<S> <C> <C> <C>
United Kingdom 212 157 (27)
Other countries 3 (6) 1
------ ------ ------
Total income/(loss) before income taxes and
minority interest 215 151 (26)
====== ====== ======
</TABLE>
Significant components of Eastern's deferred tax assets and liabilities at
March 31, 1998 are as follows:
As at
March 31, 1998
--------------
((pound) million)
Deferred tax assets
Tax loss carry forwards (1)
Leased assets (450)
Other (98)
-------
Total deferred tax assets (549)
Valuation allowance for deferred tax assets 165
-------
Net deferred tax assets (384)
-------
Deferred tax liabilities
Excess of book value over taxation value of fixed assets 274
Leased assets 507
Other 37
-------
Total deferred tax liabilities 818
-------
Net deferred tax liabilities 434
=======
All of the net deferred tax liabilities are non-current.
The recognized deferred tax asset is based upon the expected future
utilization of net operating loss carryforwards and the reversal of other
temporary differences. For financial reporting purposes, Eastern has
recognized a valuation allowance for those benefits for which realization
does not meet the more likely than not criteria. The valuation allowance
has been recognized in respect of leased assets. Eastern continually
reviews the adequacy of the valuation allowance and is recognizing these
benefits only as reassessments indicate that it is more likely than not
that the benefits will be realized. The valuation allowance increased by
(pound)18 million in the year ended March 31, 1998.
F-49
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Taxation (continued)
United Kingdom income tax expense at the statutory tax rate (33% at March
31, 1997 and 31% at March 31, 1998 and May 18, 1998) is reconciled below to
the actual income tax expense:
<TABLE>
<CAPTION>
Period from
April 1, 1998
Year ended Year ended through
March 31, 1997 March 31, 1998 May 18, 1998
-------------- -------------- ------------
((pound) million)
<S> <C> <C> <C>
Tax at United Kingdom statutory rate 71 47 (8)
Windfall tax -- 112 --
Non-deductible goodwill 10 10 1
Effect of tax rate on United Kingdom dividends (2) (2) --
Movement in valuation allowance 147 18 2
Leasing transaction 93 -- --
Tax rate change (13) -- --
Profit on disposal taxed at lower rates (5) (1) --
Non-deductible expenses 2 3 --
Other 1 2 --
---- ---- ----
Income tax expense/ (benefit) 304 189 (5)
==== ==== ====
</TABLE>
For the year ended March 31, 1998, a windfall tax was levied on Eastern
according to a formula contained in the UK Finance (No. 2) Act 1997. The
liability to the tax was assessed at (pound)112 million of which half was
paid on December 1, 1997 and the balance was paid on December 1, 1998.
As at March 31, 1998 Eastern had net operating loss carryforwards of
(pound)1 million that are available to offset future taxable income. The
net operating loss carryforwards have no expiration date.
The tax effect of components included in accumulated other comprehensive
income was a benefit of (pound)2 million in the year ended March 31, 1997,
a benefit of (pound)1 million in the year ended March 31, 1998 and a
benefit of (pound)1 million for the period from April 1, 1998 through May
18, 1998.
8. Related Party Transactions
At March 31, 1998 Eastern was owed(pound)0.4 million by TEG, which arose
from payments of salary expenses by Eastern on behalf of TEG.
F-50
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Notes Payable and Long-term Debt
Weighted average interest rate at March 31, 1998 on notes payable to banks
was 13.2%.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, 1998
--------------
((pound) million)
<S> <C>
Notes and Bonds:
(pound)350 million 8.375% bonds due 2004 350
(pound)200 million 8.5% bonds due 2025 200
(pound)200 million 8.75% bonds due 2012 200
Other:
Rent factoring loans (weighted average interest rate of 7.35%, due 1999-2001) 804
Other unsecured loans, due in instalments 8.9% - 18.3% 50
Capital leases 461
Cross-border leases 139
-------
Total long-term debt 2,204
Less current portion 228
-------
Long-term debt, less amounts due currently 1,976
=======
</TABLE>
(pound)100 million of the (pound)350 million 8.375% bonds included in
long-term debt has been converted into floating rate debt by way of
interest rate swaps, which expire in the year 2004.
Rent factoring loans - Certain subsidiaries of Eastern entered into an
agreement with commercial banks whereby future intra-group rental payments
receivable were assigned to these banks in return for a capital sum.
(pound)408 million of the capital sum has been deposited to cash
collateralize existing future lease obligations to certain banks related to
the funding of the leases of three power stations leased from National
Power.
On December 17, 1997 a subsidiary of Eastern issued a (pound)21 million
floating rate (18.26% at March 31, 1998) bond in the Czech Republic.
Long-term debt balances are denominated in the following currencies:
March 31, 1998
--------------
((pound) million)
Sterling 2,044
United States dollars 139
Other 21
-------
Total long-term debt 2,204
=======
There was no capitalized interest for the year ended March 31, 1998, or for
the period from April 1, 1998 through May 18, 1998. Capitalized interest
for the year ended March 31, 1997 was (pound)11 million.
F-51
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Notes Payable and Long-term Debt (continued)
Long-term debt, excluding capital lease balances, is repayable as follows:
Year Ending
March 31
--------
1999 213
2000 225
2001 242
2002 127
2003 21
Thereafter 915
-------
1,743
Capital leases 461
-------
Total long-term debt 2,204
=======
Capital lease obligations - As at March 31, 1998, future minimum lease
payments for assets under capital leases, together with the present value
of minimum lease payments, were:
Year Ending
March 31
--------
((pound) million)
1999 16
2000 16
2001 17
2002 542
2003 17
Thereafter 98
--------
Total future minimum lease payments 706
Less amounts representing interest (245)
--------
Present value of future minimum lease payments 461
--------
Current 15
Non-current 446
--------
Total 461
========
Substantially all of the capital lease obligations relate to coal-fired
power stations. Additional payments of approximately (pound)6 per megawatt
hour (indexed from 1996 prices) linked to output levels from the stations
are payable for the first seven years of their operation by Eastern
(operations commenced in 1996).
The lease agreement for three of the coal-fired power stations contains a
purchase option of(pound)1 in 2046. The lease is for a total of ninety-nine
years.
Cross-border leases - The debt arising on the cross-border leases is fully
collaterized by restricted cash on deposit (see Note 4). Certain
subsidiaries of Eastern have entered into cross-border lease transactions
in respect of two power stations that are wholly owned by Eastern. Eastern
has retained control of the power stations and their output and is
responsible for their operations.
F-52
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Notes Payable and Long-term Debt (continued)
Eastern's debt agreements contain certain covenants with which they must
comply, including leverage ratios, levels of net assets and interest cover
covenants. At March 31, 1998, Eastern was in compliance with all covenants.
10. Lines of Credit and Other Credit Facilities
Credit facility - At March 31, 1998 Eastern had a five year committed
revolving credit borrowing facility amounting to (pound)350 million with
interest based on LIBOR plus 0.23% which at March 31, 1998 was 7.86%.
Promissory note program - Eastern has a one year promissory note program
issued within the Czech Republic which has been utilized to fund its
investment in SME and Teplarny Brno a.s. The note bears interest at an
annual rate of PRIBOR plus 0.7% which at March 31, 1998 was 18.3%.
Short-term loan on accounts receivable - Eastern has facilities with a
financial institution whereby it may, from time to time, borrow funds from
the financial institution. Outstanding borrowings under the agreements may
not exceed certain levels and are collateralized by portions of Eastern's
trade accounts receivable. At March 31, 1998, Eastern had borrowed
(pound)300 million under these facilities. The loan bears interest at an
annual rate based upon commercial paper rates plus 0.225% which at March
31, 1998 was 7.6%.
11. Commitments
Eastern evaluates its position relative to asserted and unasserted claims,
loss-making purchase commitments or future commitments and makes provisions
as needed.
Eastern's investment in Svartisen (the offtake generated by water rights in
hydro-electric power plants in Norway) requires coverage of approximately
31.2% of the costs incurred in relation to the operation of the power
plant, as well as a portion of the maintenance costs, property tax, and
feeding costs (defined as fixed charges such as connection and capacity
charges and volume related charges such as an energy charge) for 55 years,
beginning in 1998. The electricity generated from the hydro-electric plants
will be sold into the Norwegian power pool, from which Eastern will receive
income.
Gas take-or-pay contracts - Eastern is a party to various types of
contracts for the purchase of gas. Almost all include "take-or-pay"
obligations under which the buyer agrees to pay for a minimum quantity of
gas in a year. In order to help meet the expected needs of its wholesale
and retail customers, Eastern has entered into a range of gas purchase
contracts. As at March 31, 1998, the commitments under long-term gas
purchase contracts amounted to an estimated (pound)2.8 billion, covering
periods up to 16 years forward. Management does not consider it likely, on
the basis of Eastern's current expectations of demand from its customers as
compared with its take-or-pay obligations under such purchase contracts,
that any material payments will become due from Eastern for gas not taken.
F-53
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Commitments (continued)
Rental commitments - The future minimum rental commitments under
non-cancellable operating leases were as follows:
Year ending
December 31
-----------
Period from May 19, 1998 through December 31, 1998 34
1999 53
2000 36
2001 37
2002 34
2003 30
Thereafter 27
------
Total 251
======
The operating lease commitments relate to coal-fired power stations.
Additional variable payments of approximately (pound)6 per megawatt hour
(indexed to 1996 prices) linked to output levels from these stations are
payable through 2000, the first four years of the lease agreement, by
Eastern.
Rental expense for operating leases amounted to (pound)49 million and
(pound)77 million for the years ended March 31, 1997 and 1998,
respectively. Rental expense for operating leases for the years ended March
31, 1997 and March 31, 1998 include (pound)32 million and (pound)42
million, respectively, of minimum lease payments and (pound)17 million and
(pound)35 million, respectively, of variable lease payments, based on
output. Rental expense for operating leases amounted to (pound)10 million
for the period ended May 18, 1998. Rental expense for operating leases
during the period to May 18, 1998 includes (pound)6 million of minimum
lease payments and (pound)4 million of variable lease payments, based upon
output.
12. Contingencies
Eastern is subject to business risks that are actively managed against
exposures.
In February 1997, the official government representative of pensioners
(Pensions Ombudsman) made a 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 ESPS relating 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. These determinations were 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 have now
appealed against this decision and judgment has now been received although
a final order is awaited. The appeal was allowed endorsing the Pensions
Ombudsman's determination that the corporation was not entitled to
unilaterally deal with any surplus. If a similar complaint were to be made
against Eastern in relation to its use of actuarial surplus in its section
of the ESPS, it would vigorously defend the action, ultimately through the
courts. However, if a determination were finally to be made against it and
upheld by the courts, Eastern could have a potential liability to repay to
its section of the ESPS an amount estimated by Eastern to be up to
(pound)45 million (exclusive of any future applicable interest charges).
General - In addition to the above, Eastern is involved in various legal
and administrative proceedings arising in the ordinary course of its
business. Eastern believes that all such lawsuits and resulting claims
would not have a material effect on its financial position, results of
operation or cash flows.
F-54
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Employee Share Plans
TEG had the following employee share plans in which Eastern's employees
participated for the two year period ended March 31, 1998 and for the
period from April 1, 1998 through May 18, 1998:
(a) The Energy Group Sharesave Scheme which was available to the United
Kingdom-based employees of Eastern and those directors who devoted
more than 25 hours a week to their duties. Employees who participated
in this scheme had to enter into a monthly savings contract, for
either a three or five year period. The exercise price for the three
year Sharesave Scheme was based on a 15% discount of the TEG stock
price on February 25, 1997 (date of original grant) and the five year
Sharesave Scheme exercise price was based on a 20% discount.
(b) The Energy Group Executive Share Option Scheme which was administered
by the Remuneration Committee of the Board of Directors of TEG (the
Remuneration Committee) was available at its discretion to employees
and those directors who devote more than 25 hours a week to their
duties. Eligible participants under this plan were granted options to
acquire shares with an exercise price equal to the February 25, 1997
(date of grant) TEG stock price, which were not exercisable for three
years.
(c) The Energy Group Long-term Incentive Plan operated in conjunction with
Eastern's Employee Benefit Trust. The plan was supervised and
administered by the Remuneration Committee. The Plan could be made
available to all employees and directors at the discretion of the
Remuneration Committee, but it was in practice limited to the
executive directors and certain senior executives of Eastern. Awards
under this plan required a certain level of achievement of total
shareholder return, normally calculated over three years, before they
vested.
The movements in share options outstanding during the year ended March 31,
1998 and the period ended May 18, 1998 were:
<TABLE>
<CAPTION>
Weighted
average As at As at As at
fair value Exercise March 31 March 31, Exercise/ May 18,
of options price 1997 Exercised Lapsed Granted 1998 Lapsed Granted 1998
---------- ----- ---- --------- ------ ------- ---- ------ ------- ----
(pence) (pence)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Executive
Share Options 73 547 774,416 10,958 38,353 -- 725,105 -- -- 725,105
Sharesave
Scheme - 3 year 109.8 465 19,455 -- -- 233,466 252,921 -- 29,183 282,104
Sharesave
Scheme - 5 year 133.3 438 73,254 -- -- 879,052 952,306 -- 36,627 988,933
Long-term
Incentive Plan 465 -- 486,926 -- 33,951 -- 452,975 -- -- 452,975
</TABLE>
No options lapsed or were exercised prior to March 31, 1997.
With the exception of the Sharesave Schemes, the options listed above were
all granted between February 25, 1997 and March 31, 1997. The granted
options for the Sharesave Schemes reflect additional amounts saved by
participants during the respective period.
Since May 18, 1998 all options or awards then outstanding under the
employee share plans described in (a) to (c) above have, as a consequence
of the takeover of Eastern by TXU Corp (see Note 17), either been
exercised, waived or surrendered for a cash cancellation payment by TXU
Corp or lapsed.
Eastern recorded compensation expense relating to the employee share plans
of (pound)0.1 million in the year to March 31, 1997, (pound)2 million in
the year to March 31, 1998 and (pound)0.3 million in the period from April
1, 1998 to May 18, 1998.
Eastern determined the potential impact of SFAS No. 123, "Accounting For
Stock-Based Compensation" with regard to the recognition of compensation
expense. Under SFAS 123, compensation expense is
F-55
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Employee Share Plans (continued)
determined based upon the fair value at the grant date for awards. Had
compensation expense for Eastern share option schemes been determined
based upon the methodology prescribed under SFAS 123, Eastern's loss
would not have been affected in the year ended March 31, 1997, would have
been (pound)500,000 lower in the year ended March 31, 1998 and would have
been (pound)125,000 lower in the period ended May 18, 1998. The fair
value of the options granted are estimated using the Black Scholes
model.
The following weighted-average assumptions were assumed in determining the
fair value of options for the Executive Share Option Scheme: exercise price
is equal to the fair value of the stock on the grant date; risk-free
interest rate is 5.31%; expected lives of 2 years and remaining contract
life of 5.5 years; expected volatility of 27.3% and a dividend yield of
5.48%. The same assumptions were used in determining the compensation cost
as of the grant date for the Long-term Incentive Plan and the Sharesave
Schemes for the risk free interest rate, expected volatility and dividend
yield. For the 5 year Sharesave Scheme the exercise price is 80% of the
stock price at date of grant and a contract life of 4.3 years. For the 3
year Sharesave Scheme the exercise price is 85% of the stock price at date
of grant and a contract life of 2.3 years. For the Long-term Incentive Plan
the exercise price is nil and the expected life is 3 years.
14. Dividend Restrictions
Certain debt instruments of Eastern contain provisions that, under certain
conditions, restrict distributions on or acquisitions of common stock. At
March 31, 1998 retained earnings were not restricted as a result of such
provisions.
15. Segmental Information
The segments have been identified on the basis of the underlying nature of
the business and its customer base and the corresponding skill sets
required, e.g., engineering, portfolio management and customer services.
The energy retail business segment provides electricity and gas to United
Kingdom national domestic, industrial and commercial users. It also has
commenced retailing joint ventures in continental Europe. The energy
management and generation business segment manages an integrated portfolio
of contracts and physical gas and generation assets. The contracts include
supplying the energy retail business with electricity and gas as well as
contracts with third party energy retailers, traders and wholesalers. The
networks business segment owns and manages the electricity distribution
system and its principal customer base is energy retail and other
electricity suppliers. The other category consists of two operating
segments, metering and telecoms which fall below the quantitative
thresholds for determining reportable segments.
As set out below, contribution for each segment is defined as operating
profit on a UK GAAP basis before exceptional and extraordinary items, but
after a notional charge for the cost of capital. Capital/investment
expenditure includes all items of capital and investment expenditures
including the European equity investment. The cost of capital is calculated
as 0.5% per month on working capital and is eliminated on consolidation.
Overhead costs, such as those incurred by Eastern at head office and core
costs related to information technology are not allocated among the
segments.
F-56
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Segmental Information (continued)
<TABLE>
<CAPTION>
Period from April 1,
Year ended March 31, 1998 through May 18, 1998
------------------------------------------------------- --------------------------
1997 1998
-------------------------- ---------------------------
Capital/ Capital/ Capital/
Investment Investment Investment
Contribution expenditure Contribution expenditure Contribution expenditure
------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Energy retail (8) 16 (52) 42 (5) 6
Energy management and
generation 103 60 180 44 (13) 6
Networks 165 147 189 120 21 31
Other -- -- -- 32 (3) 35
--------- --------- --------- --------- --------- ---------
260 223 317 238 -- 78
Cost of capital elimination 151 -- 125 -- 17 --
Unallocated corporate costs (40) 31 (11) 26 (28) --
--------- --------- --------- --------- --------- ---------
Total (UK GAAP) 371 254 431 264 (11) 78
--------- --------- --------- --------- --------- ---------
Purchase accounting and
US GAAP adjustments (61) -- (70) -- -- --
Unallocated contract costs -- -- (68) -- -- --
Unallocated restructuring
costs (20) -- (20) -- -- --
Unallocated investment
income 13 -- 4 -- 1 --
--------- --------- --------- --------- --------- ---------
Income (loss) before
interest, income
taxes and minority
interest 303 -- 277 -- (10) --
========= ========= ========= ========= ========= =========
</TABLE>
Revenues are attributed to countries based on location of customers. There
are no revenues for transactions with a single external customer that are
10% or more of Eastern's revenue. The electricity trading market in England
and Wales (the Pool) is not considered by Eastern to be an external
customer, as all electricity generated is sold into the Pool and is then
repurchased from the Pool for subsequent resale. Revenues billed by energy
retail for the other segments are presented as revenues of the other
segments.
<TABLE>
<CAPTION>
Revenues for
Revenues for the from
year ended March 31, April 1, 1998
-------------------------------- through
1997 1998 May 18, 1998
------------- --------------- ----------------
((pound)million) ((pound)million) ((pound)million)
<S> <C> <C> <C>
Energy retail 1,568 1,655 205
Energy management and generation 952 1,337 165
Networks 420 414 53
Other 44 69 2
------- ------- ------
Total 2,984 3,475 425
======= ======= ======
</TABLE>
F-57
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Segmental Information (continued)
<TABLE>
<CAPTION>
Revenues for
the period
Revenues for the from
year ended March 31, April 1, 1998
-------------------------------- through
1997 1998 May 18, 1998
------------- --------------- ----------------
((pound)million) ((pound)million) ((pound)million)
<S> <C> <C> <C>
United Kingdom 2,966 3,447 422
Other countries 18 28 3
------- ------- ------
Total 2,984 3,475 425
======= ======= ======
</TABLE>
Long-lived
assets at
March 31, 1998
--------------
((pound) million)
United Kingdom 2,314
Other countries 51
-------
Total 2,365
=======
16. Derivative and Financial Instruments
Eastern uses derivative financial instruments for purposes other than
trading and does so to reduce its exposure to fluctuations in electricity
prices, gas prices, interest rates and foreign exchange rates. Derivative
financial instruments used by Eastern include contracts for differences,
electricity forward rate contracts, interest rate swaps, interest forward
rate agreements, options, gas swaps futures and foreign exchange forward
contracts.
Electricity price risk management - Electricity forward contracts are
primarily used by Eastern to hedge future changes in electricity prices.
Almost all electricity generated in England and Wales must be sold to the
Pool, and electricity suppliers must likewise generally buy electricity
from the Pool for resale to their customers. The Pool is operated under a
Pooling and Settlement Agreement to which all licensed generators and
suppliers of electricity in Great Britain are party. These trading
arrangements are currently under review by the United Kingdom government.
Eastern enters into electricity forward contracts to assist in the
management of its exposure to fluctuations in electricity pool prices. The
contracts bought and sold are contracts for differences (CfDs) and
electricity forward agreements (EFAs) that fix the price of electricity for
an agreed quantity and duration by reference to an agreed strike price.
EFAs are similar in nature to CfDs, except that they tend to last for
shorter time periods and are based on standard industry terms rather than
being individually negotiated. Long-term CfDs are in place to hedge a
portion of the electricity to be purchased through to 2009. Such CfDs
represent an annual commitment of approximately five terawatt hours (TWh),
declining on a linear basis to approximately two TWh by 2005 and finally
expiring in 2010. There are no similar long-term commitments under EFAs.
The impact of changes in the market value of these contracts, which serve
as hedges, is deferred until the related transaction is completed.
F-58
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. Derivative and Financial Instruments (continued)
The fair value of outstanding CfDs and EFAs at March 31, 1998 was (pound)29
million, calculated as the difference between the expected value of the
CfDs or EFAs, based on their known strike price and known volume, and the
current market value, based on an estimate of forward prices for the CfD or
EFA term. It should be noted that the market for the CfDs and EFAs has not
been liquid to date and there is no readily identifiable market through
which the majority of CfDs or EFAs could be realized through an exchange.
No easily definable forward price curve exists for the duration and shape
of the CfDs or EFAs that would be agreed generally.
Gas swaps and futures - In the gas retail business, Eastern sells fixed
price contracts to customers and supplies the customer through a portfolio
of gas purchase contracts and other wholesale contracts. The overall net
exposure of Eastern to the gas spot market is managed by using gas swaps
and futures.
Interest rate management - Interest rate swaps and forward rate agreements
are used by Eastern to convert between fixed rates and floating rates as
required. Gains and losses from interest rate swaps and forward rate
agreements are accrued over the contract period. The interest rate swaps
held by Eastern as at March 31, 1998 are comprised of two swaps to convert
(pound)100 million of the (pound)350 million 8.375% bonds due 2004 into
floating rate debt; (pound)35 million is based on LIBOR and (pound)65
million is based on LIBOR less 0.7625%.
Forward rate agreements totalling (pound)865 million for a maximum duration
of one year to swap floating rate deposits into fixed rates were
outstanding at March 31, 1998.
Foreign currency risk management - Eastern has exposure to foreign currency
movements and uses derivative financial instruments to manage this exposure
(principally investments in European countries). The instruments used are
forward purchase contracts and options. The policy with regard to any such
exposures is to match assets owned in foreign countries with borrowings in
that same currency. Where there are firm commitments to purchase goods in a
foreign currency then forward contracts or options are used to fix the
exchange rate. There were no material foreign exchange forward contracts
outstanding at March 31, 1998.
Concentrations and credit risk - Eastern's financial instruments that are
exposed to concentrations of credit risk consist primarily of cash
equivalents, trade receivables and derivative contracts.
Eastern only deposits cash with banks that have a rating in excess of AA or
invests in commercial paper from issuers with ratings of A1 or P1. Maximum
limits are set for each bank based on their ratings and also maximum limits
are set for each country.
Eastern's trade receivables result primarily from its gas and electricity
retail operations and reflect a broad customer base including industrial,
commercial and domestic customers.
Approximately 38 per cent by volume of all of Eastern's CfDs and EFAs in
the year ended March 31, 1998 were contracted with two primary
counterparties.
Credit risk relates to the risk of loss that Eastern would incur as a
result of non-performance by counterparties to their respective derivative
instruments. Eastern maintains credit policies with regard to its
counterparties that management believes significantly minimize overall
credit risk. Eastern generally does not obtain collateral to support the
agreements but establishes credit limits and monitors the financial
viability of counterparties and believes its credit risk is minimal on
these transactions. The extent of this exposure varies with the prevailing
interest and currency rates and was not material throughout the periods
presented.
F-59
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. Derivative and Financial Instruments (continued)
At March 31, 1998, no single bank was party to more than (pound)100 million
nominal value of such agreements. Eastern believes the risk of
nonperformance by counterparties is minimal.
Fair value of financial instruments
The carrying amounts and fair values of the material financial instruments
of Eastern are as follows:
<TABLE>
<CAPTION>
As at March 31, 1998
------------------------
Carrying Fair
amount value
-------- -----
((pound) million)
<S> <C> <C>
Assets
Other investments 42 42
Restricted cash investments 547 547
Cash and equivalents 714 714
Liabilities
Notes payable - banks 57 57
Short-term loans on accounts receivable 300 300
Total long-term debt, excluding capital leases 1,743 1,827
Other financial instruments - favorable/(unfavorable)
Interest rate swaps -- 11
Foreign exchange contracts -- (1)
Gas swaps -- 21
CfDs and EFAs -- 29
Financial guarantees and letters of credit -- (2)
</TABLE>
The following methods and assumptions were used to determine the above fair
values:
(i) The fair value of fixed asset investments is estimated based on quoted
market prices where available and other estimates;
(ii) The carrying amounts of current asset investments, short-term
deposits, cash and bank overdrafts, etc. approximate their fair values
because of the short maturity of these instruments;
(iii) The fair value of the investment bonds is based on their quoted
mid-market prices and excludes the value of the interest rate swaps;
(iv) The fair value of the interest rate swaps is based on the cancellation
value of each swap quoted by the relevant bank counterparty;
(v) The fair value of foreign exchange contracts is based upon valuations
provided by the counterparty;
(vi) The fair value of the gas swaps is based on the net present value of
discounted future cash flows in accordance with the underlying gas
forward curve;
(vii) The fair value of the CfDs and EFAs is based upon a discounted cash
flow analysis using an estimate of forward prices in the Pool;
(viii) The fair value of financial guarantees and letters of credit is
based upon fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations
with the counterparties at the reporting date.
F-60
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Subsequent Events
As of May 19, 1998, TXU Acquisitions Limited (TXU Acquisitions), a wholly
owned subsidiary of TXU Corp, acquired control of TEG. This business
combination was accounted for as a purchase. During the period between
February 5, 1998 and May 18, 1998, TXU Acquisitions had acquired a 22%
interest in TEG. Substantially all of TEG's continuing operations are
conducted through Eastern. The acquisition of TEG by TXU Acquisitions
resulted in the replacement of the five year committed revolving credit
facility, amounting to (pound)350 million, with revolving borrowing
facilities of (pound)700 million, of which (pound)250 million is a stand
alone facility for the exclusive use of Eastern and a revolving credit
facility under which the current holding company of Eastern may borrow up
to (pound)450 million for general corporate purposes.
F-61
<PAGE>
[LOGO] PRICEWATERHOUSECOOPERS
- --------------------------------------------------------------------------------
Report of Independent Accountants
---------------------------------
To the Board of Directors and Shareholders of Energy Group Overseas B.V.
In our opinion, the accompanying balance sheet and the related statements of
income, of comprehensive income, of common stock equity and of cash flows
present fairly, in all material respects, the financial position of Energy Group
Overseas B.V. at March 3l, 1998 and the results of its operations and its cash
flows for the period from formation (October 8, 1997) to March 31, 1998 and from
April 1, 1998 to May 18, 1998 in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of Overseas' management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards in the
United Kingdom which do not differ significantly with those in the United States
and which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers
London, England
April 26, 1999
PricewaterhouseCoopers is the successor partnership to the UK firms of Price
Waterhouse and Coopers & Lybrand. The principal place of business of
PricewaterhouseCoopers and its associate partnerships, and of Coopers & Lybrand,
is 1 Embankment Place, London WC2N 6NN. The principal place of business of Price
Waterhouse is Southwark Towers, 32 London Bridge Street, London SE1 9SY. Lists
of the partners' names are available for inspection at those places.
All partners in the associate partnerships are authorised to conduct business as
agents of, and all contracts for services to clients are with,
PricewaterhouseCoopers. PricewaterhouseCoopers is authorised by the Institute of
Chartered Accountants in England and Wales to carry on investment business.
F-62
<PAGE>
Energy Group Overseas B.V.
BALANCE SHEET
((pound) thousand)
<TABLE>
<CAPTION>
As of
March 31, 1998
--------------
<S> <C>
Current Assets:
Cash and cash equivalents 5
Interest receivable 10,049
Unamortized debt issue costs 2,552
Prepaid expenses 2
-------
12,608
-------
Long-term loan to Related Party Obligor 297,053
-------
Total assets 309,661
=======
Current Liabilities:
Interest payable 9,883
Corporation tax 55
Accrued expenses 1
-------
9,939
Long-term Debt:
Guaranteed Notes (net of unamortized discount of (pound)576) 296,477
Unearned income related to amortization of discount and debt issue costs 3,128
-------
299,605
-------
Common Stock Equity:
Common stock 13
Retained earnings 104
Accumulated other comprehensive income --
-------
117
-------
Total liabilities and common stock equity 309,661
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
Energy Group Overseas B.V.
STATEMENTS OF INCOME
((pound) thousand)
<TABLE>
<CAPTION>
Period from Period from
formation through April 1 through
March 31, 1998 May 18, 1998
-------------- ------------
<S> <C> <C>
Financial income/(charges)
Interest expense on Guaranteed Notes (10,099) (3,209)
Interest income from related party 10,268 3,263
Amortization of discount (13) (4)
Amortization of debt issue costs (48) (15)
Amortization income charged to Related Party Obligor 61 19
------- -------
169 54
------- -------
General and administrative expenses (6) (5)
------- -------
Profit before taxation 163 49
Tax expense (59) (18)
------- -------
Net income 104 31
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
Energy Group Overseas B.V.
STATEMENTS OF COMPREHENSIVE INCOME
((pound) thousand)
Period from Period from
formation through April 1 through
March 31, 1998 May 18, 1998
-------------- ------------
Net income 104 31
Other comprehensive income:
Cumulative translation adjustment -- 3
----- -----
Comprehensive income 104 34
===== =====
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
Energy Group Overseas B.V.
STATEMENTS OF COMMON STOCK EQUITY
((pound) thousand)
<TABLE>
<CAPTION>
Accumulated other
Retained comprehensive
Common stock earnings income
------------ -------- ------
<S> <C> <C> <C>
Balance at October 8, 1997 -- -- --
Stock (40,000 shares) issued 13 -- --
Net income for the period from formation through
March 31, 1998 -- 104 --
Cumulative translation adjustment -- -- --
------- ------- -------
Balance at March 31, 1998 13 104 --
======= ======= =======
Balance at April 1, 1998 13 104 --
Net income for the period from April 1 through -- 31 --
May 18, 1998
Cumulative translation adjustment -- -- 3
------- ------- -------
Balance at May 18, 1998 13 135 3
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
Energy Group Overseas B.V.
STATEMENTS OF CASH FLOWS
((pound) thousand)
<TABLE>
<CAPTION>
Period from Period from April
formation through 1 through
March 31, 1998 May 18, 1998
-------------- ------------
<S> <C> <C>
Cash flows - operating activities:
Net income 104 31
Change in interest receivable (10,268) (3,262)
Change in prepaid expenses (2) --
Change in interest payable 10,099 (8,064)
Change in corporation tax payable 59 18
Change in accrued expenses 1 4
--------- ---------
Total cash flow used by operating activities (7) (11,273)
--------- ---------
Cash flows - investing activities -- --
Cash flows - financing activities:
Issuance of common stock: 13 --
Proceeds from Guaranteed Note offering 305,765 --
Long term loan to Related Party Obligor (305,765) --
Proceeds on loan from Related Party Obligor -- 11,272
--------- ---------
Total cash flow from financing activities 13 11,272
--------- ---------
Effect of exchange rate changes on cash (1) --
--------- ---------
Net change in cash and cash equivalents 5 (1)
Cash and cash equivalents - beginning balance -- 5
--------- ---------
Cash and cash equivalents - ending balance 5 4
========= =========
Supplemental cash flow disclosures:
Cash paid for interest -- 11,272
Cash paid for income taxes -- --
</TABLE>
The accompanying notes are an integral part of these financial statements
F-67
<PAGE>
Energy Group Overseas B.V.
NOTES TO THE FINANCIAL STATEMENTS
1. Description of business and summary of significant accounting policies
General -- Energy Group Overseas B.V. (Overseas) is a private limited
liability company established in Amsterdam on October 8, 1997. Overseas, a
consolidated subsidiary of The Energy Group (TEG), issued on October 10,
1997 US$ 500 million aggregate principal amount of notes guaranteed by TEG
(Guaranteed Notes).
The Financial Statements have been prepared in conformity with accounting
principles generally accepted in the United States (US GAAP).
Foreign currencies -- All assets and liabilities expressed in currencies
other than US Dollars (US$), Overseas' functional currency, have been
translated into US Dollars at the rates of exchange approximating those at
the date of the transactions. Resulting exchange differences are recognized
in the profit and loss account. The financial statements have been
translated from US Dollars to British pounds sterling ((pound)) utilizing
the exchange rate prevailing at the period end for the balance sheet and at
the average rate for the period for all profit and loss accounts. Any
difference in the translation process has been recorded as accumulated
other comprehensive income in the common stock equity section of the
balance sheet.
Amortization of debt issue costs -- The discount and debt issue costs
relating to the issuance of the Guaranteed Notes have been deferred and are
being amortized on a straight line basis over the life of the debt, which
does not differ significantly from the interest method.
Use of estimates -- The preparation of Overseas' financial statements, in
conformity with US GAAP, requires management to make estimates and
assumptions about future events that affect the reporting and disclosure of
assets and liabilities at the balance sheet dates and the reported amounts
of revenue and expense during the period covered by the financial
statements. In the event estimates and/or assumptions prove to be different
from actual amounts, adjustments are made in subsequent periods to reflect
more current information.
Cash and cash equivalents -- Cash equivalents consist of highly liquid
investments, which are readily convertible into cash and have maturities of
three months or less.
Income taxes -- Deferred income taxes are determined under the liability
method. Deferred income taxes represent liabilities to be paid or assets to
be received in the future and reflect the tax consequences on future years
of temporary differences between the tax bases of assets and liabilities
and their financial reporting amounts. Future tax rate changes would affect
those deferred tax liabilities or assets in the period when the tax rate
change is enacted.
Future tax benefits, such as net operating loss carryforwards, are
recognized to the extent that realization of such benefits is more likely
than not.
Dividends -- Dutch law prescribes that no dividends can be declared until
all losses, if any, have been recovered.
2. Guaranteed Notes
On October 10, 1997, Overseas issued US$ 500 million aggregate principal
amount of Guaranteed Notes. The Guaranteed Notes were issued in two series;
US$ 200 million 7.375% Notes due 2017 and US$ 300 million Notes 7.50% due
2027. The Guaranteed Notes are unconditionally guaranteed by TEG. Interest
is payable semi-annually in arrears on April 15 and October 15 in each
year, beginning April 1998. No principal payments on either series are due
until the Guaranteed Notes are due.
F-68
<PAGE>
Energy Group Overseas B.V.
NOTES TO THE FINANCIAL STATEMENTS (continued)
3. Common stock equity
The authorized share capital of Overseas consists of 200,000 ordinary
shares of NLG 1 each. As at March 31, 1998, 40,000 shares ((pound)13,000)
were issued and fully paid up. All shares are held by a wholly owned
subsidiary of TEG.
4. Related party transactions
At March 31, 1998, Overseas had a long-term loan to a wholly-owned
subsidiary of TEG (Related Party Obligor) of (pound)297,053,000. The
long-term loan balance equals the principal amount of the Guaranteed Notes.
Overseas had interest receivable from the Related Party Obligor relating to
the long-term loan of (pound)10,049,000 at March 31, 1998. Interest income
of (pound)10,268,000 and (pound)3,263,000 for the periods ended March 31,
1998 and May 18, 1998, respectively, was attributable to interest earned on
the long-term loan to the Related Party Obligor. Additional funding in the
amount of (pound)11,272,000 was received from the Related Party Obligor in
April of 1998.
Overseas will at all times earn a net spread of 12.5 basis points between
the rate Overseas pays on the Guaranteed Notes and the rate Overseas
charges the Related Party Obligor.
Additionally, the Related Party Obligor has agreed to discharge and
indemnify Overseas for the costs incurred by Overseas in issuing the
Guaranteed Notes. The amortization charges shown in the statement of income
are directly offset by the amortization income charged to the Related Party
Obligor. The (pound)3,128,000 balance at March 31, 1998 represents the
remaining unamortized discount and debt issue costs which will be
recognized in the statement of income over the life of the Guaranteed
Notes.
5. Taxes
All profit before tax is taxed in The Netherlands.
A minimum taxable income, calculated as the 12.5 basis point spread between
interest income and interest expense, must be utilized for determination of
income tax expense if it exceeds Overseas' pre-tax income.
During the period from April 1, 1998 through May 18, 1998, additional tax
expense was incurred as the minimum taxable income exceeded actual pre-tax
income. Any benefit from additional tax expense relating to the minimum
taxable income can be carried forward for a three year period. Overseas has
provided for a full valuation reserve against the deferred tax asset of
(pound)2,000 at May 18, 1998 as it is more likely than not that the benefit
will not be recognized.
During the period ended March 31, 1998, the Dutch statutory rate for income
under NGL 100,000 was decreased by 1% from 36% for income earned through
December 31, 1997 to 35% for income earned on or after January 1, 1998.
There was no change in the statutory rate for income over NGL 100,000.
Period from Period from
formation April 1, 1998
through through
March 31, 1998 May 18, 1998
-------------- ------------
((pound) thousand)
Tax at Dutch statutory rate on pre-tax income 59 16
Movement on valuation allowance -- 2
------ ------
Tax expense 59 18
====== ======
F-69
<PAGE>
Energy Group Overseas B.V.
NOTES TO THE FINANCIAL STATEMENTS (continued)
6. Fair value of financial instruments
The carrying amount and fair value of the material financial instruments
used by Overseas are as follows:
As of March 31, 1998
-----------------------------
Carrying Fair
amount value
-------- -------
((pound) thousand)
Guaranteed Notes 296,477 306,388
Long-term loan to Related Party Obligor 297,053 306,981
The fair value of the Guaranteed Notes and the long-term loan to the
Related Party Obligor varies with market conditions and is estimated based
on trading levels at March 31, 1998.
The carrying amounts of all other assets and liabilities approximate their
fair values because of the short maturity of these instruments.
7. Subsequent events
On May 19, 1998 TXU Acquisitions Limited (TXU Acquisitions), a wholly-owned
subsidiary of Texas Utilities Company, now doing business as TXU Corp,
acquired control of TEG. On October 9, 1998, due to a downgrading of the
credit rating on the Guaranteed Notes, the interest rate on both series of
Guaranteed Notes increased by five basis points. Overseas will continue to
maintain its 12.5 basis point spread. In October 1998, in connection with a
restructuring of TEG and its subsidiaries, Overseas and its direct holding
company were sold to another wholly-owned subsidiary of TXU Acquisitions
and that subsidiary assumed the obligations of the Related Party Obligor
under the long-term intercompany loan. In addition, TXU Eastern Holdings
Limited, an indirect 90% holding company of TXU Acquisitions, guaranteed
the Guaranteed Notes.
F-70
<PAGE>
TXU Europe Limited and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEET (unaudited)
((pound) million)
As of
June 30, 1999
-------------
Assets
Property, plant and equipment, net 2,559
-----
Current assets
Cash and cash equivalents 578
Accounts receivable (net of allowance for uncollectible accounts) 307
Inventories 125
Other current assets 88
-----
Total current assets 1,098
Investments
Restricted cash 732
Other 279
-----
Total investments 1,011
-----
Deferred debits
Goodwill (net of accumulated amortization of (pound)94 million) 3,430
Prepayments for pensions 256
Other deferred debits 144
-----
Total deferred debits 3,830
-----
Total assets 8,498
=====
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-71
<PAGE>
TXU Europe Limited and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEET (unaudited)
((pound) million, except for number of shares and par value)
<TABLE>
<CAPTION>
As of
June 30, 1999
-------------
<S> <C>
Capitalization and liabilities
Capitalization
Common stock (3,000,000,000 shares at US$1 par and 100 deferred shares at
(pound)1 par authorized) 2,455,705,299 shares and 100 deferred shares
issued and outstanding 1,467
Retained earnings 152
Accumulated other comprehensive loss (14)
------
Total common stock equity 1,605
Minority interest 199
Long-term debt less amounts due currently 4,538
------
Total capitalization 6,342
------
Current liabilities
Notes payable - banks 252
Long-term debt due currently 378
Accounts payable 395
Taxes accrued 203
Other current liabilities 194
------
Total current liabilities 1,422
------
Deferred credits and other noncurrent liabilities
Deferred income taxes, net 355
Provision for unfavorable contracts 242
Other deferred credits and noncurrent liabilities 137
------
Total deferred credits and noncurrent liabilities 734
------
Commitments and contingencies (Note 4) --
Total capitalization and liabilities 8,498
------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-72
<PAGE>
TXU Europe Limited and Subsidiaries
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (unaudited)
((pound) million)
<TABLE>
<CAPTION>
Predecessor Successor
------------ -----------------------------
Period from Period from
January 1, formation Six months
1998 through through ended
May 18, 1998 June 30, 1998 June 30, 1999
------------ ------------- -------------
<S> <C> <C> <C>
Operating revenues 1,563 326 1,986
---------- ---------- ----------
Costs and expenses
Purchased power 743 141 864
Gas purchased for resale 281 59 447
Operation and maintenance 375 70 270
Depreciation and amortization 73 24 117
---------- ---------- ----------
Total operating expenses 1,472 294 1,698
---------- ---------- ----------
Operating income 91 32 288
Other income (expense) - net 1 13 (10)
---------- ---------- ----------
Income before interest, income taxes and minority
interest 92 45 278
Interest income 35 21 29
Interest expense, net of capitalized interest 76 44 166
---------- ---------- ----------
Income before income taxes and minority interest 51 22 141
Income tax expense 35 9 56
---------- ---------- ----------
Income before minority interest 16 13 85
Minority interest -- 3 9
---------- ---------- ----------
Net income 16 10 76
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-73
<PAGE>
TXU Europe Limited and Subsidiaries
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (unaudited)
((pound) million)
<TABLE>
<CAPTION>
Predecessor Successor
------------ ----------------------------
Period from Period from
January 1, formation Six months
1998 through through ended
May 18, 1998 June 30, 1998 June 30, 1999
------------ ------------- -------------
<S> <C> <C> <C>
Net income 16 10 76
Other comprehensive income
Unrealized loss on securities classified as
available for sale (4) (8) (6)
Cumulative translation adjustment -- -- --
-------- -------- --------
Comprehensive income 12 2 70
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-74
<PAGE>
TXU Europe Limited and Subsidiaries
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (unaudited)
((pound) million)
<TABLE>
<CAPTION>
Predecessor Successor
----------- ---------------------------------
Period from Period from
January 1, formation Six months
1998 through through ended
May 18, 1998 June 30, 1998 June 30, 1999
------------ ------------- -------------
<S> <C> <C> <C>
Cash flows - operating activities
Net income 16 10 76
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 73 24 117
Deferred income taxes (43) (44) 31
Net gain on sale of assets (1) -- --
Minority interest -- 3 9
Undistributed equity in earnings of TEG -- (2) --
Changes in operating assets and liabilities 109 126 180
Other -- -- (35)
--------- --------- ---------
Cash provided by operating activities 154 117 378
--------- --------- ---------
Cash flows - investing activities
Acquisition of TEG (net of cash acquired of $2,011) -- (1,432) --
Capital expenditures (112) (33) (124)
Investments (30) -- (60)
Other 3 -- 2
--------- --------- ---------
Cash used in investing activities (139) (1,465) (182)
--------- --------- ---------
Cash flows - financing activities
Net borrowings under the:
Senior notes -- -- 921
Term facility -- -- 750
Revolving credit facility -- -- 233
Acquisition facility -- 1,656 --
Interim facility -- 75 --
Other long-term debt 6 -- 109
Issuance of common stock to parent -- 1,467 --
Retirements of:
Acquisition facility -- -- (750)
TXU Corp note payable -- -- (682)
Other long-term debt (50) (64) (377)
Change in notes payable - banks 21 8 (280)
Receivable financing 150 -- --
Change in minority interest -- 166
Debt financing cost -- (36) (9)
Dividends paid (100) -- --
--------- --------- ---------
Cash provided by financing activities 27 3,272 (85)
--------- --------- ---------
Net change in cash and cash equivalents 42 1,924 111
--------- --------- ---------
Cash and cash equivalents - beginning balance 684 -- 467
--------- --------- ---------
Cash and cash equivalents - ending balance 726 1,924 578
========= ========= =========
Non-cash transactions:
Issuance of loan notes -- 85 --
Advances from TXU Corp -- 844 --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-75
<PAGE>
TXU Europe Limited and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Significant Accounting Policies
The condensed consolidated financial statements of TXU Europe Limited,
formerly known as TXU Eastern Holdings Limited (the Company), have been
prepared on the same basis as the audited financial statements included
elsewhere in this registration statement, and, in the opinion of the
Company's management, all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation of the results of operations
and financial position have been included herein.
The Company defers the effect of changes in the market value of derivative
financial instruments for contracts for differences and electricity forward
agreements, which are used to hedge firm commitments, to the period when
the related transaction is completed. In the event that an overall analysis
of the firm commitments being hedged indicates that the Company is in a net
loss position, a provision is made for these anticipated losses.
Transactions that are entered into that do not meet the criteria for hedge
accounting are marked to market on the balance sheet at the period end, and
the unrealized gain or loss is recognized in income for that period.
2. Long-term Debt
On May 13, 1999, a subsidiary of the Company issued US$1.5 billion
((pound)921 million) worth of Senior Notes in three tranches: US$350
million ((pound)215 million), 6.15% due May 15, 2002; US$650 million
((pound)399 million), 6.45% due May 15, 2005; and US$500 million
((pound)307 million), 6.75% due May 15, 2009. The proceeds of this issuance
were used to repay the note payable to TXU Corp and to reduce borrowings
under the Sterling Credit Agreement and for other corporate purposes.
Shortly thereafter, the Company entered into various interest rate and
currency swaps that in effect changed the interest rate on the borrowings
from fixed to variable based on LIBOR, and fixed the principal amount to be
repaid in sterling.
The fair value of the new Senior Notes was (pound)0.9 billion at June 30,
1999. The fair value of the interest rate swaps was (pound)21 million. The
average pay rate and the average receive rate on the related interest rate
swaps were 5.99% and 6.48%, respectively.
3. Lines of Credit and Other Credit Facilities
Lines of credit - The amended Sterling Credit Agreement provides for
borrowing of up to (pound)1.275 billion and has two facilities: a
(pound)750 million term facility which will terminate on March 2, 2003 and
a (pound)525 million revolving credit facility which has a (pound)200
million 364-day tranche (Tranche A) and a (pound)325 million tranche which
terminates March 2, 2003 (Tranche B). The Company and TXU Finance are the
only permitted borrowers under the amended Sterling Credit Agreement. The
amended Sterling Credit Agreement allows for borrowings at various interest
rates based on the prevailing rates in effect in the countries in which the
borrowings originate. As of June 30, 1999, (pound)750 million of borrowings
were outstanding under the term facility, and approximately (pound)173
million were outstanding under Tranche B. On May 18, 1999, $198 million in
letters of credit issued under the Sterling Credit Agreement/Revolving
Credit Facility matured and were not renewed. The amended Sterling Credit
Agreement is unsecured.
Eastern Electricity also has a separate revolving credit facility,
terminating March 2, 2003, for short-term borrowings of up to (pound)250
million to be used for Eastern Electricity's general corporate purposes.
There were no borrowings outstanding at June 30, 1999 under the Eastern
Electricity Revolving Credit Facility.
Promissory note program - The Company has a one year promissory note
program issued within the Czech Republic, which has been utilised to fund
its investment in SME and Teplarny Brno a.s. The note bears interest at an
annual rate determined on the date of issuance based on PRIBOR plus 0.7%
which was 13.89%. At June 30, 1999, (pound)57 million was outstanding under
the promissory note program.
Receivables Financing - Eastern has facilities with Citibank N.A. to
provide financing through trade accounts receivable whereby Eastern
Electricity may sell up to (pound)300 million of its electricity
receivables and, beginning June 11, 1999, TXU Finance (No. 2) Limited may
borrow up to an aggregate of (pound)275
F-76
<PAGE>
TXU Europe Limited and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. Lines of Credit and Other Credit Facilities (unaudited)
million, collateralized by additional receivables of Eastern Electricity,
through a short-term note issue arrangement. The program has an overall
program limit of (pound)550 million.
Through March 31, 1999, the electricity receivable financings were in the
form of short-term loans collateralized by Eastern's trade accounts
receivable. Subsequent to March 31, 1999, the program was restructured so
that a portion of the receivables are sold outright rather than being used
to collateralize short-term borrowings. Eastern Electricity continually
sells additional receivables to replace those collected. At June 30, 1999,
accounts receivable of Eastern were reduced by (pound)255 million to
reflect the sales of the receivables under the new program. An additional
(pound)45 million of receivables remain as collateral for short-term loans.
At June 30, 1999, TXU Finance (No. 2) Limited had borrowed (pound)150
million through the note issue arrangement. The borrowings by Eastern
Electricity and TXU Finance (No. 2) Limited bear interest at an annual rate
based on commercial paper rates plus 0.225%, which was 5.225% at June 30,
1999.
Letters of credit - At June 30, 1999, there were outstanding letters of
credit totalling (pound)78 million for which the Company would have
reimbursement obligations.
4. Contingencies
The Company is subject to business risks that are actively managed to limit
exposures.
In February, 1997 the official government representative of pensioners
(Pensions Ombudsman) made a 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 ESPS relating 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. These determinations were 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 pensions have now
appealed against this decision and judgement has now been received although
a final order is awaited. The appeal was allowed endorsing the Pensions
Ombudsman's determination that the corporation was not entitled to
unilaterally deal with any surplus. If a similar complaint were to be made
against Eastern in relation to its use of actuarial surplus in its section
of the ESPS, it would vigorously defend the action, ultimately through the
courts. However, if a determination were finally to be made against it and
upheld by the courts, Eastern could have a potential liability to repay to
its section of the ESPS an amount estimated by the Company to be up to
(pound)45 million (exclusive of any future applicable interest charges).
On May 19, 1998 a complaint was filed by Optimum Solutions Limited against
National Grid, Yorkshire Electricity Group plc, Eastern Electricity and
Logica Plc. Yorkshire Electricity and Eastern Electricity are both members
of the electricity trading market in England and Wales (the Pool). Optimum
Solutions Limited alleges breach of confidence in respect of information
supplied in the context of the development of the trading arrangements for
the 1998 liberalization of electricity supply in England and Wales, or
Trading Arrangements. Optimum Solutions Limited requests an unspecified
amount of damages relating to breach of contract, an unspecified amount of
equitable compensation for misuse of the confidential information and
return of material alleged to contain confidential information. It is
alleged that the Pool has made use of the confidential information in the
development of the Trading Arrangements and that Eastern Electricity made
use of it in using the system developed by the Pool for trading purposes.
The action against Eastern Electricity is being strenuously defended. The
Company cannot predict the outcome of this proceeding.
On January 25, 1999, the Hindustan Development Corporation issued
proceedings in the Arbitral Tribunal in Delhi, India against TEG claiming
damages of US$413 million for breach of contract following the termination
of a Joint Development Agreement dated March 20, 1997 relating to the
construction,
F-77
<PAGE>
TXU Europe Limited and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Contingencies (continued)
development and operation of a lignite based thermal power plant at
Barsingsar, Rajasthan. The Company is vigorously defending this claim. The
Company cannot predict the outcome of this proceeding.
In November 1998, five complaints were filed against subsidiaries of
Eastern by five of their former sales agencies. The agencies claim a total
of (pound)104 million arising from the summary termination for the claimed
fundamental breach of their respective contracts in April 1998. The five
agencies are claiming damages for failure to give reasonable notice for
compensation under the UK Commercial Agents Regulations 1994. These actions
are all being defended strenuously, and counterclaims have been filed. The
Company cannot predict the outcome of these claims and counterclaims.
General - In addition to the above, the Company and its subsidiaries are
involved in various legal and administrative proceedings arising in the
ordinary course of its business. The Company believes that all such
lawsuits and resulting claims would not have a material effect on its
financial position, results of operation or cash flows.
Financial Guarantees - TEG has guaranteed up to $110 million ((pound)70
million at June 30, 1999) of certain liabilities that may be incurred and
payable by the purchasers of the businesses sold in the Peabody Sale with
respect to the Peabody Holding Company Retirement Plan for Salaried
Employees, the Powder River Coal Company Retirement Plan and the Peabody
Coal UMWA Retirement Plan, subject to certain specified conditions.
TEG entered into various guarantees of obligations of affiliates of its
former subsidiary Citizens Power LLC, arising under power purchase
agreements and note purchase agreements in connection with various Citizens
Power energy restructuring projects, as well as various indemnity
agreements in connection with such projects. The Company and TEG continue
to be the guarantor or the indemnifying party, as the case may be, under
these various agreements. In connection with the acquisition, letters of
credit were issued under the Sterling Credit Facility in the amount of $198
million ((pound)125 million) to support certain debt financings associated
with these restructuring projects. The letters of credit matured in May
1999 and were not renewed.
As a consequence of a restructuring whereby a subsidiary of TXU
Acquisitions transferred Eastern to another wholly-owned subsidiary of TXU
Acquisitions, the Company and certain other affiliated UK subsidiaries of
TXU Corp may be required to make certain adjustments to the guarantees,
which the Directors of the Company do not currently expect to have a
material adverse impact on the Company.
F-78
<PAGE>
TXU Europe Limited and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Segments
<TABLE>
<CAPTION>
Period from January 1, 1998 Period from formation
through through Six months ended
May 18, 1998 June 30, 1998 June 30, 1999
-------------------------- -------------------------- --------------------------
Revenues Contribution Revenues Contribution Revenues Contribution
---------- ------------ ---------- ------------ ---------- ------------
((pound)million) ((pound)million) ((pound)million)
<S> <C> <C> <C> <C> <C> <C>
Energy retail 628 (26) 157 (4) 777 (37)
Energy management and generation 764 91 116 10 983 171
Networks 168 76 44 15 220 94
Other 3 (2) 9 3 6 2
Cost of capital elimination -- 50 -- 16 -- 69
Unallocated corporate costs -- (42) -- -- -- (48)
---------- ---------- ---------- ---------- ---------- ----------
Total (UK GAAP) 1,563 147 326 40 1,986 251
---------- ---------- ---------- ---------- ---------- ----------
Purchase accounting and US GAAP
adjustments -- (55) -- 5 -- 27
---------- ---------- ---------- ---------- ---------- ----------
Income before interest, income
taxes and minority interest -- 92 -- 45 -- 278
========== ========== ========== ========== ========== ==========
</TABLE>
As set out above, contribution is defined as operating profit and a
notional charge for the cost of capital.
6. Subsequent Events
The regulation of distribution and supply charges is currently subject to
review by the Office of Gas and Electricity Markets covering England, Wales
and Scotland (OFGEM). On August 12, 1999, OFGEM issued a draft report
proposing a range of substantial net revenue reductions for the
distribution businesses of all Regional Electric Companies in the UK. In
October 1999, OFGEM is expected to issue proposed price adjustments for the
electric supply businesses. The final OFGEM report is expected at the end
of November 1999 and both distribution and supply price adjustments are
expected to become effective April 1, 2000. The Company is analyzing the
draft proposal and cannot predict at this time either the final price
adjustments that will be applicable to Eastern or the ultimate impact of
such adjustments on the Company's financial position, results of operations
or cash flows.
In September 1999, Eastern announced that it was to form a joint venture
company with Pohjolan Voima Oy, Finland's second largest electricity
generator. The joint venture company will be owned 81% by Eastern and 19%
by Pohjolan Voima Oy. As part of the transaction the joint venture will
acquire approximately 600 MW of Pohjolan Voima Oy's thermal generating
capacity. Eastern will pay approximately (pound)200 million for its share
of the joint venture.
F-79
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited)
Unaudited Condensed Combined Pro Forma Statement of Income
For the Year ended December 31, 1998
As of May 19, 1998, TXU Acquisitions Limited (TXU Acquisitions), an
indirect wholly-owned subsidiary of Texas Utilities Company (now doing business
as and referred to herein as TXU Corp), acquired control of The Energy Group PLC
(now known as Energy Holdings (No. 3) Limited) (TEG). TXU Europe Limited
(formerly known as TXU Eastern Holdings Limited) (the Company), an indirect
wholly-owned subsidiary of TXU Corp, indirectly owns 90% of TXU Acquisitions,
and another indirect wholly-owned subsidiary of TXU Corp owns the remaining
10%.
Immediately prior to the purchase of TEG by TXU Acquisitions, subsidiaries
of TEG completed the sale of TEG's US and Australian coal businesses and US
energy marketing operations (Peabody Sale). The TEG businesses acquired,
exclusive of those operations sold in the Peabody Sale, are referred to as the
"TEG Businesses Acquired", and include Eastern Group plc (Eastern) and Energy
Group Overseas B.V., a finance subsidiary (Overseas).
The following unaudited condensed combined pro forma statement of income
for the year ended December 31, 1998 (the Pro Forma Statement of Income) has
been prepared from, and should be read in conjunction with, the historical
consolidated financial statements and notes thereto of the Company, Eastern and
Overseas included elsewhere in this prospectus. The Pro Forma Statement of
Income assumes that the acquisition of the TEG Businesses Acquired occurred
on January 1, 1998. The historical information included in the Pro Forma
Statement of Income has been prepared in accordance with US GAAP.
The acquisition of TEG by TXU Acquisitions was accounted for as a purchase.
The Pro Forma Statement of Income includes the effects of fair value and
purchase accounting adjustments.
The Pro Forma Statement of Income combines the unaudited historical
condensed statements of consolidated income of Eastern and Overseas for the
three months ended March 31, 1998 and the audited historical statements of
consolidated income (loss) of Eastern and Overseas for the period from April 1,
1998 to May 18, 1998 with the audited historical statement of consolidated
income of the Company for the period from formation to December 31, 1998 and
gives effect to the pro forma adjustments described in the Notes hereto. The pro
forma adjustments reflect estimates made by the Company and assumptions it
believes to be reasonable. The Pro Forma Statement of Income includes an
estimate of the financing charge as if the acquisition financing had been in
place for the whole period. The pro forma information has not taken into account
any significant changes in future operating activities that may occur as a
result of the acquisition.
P-1
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited)
The Unaudited Condensed Combined Pro Forma Statement of Income is provided
for illustrative purposes only and does not purport to represent what the actual
results of operations would have been if the purchase had occurred on January 1,
1998, nor is it necessarily indicative of future operating results.
<TABLE>
<CAPTION>
TEG Business Acquired The Company
--------------------------------- --------------------------------------------------
Historical Historical Pro Forma
--------------------------------- ------------ -------------------------------
Period from
Three Month Period from Formation to Year ended
ended April 1 to May December 31, Pro forma December 31,
March 31, 1998 18, 1998 1998 Adjustments 1998
-------------- -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues 1,100 425 2,165 0 3,690
Costs and expenses 996 436 1,851 (101)(a) 3,182
------ ------ ------ ------ ------
Operating income (loss) 104 (11) 314 101 508
Other income (deductions) 4 1 46 (20)(b) 31
Interest income 23 12 64 (24)(c) 75
Interest expense (60) (31) (269) (56)(d) (416)
------ ------ ------ ------ ------
Income (loss) before income
taxes 71 (29) 155 1 198
Income tax expense
(benefit) 30 (6) 67 -- 91
------ ------ ------ ------ ------
Income (loss) before
minority interest 41 (23) 88 1 107
Minority interest -- -- 11 2(e) 13
------ ------ ------ ------ ------
Net income (loss) 41 (23) 77 (1) 94
====== ====== ====== ====== ======
</TABLE>
See Notes to Unaudited Condensed Combined Pro Forma Statement of Income.
P-2
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited)
Notes to Unaudited Condensed Combined Pro Forma Statement of Income
The amounts for the TEG Businesses Acquired are comprised of the following:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998 Period from April 1 through May 18, 1998
------------------------------------------- ------------------------------------------
Eastern Overseas Other(1) Total Eastern Overseas Other(1) Total
------- -------- -------- ----- ------- -------- -------- -----
((pound) million)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues 1,100 -- -- 1,100 425 -- -- 425
Operating expenses 996 -- -- 996 436 -- -- 436
------ ------ ------ ------ ------ ------ ------ ------
Operating income
(loss) 104 -- -- 104 (11) -- -- (11)
Other income 4 -- -- 4 1 -- -- 1
Interest income 23 6 (6) 23 12 3 (3) 12
Interest expense (54) (6) -- (60) (28) (3) -- (31)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss)
before income taxes 77 -- (6) 71 (26) -- (3) (29)
Income tax expense
(benefit) 32 -- (2) 30 (5) -- (1) (6)
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) 45 -- (4) 41 (21) -- (2) (23)
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
(1) Other represents the elimination of intercompany interest income on a
long-term loan between Overseas and another subsidiary of TEG.
Summary of Pro Forma Adjustments:
(a) Costs and expenses
((pound) million)
(1) Unfavorable electricity and gas contracts (29)
(2) Fair value of leased assets (10)
(3) Leases (86)
(4) Goodwill amortization 24
------
Total (101)
(1) Represents reversal of operating expenses, primarily for electricity and gas
purchases, recorded by Eastern, to the extent that a liability for the present
value of unfavorable commitments, obligations and contracts is made in purchase
accounting.
(2) Represents impact of purchase accounting adjustments relating to the
fair value of leased assets.
(3) Represents impact of purchase accounting adjustments relating to the
establishment of long-term debt associated with payments, both fixed and those
considered virtually certain, under the lease terms ((pound)61 million) and
adjustment for the amortization of operating lease payments and capitalized
leases over the revised estimated economic life of power plants under
lease ((pound)25 million). Alternative operating methodologies
employed by TXU Corp extend the estimated economic life of the plants by ten
years.
(4) Goodwill recorded by the Company from the acquisition totals approximately
(pound)3.5 billion. Annual amortization over the 40-year life is (pound)88
million of which (pound)52 million was recorded during the period from May 19 to
December 31, 1998. The net pro forma amortization for the period to acquisition
is (pound)36 million which is (pound)24 million greater than amortization
recorded by Eastern of (pound)12 million.
P-3
<PAGE>
(b) Other income/deductions
((pound) million)
(1) Equity in net income of TEG (2)
(2) Earnings on portion of Peabody Sale
proceeds invested in tax efficient scheme (18)
-----
Total (20)
=====
(1) Represents reversal of equity in net income of TEG of(pound)2 million
recorded by the Company for its approximate 22% interest for the period March
through May 18, 1998.
(2) Represents reversal of earnings of (pound)18 million recorded by the Company
on the portion of the Peabody Sale proceeds invested in a short-term investment.
These proceeds have been used to reduce Acquisition debt for the entire period
presented in the pro forma statement of income.
((pound) million)
(c) Interest income (24)
=====
Represents reversal of interest earnings on the remaining Peabody Sale
proceeds invested in cash. These proceeds have been used to reduce Acquisition
debt for the entire period presented in the pro forma statement of income.
(d) Interest expense
((pound) million)
(1) Interest and fees on Acquisition debt (50)
(2) Interest on unfavorable commitments,
obligations and unfavorable contracts (8)
(3) Amortization of discount on fair value
of debt at acquisition 2
------
Total (56)
======
(1) The annual pro forma interest expense on debt issued in the
acquisition is (pound)120 million consisting of interest on the Acquisition
facility of (pound)55 million (calculated based on the fixed interest rate
of 7.8% paid by the Company pursuant to a related interest rate swap), on
the intercompany note to TXU Corp of (pound)59 million (calculated at the
actual fixed interest rate of 6.7%) and on loan notes of (pound)6 million
(calculated based upon an assumed interest rate of 7.2%). Interest on the
loan notes is paid at a variable rate based on LIBOR minus .5%. A 1/8%
variance of the interest rate on the loan notes would change the annual
interest by (pound)0.1 million. Pro forma annual amortization of financing
fees on the Acquisition debt is (pound)12 million. Interest and other
charges incurred for the period from formation to December 31, 1998 total
(pound)82 million. The net pro forma increase in interest expense is
(pound)50 million.
(2) Represents pro forma annual interest on the present value of
unfavorable commitments, obligations and unfavorable contracts of (pound)13
million, less (pound)12 million incurred for the period to
December 31, 1998 plus (pound)7 million on imputed interest for a capital
lease.
(3) Represents amortization of fair value adjustment to debt at
acquisition of (pound)2 million.
(e) Represents minority interest on net earnings of TEG Businesses Acquired and
pro forma adjustments.
The Company's total investment to acquire TEG was (pound)4,448 million.
P-4
<PAGE>
((pound) million)
The investment was funded as follows:
Borrowings repaid with cash from Peabody Sale received by TEG 1,314
prior to the Acquisition
Proceeds from common stock issued to TXU Corp 1,467
Borrowings under Acquisition facilities 700
Note issued to TXU Corp for TEG ordinary shares acquired by 882
TXU Corp in the Share Alternative
Loan notes 85
------
Total 4,448
======
TXU Corp issued 37,316,884 shares of TXU Corp common stock which TXU
Acquisitions offered to TEG shareholders as part of its Share Alternative.
105,117,980 of TEG ordinary shares outstanding were tendered by TEG shareholders
and exchanged for TXU Corp common stock. TXU Acquisitions acquired the shares of
TXU Corp common stock from TXU Corp by the issuance of an intercompany note for
(pound)882 million bearing interest at 6.7% per annum.
P-5
<PAGE>
REGISTERED OFFICE OF FUNDING
The Adelphi
1-11 John Adam Street
London
WC2N 6HT
REGISTERED OFFICE OF TXU EUROPE
The Adelphi
1-11 John Adam Street
London
WC2N 6HT
TRUSTEE, PAYING AGENT AND TRANSFER AGENT
The Bank of New York
101 Barclay Street
New York, New York 10286
LUXEMBOURG PAYING AGENT AND TRANSFER AGENT
Kredietbank SA Luxembourgeoise
43, Boulevard Royal L-2955
Luxembourg
BOOK-ENTRY DEPOSITARY
The Bank of New York
101 Barclay Street
New York, New York 10286
EXCHANGE AGENT
The Bank of New York
101 Barclay Street
New York, New York 10286
LEGAL ADVISORS
To the Issuer and the Guarantor as
to United States law
Thelen Reid & Priest LLP Worsham, Forsythe & Wooldridge, L.L.P.
40 West 57th Street 1601 Bryan Street
New York, New York 10019 Dallas, Texas 75201
To the Issuer and the Guarantor as
to English law
E.J. Lean Norton Rose
Eastern Group plc Kempson House
Wherstead Park Camomile Street
Ipswich, Suffolk London EC3A 7AN
IP9 2AQ
To the Holders
as to United States law
Winthrop, Stimson, Putnam & Roberts
One Battery Park Plaza
New York, New York 10004
AUDITORS
Deloitte & Touche
Hill House
1 Little New Street
London EC4A 3TR
LISTING AGENT
Kredietbank SA Luxembourgeoise
43, Boulevard Royal L-2955
Luxembourg
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. Indemnification of Directors and Officers.
Under English law, directors are entitled to an indemnity out of the assets
of the company for liabilities incurred by them in the proper management of the
company's business, other than for wrongful or unauthorized acts. However,
Section 310 Companies Act 1985 makes void any agreement by a company, whether
contained in a company's articles of association or elsewhere, to indemnify any
director or officer against, or hold him exempt from, any liability which would
otherwise attach to him as a consequence of any illegal act, negligence,
default, breach of duty or breach of trust of which he may be guilty in relation
to the company.
There are certain exceptions to that general rule:
(1) A company is not prevented from purchasing and maintaining insurance
for any director, officer or auditor against liability; and
(2) A company may indemnify any director, officer or auditor against any
liability incurred by him in successfully defending civil or criminal
proceedings or in successfully applying for judicial relief from
liability in the case of honest and reasonable conduct under the
Companies Act 1985 (i.e., actions under section 727 Companies Act
1985).
Indemnification with respect to (2) may be done by including Regulation 118 of
Table A in a company's articles. Regulation 118 states that:
"subject to the provisions of the Act but without prejudice to any
indemnity to which a director may otherwise be entitled, every director
or other officer or auditor of the company shall be indemnified out of
the assets of the company against any liability incurred by him in
defending any proceedings, whether civil or criminal in which judgment
is given in his favour or in which he is acquitted or in connection with
any application in which relief is granted to him by the court from
liability for negligence, default, breach of duty, or breach of trust in
relation to the affairs of the company."
Article 15 of the Articles of Association of TXU Eastern Funding Company
provides as follows:
"Every Director or other officer of the Company shall be indemnified out
of the assets of the Company against all losses or liabilities which he
may sustain or incur in or about the execution of the duties of his
office or otherwise in relation thereto, including any liability
incurred by him in defending any proceedings, whether civil or criminal,
in which judgment is given in his favour or in which he is acquitted or
in connection with any application under the Act in which relief is
granted to him by the Court, and no Director or other officer shall be
liable for any loss, damage or misfortune which may happen to or be
incurred by the Company in the execution of the duties of his office or
in relation thereto. This Regulation shall have effect only in so far as
its provisions are not avoided by Section 310 of the Companies Act 1985.
Regulation 118 in Table A shall not apply to the Company."
Article 11.1 of the New Articles of Association of TXU Europe Limited provides
as follows:
"Subject to the provisions of, and so far as may be consistent with, the
Statutes, but without prejudice to any indemnity to which a director may
be otherwise entitled, every director, auditor, secretary or other
officer of the company shall be entitled to be indemnified by the
company against all costs, charges, losses, expenses and liabilities
incurred by him in the execution and/or discharge of his duties and/or
the exercise of his powers and/or otherwise in relation to or in
connection with his duties, powers or office including (without
prejudice to the generality of the foregoing) any liability incurred by
him in defending any proceedings, civil or criminal, which relate to
anything done or omitted or alleged to have been done or omitted by
II-1
<PAGE>
him as an officer or employee of the company and in which judgment is
given in his favour (or the proceedings are otherwise disposed of
without any finding or admission of any material breach of duty on
his part) or in which he is acquitted or in connection with any
application under any statute for relief from liability in respect of
any such act or omission in which relief is granted to him by the
Court."
II-2
<PAGE>
ITEM 21. Exhibits.
PREVIOUSLY FILED*
----------------------
WITH FILE
EXHIBIT NUMBER AS EXHIBIT
- ------- --------- ----------
3(a) ** 3(a) - Memorandum of Association of TXU Eastern
Funding Company.
3(b) ** 3(b) - Articles of Association of TXU Eastern
Funding Company.
3(c) - Memorandum of Association of TXU
Europe Limited.
3(d) - New Articles of Association of TXU
Europe Limited.
4(a) ** 3(e) - Indenture (For Unsecured Debt Securities)
dated May 1, 1999.
4(b) ** 4(d) - Officer's Certificate establishing 6.15%
senior notes due May 15, 2002 and 6.15%
exchange senior notes due May 15, 2002,
with the forms of notes attached thereto.
4(c) ** 4(c) - Officer's Certificate establishing 6.45%
senior notes due May 15, 2005 and 6.45%
exchange senior notes due May 15, 2005,
with the forms of notes attached thereto.
4(d) ** 4(d) - Officer's Certificate establishing 6.75%
senior notes due May 15, 2009 and 6.75%
exchange senior notes due May 15, 2009
with the forms of notes attached thereto.
4(e) ** 4(e) - Registration Rights Agreement with
respect to the senior notes.
4(f) ** 4(f) - Deposit Agreement with respect to the
senior notes and the exchange senior
notes.
4(g) - Revised Form of Letter of Transmittal.
5(a) ** 5(a) - Opinion and Consent of E.J. Lean,
General Counsel to TXU Eastern Funding
Company and TXU Europe Limited.
5(b) ** 5(b) - Opinion and Consent of Worsham, Forsythe
& Wooldridge, L.L.P., United States
counsel to TXU Eastern Funding Company
and TXU Europe Limited.
5(c) ** 5(c) - Opinion and Consent of Thelen Reid
and and & Priest LLP, special United States
8(a) 8(a) counsel to TXU Eastern Funding Company
and TXU Europe Limited.
8(b) *** 8(b) - Opinion of Norton Rose, English legal
advisers to TXU Eastern Funding Company
and TXU Europe Limited.
II-3
<PAGE>
PREVIOUSLY FILED*
----------------------
WITH FILE
EXHIBIT NUMBER AS EXHIBIT
- ------- --------- ----------
10(a) 1-12833 10(a) - Facilities Agreement for
Form 10-Q (pound)1,275,000, Credit Facilities,
(Quarter ended dated March 24, 1999, among TXU Europe
March 31, 1999) Limited, TXU Finance (No. 2) Limited, TXU
Acquisitions Limited, Chase Manhattan
Bank plc, Lehman Brothers International
(Europe), Merrill Lynch Capital
Corporation and the other banks named
therein.
10(b) 1-12833 99(a) - Facility Agreement for
Form 10-Q (pound)250,000,000 Revolving Credit
(Quarter ended Facility, dated May 21, 1998, among
September 30, 1998) Eastern Electricity plc, and Chase
Manhattan plc, Lehman Brothers
International and Merrill Lynch Capital
Corporation as Joint Lead Arrangers, and
The Chase Manhattan Bank, Lehman
Commercial Paper Inc. and Merrill Lynch
Capital Corporation as Underwriters.
10(c) 333-8008 and 4.1 - Indenture, dated as of October 16, 1997,
333-8008-1 Energy Group Overseas B.V. (EGO), The
Energy Group PLC and The Bank of New
York, as Trustee.
10(d) 333-8008 and 4.2 - Form of 7.375% Series B Guaranteed note
333-8008-1 of EGO due 2017.
10(e) 333-8008 and 4.3 - Form of 7.500% Series B Guaranteed note
333-8008-1 of EGO due 2027.
10(f) 1-14576 3.10 - Deed of Assignment of Rents, dated as of
Form 20-F, dated October 28, 1996, among Eastern Merchant
January 27, 1997 Properties Limited (EMPL), Eastern Group
Finance Limited, Barclays Bank PLC (as
agent) and the banks listed therein.
10(f)-1 1-14576 3.12 - Guarantee and Indemnity Deed, dated as of
Form 20-F, dated October 28, 1996, among Eastern Group plc
January 27, 1997 Eastern Generation Limited, Eastern
Electricity plc, Barclays Bank PLC,
Barclays De Zoete Wedd Limited, and the
other banks listed therein.
10(f)-2 ***** 10(f)-2 - Amendment dated July 17, 1998 to the
Guarantee and Indemnity Deed, dated as of
October 28, 1996, among Eastern Group
plc, Eastern Generation Limited, Eastern
Electricity plc, Barclays Bank PLC,
Barclays De Zoete Wedd Limited, and the
other banks listed therein.
10(f)-3 ***** 10(f)-3 - Amendment dated March 11, 1999 to the
Guarantee and Indemnity Deed dated as of
October 28, 1996 (as amended and restated
on July 17, 1998), among Eastern Group
plc, Eastern Generation Limited, Eastern
Electricity, Barclays Bank PLC, Barclays
De Zoete Wedd Limited, and the other
banks listed therein.
II-4
<PAGE>
PREVIOUSLY FILED*
----------------------
WITH FILE
EXHIBIT NUMBER AS EXHIBIT
- ------- --------- ----------
10(g) 1-14576 3.11 - Standby Credit Facility Agreement, dated
Form 20-F, dated as of October 28, 1996, among EMPL and
January 27, 1997 Eastern Merchant Generation Limited
(EMGL) (as borrowers), Eastern Group plc
(Eastern) and Eastern Generation Limited
(EGL) (as guarantors), Eastern
Electricity plc (EE), The Industrial Bank
of Japan, Limited (as arranger and
agent), The Bank of Nova Scotia, the
Dai-ichi Kangyo Bank, Limited, The Royal
Bank of Scotland plc and Societe Generale
(as co-arrangers), and the financial
institutions listed therein.
10(g)-1 ***** 10(g)-1 - Supplemental Agreement dated July 17,
1998 to the Standby Credit Facility dated
October 28, 1996 among EMPL and EMGL (as
borrowers), Eastern and EGL (as
guarantors), EE, Barclays Capital and The
Royal Bank of Scotland plc (as
arrangers), The Bank of Nova Scotia,
Bayerische Landesbank Girozentrale, The
Dai-Ichi Kangyo Bank, Limited, Den Danske
Bank Aktieselskab, Nationsbank, N.A.,
Royal Bank of Canada Europe Limited, The
Toronto-Dominion Bank and Westdeutsche
Landesbank Girozentrale (as
co-arrangers), The Royal Bank of Scotland
plc (as agent), and the financial
institutions listed therein.
10(g)-2 ***** 10(g)-2 - Amendment dated March 11, 1999 to the
Supplemental Agreement dated July 17,
1998 to the Standby Credit Facility dated
October 28, 1996 among EMPL and EMGL (as
borrowers), Eastern and EGL (as
guarantors), EE, Barclays Capital and The
Royal Bank of Scotland plc (as
arrangers), The Bank of Nova Scotia,
Bayerische Landesbank Girozentrale, The
Dai-Ichi Kangyo Bank, Limited, Den Danske
Bank Aktieselskab, Nationsbank, N.A.,
Royal Bank of Canada Europe Limited, The
Toronto-Dominion Bank and Westdeutsche
Landesbank Girozentrale (as
co-arrangers), The Royal Bank of Scotland
plc (as agent), and the financial
institutions listed therein.
10(h) *** 10(h) - Pooling and Settlement Agreement dated 30
March 1990, as amended as of 15 April
1999, among Eastern Electricity plc,
National Grid Company plc and other
parties.
10(i) **** 10(i) - Master Connection and Use of System
Agreement dated as of 30 March 1990 among
the National Grid Company plc and its
users (including Eastern Electricity
plc).
10(j) **** 10(j) - Lease of land and premises known as West
Burton, Ironbridge and Rugeley B Power
Stations dated 27 June 1996 from National
Power PLC to Eastern Merchant Properties
Limited and Eastern Group PLC.
II-5
<PAGE>
PREVIOUSLY FILED*
----------------------
WITH FILE
EXHIBIT NUMBER AS EXHIBIT
- ------- --------- ----------
10(k) **** 10(k) - Sublease of land and premises known as
West Burton, Ironbridge and Rugeley B
Power Stations dated 27 June 1996 from
Eastern Merchant Properties Limited to
Eastern Merchant Generation Limited and
Eastern Group PLC.
10(l) **** 10(l) - Lease of commercial premises at High
Marnham, Newark, Nottinghamshire dated 2
July 1996 between PowerGen plc and
Eastern Merchant Properties Limited.
10(m) **** 10(m) - Underlease of commercial premises at High
Marnham, Newark, Nottinghamshire dated 2
July 1996 between Eastern Merchant
Properties Limited and Eastern Merchant
Generation Limited.
10(n) **** 10(n) - Lease of commercial premises at Drakelow,
Burton-on-Trent, Staffordshire dated 2
July 1996 between PowerGen plc and
Eastern Merchant Properties Limited.
10(o) **** 10(o) - Underlease of commercial premises at
Drakelow, Burton-on-Trent, Staffordshire
dated 2 July 1996 between Eastern
Merchant Properties Limited and Eastern
Merchant Generation Limited.
12(a) ** 12(a) - Computation of Ratio of Earnings to Fixed
Charges for TXU Europe Limited.
12(a)-1 ***** 12(a)-1 - Computation of Ratio of Earnings to Fixed
Charges for TXU Europe Limited
including the period from formation
through June 30,1998 and six months ended
June 30, 1999.
12(b) ** 12(b) - Computation of Ratio of Earnings to Fixed
Charges for Eastern Group plc and
Subsidiaries (US GAAP basis).
12(b)-1 ***** 12(b)-1 - Computation of Ratio of Earnings to Fixed
Charges for Eastern Group plc and
Subsidiaries (US GAAP basis) including
the period from January 1, 1998 through
May 18, 1998.
12(c) ** 12(c) - Computation of Ratio of Earnings to Fixed
Charges for Earnings to Fixed Charges for
Eastern Group plc and Subsidiaries (UK
GAAP basis).
21(a) ** 21(a) - List of subsidiaries of TXU Europe
Limited.
23(a) 23(a) - Consent of PricewaterhouseCoopers.
23(b) ** 23(b) - Consent of E.J. Lean (included in Opinion
filed as Exhibit 5(a) hereto).
23(c) ** 23(c) - Consent of Worsham, Forsythe & Wooldridge
L.L.P. (included in Opinion filed as
Exhibit 5(b) hereto).
23(d) ** 23(d) - Consent of Thelen Reid & Priest LLP
(included in Opinion filed as Exhibits
5(c) and 8(a) hereto).
II-6
<PAGE>
PREVIOUSLY FILED*
----------------------
WITH FILE
EXHIBIT NUMBER AS EXHIBIT
- ------- --------- ----------
23(e) ** 23(e) - Consent of Norton Rose.
24(a) ** 24(a) - Power of Attorney for TXU Eastern Funding
Company.
24(b) ** 24(b) - Power of Attorney for TXU Europe Limited
25(a) ** 25(a) - Statement on Form T-1 of The Bank of New
York relating to the Indenture (For
Unsecured Debt Securities) dated May 1,
1999.
27(a) *** 27(a) - Financial Data Schedule.
27(b) ***** 27(b) - Financial Data Schedule for the six
months ended June 30, 1999.
99(a) ** 99(a) - Form of Exchange Agent Agreement.
- -------------------
* Incorporated herein by reference.
** Previously filed with the original Registration Statement (Nos. 333-82307
and 333-82307-01).
*** Previously filed with Amendment No. 1 to the Registration Statement (Nos.
333-82307 and 333-82307-01).
**** Previously filed with Amendment No. 2 to the Registration Statement (Nos.
333-82307 and 333-82307-01).
***** Previously filed with Amendment No. 3 to the Registration Statement (Nos.
333-82307 and 333-82307-01).
II-7
<PAGE>
ITEM 22. Undertakings.
a. The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) under the Securities Act of
1933 if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
b. That, insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrants pursuant to the provisions described under Item 20
above, or otherwise, the registrants have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrants of expenses incurred or paid by a director, officer
or controlling person of the registrants in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrants will,
unless in the opinion of their counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by them is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
c. (i) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
d. To supply by means of a post-effective amendment all information
concerning a transaction and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-8
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF NEW YORK, STATE OF NEW YORK, ON THE 27TH OF OCTOBER, 1999.
TXU EASTERN FUNDING COMPANY
By: /s/ ROBERT J. REGER, JR.
-------------------------------
(ROBERT J. REGER, JR., ESQ.,
ATTORNEY-IN-FACT)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
---------- ----- ----
ERLE NYE* PRINCIPAL EXECUTIVE
- -------------------------------------- OFFICER AND DIRECTOR
(ERLE NYE)
MICHAEL J. MCNALLY* PRINCIPAL FINANCIAL
- -------------------------------------- OFFICER, PRINCIPAL
(MICHAEL J. MCNALLY) ACCOUNTING OFFICER AND
DIRECTOR
H. JARRELL GIBBS* DIRECTOR OCTOBER 27, 1999
- --------------------------------------
(H. JARRELL GIBBS)
ROBERT A. WOOLDRIDGE* DIRECTOR
- --------------------------------------
(ROBERT A. WOOLDRIDGE)
*BY: /S/ ROBERT J. REGER, JR. AUTHORIZED REPRESENTATIVE
---------------------------------- IN THE UNITED STATES AND
(ROBERT J. REGER, JR.) ATTORNEY-IN-FACT
II-9
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF NEW YORK, STATE OF NEW YORK, ON THE 27TH OF OCTOBER, 1999.
TXU EUROPE LIMITED
By: /S/ ROBERT J. REGER, JR.
----------------------------------
(ROBERT J. REGER, JR., ESQ.,
ATTORNEY-IN-FACT)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
---------- ----- ----
ERLE NYE* PRINCIPAL EXECUTIVE
- -------------------------------------- OFFICER AND DIRECTOR
(ERLE NYE)
MICHAEL J. MCNALLY* PRINCIPAL FINANCIAL
- -------------------------------------- OFFICER, PRINCIPAL
(MICHAEL J. MCNALLY) ACCOUNTING OFFICER AND
DIRECTOR
ROBERT A. WOOLDRIDGE* DIRECTOR
- --------------------------------------
(ROBERT A. WOOLDRIDGE)
DEREK CHARLES BONHAM* DIRECTOR
- --------------------------------------
(DEREK CHARLES BONHAM)
H. JARRELL GIBBS* DIRECTOR OCTOBER 27, 1999
- --------------------------------------
(H. JARRELL GIBBS)
PAUL COLIN MARSH* DIRECTOR
- --------------------------------------
(PAUL COLIN MARSH)
PHILIP GEORGE TURBERVILLE* DIRECTOR
- --------------------------------------
(PHILIP GEORGE TURBERVILLE)
JAMES WHELAN* DIRECTOR
- --------------------------------------
(JAMES WHELAN)
*BY: /S/ ROBERT J. REGER, JR. AUTHORIZED REPRESENTATIVE
---------------------------------- IN THE UNITED STATES AND
(ROBERT J. REGER, JR.) ATTORNEY-IN-FACT
II-10
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
3(c) - Memorandum of Association of TXU
Europe Limited.
3(d) - New Articles of Association of TXU
Europe Limited.
4(g) - Revised Form of Letter of Transmittal.
23(a) - Consent of PricewaterhouseCoopers.
THE COMPANIES ACT 1985
PRIVATE COMPANY LIMITED BY SHARES
MEMORANDUM OF ASSOCIATION
OF
TXU EUROPE LIMITED
------------------------------------------------------------------
1. The Company's name is *TXU Europe Limited.
2. The Company's registered office is to be situated in England
and Wales
3. The Company's objects are:
(a) (i) the object of the Company is to carry on business
as a general commercial company;
(ii) without prejudice to the generality of clause
3(a)(i) of this Memorandum of Association, and the
powers of the Company derived from Section 3A of
the Companies Act 1985 to 1989, the Company has
power to do all or any of the following objects or
any of them;
(b) to carry on any other trade or business whatever, which
can in the opinion of the Directors be advantageously
carried on in connection with or ancillary to any of
the businesses of the Company;
(c) to purchase, take on lease or in exchange, hire or
otherwise acquire and hold for any estate or interest
in any lands, building, easements, rights, privileges,
concessions, patents, patent rights licences, secret
processes, machinery, plant, stock-in-trade, and any
real or personal property of any kind necessary or
convenient for the purposes of or in connection with
the Company's business or any branch or department
thereof;
(d) to erect, construct, lay down, or enlarge, alter and
maintain any roads, railways, tramways, sidings,
bridges, reservoirs, shops, stores, factories,
buildings, works, plant and machinery necessary or
convenient for the Company's business, and to
contribute to or subsidise the erection, construction
and maintenance of any of the above.
---------------
* The name of the Company was changed from ERRORFREE LIMITED to
TU FINANCE (No. 1) LIMITED on 26 February 1998 by Special
Resolution passed on 25 February 1998, from TU FINANCE (No. 1)
LIMITED to TXU EASTERN HOLDINGS LIMITED on 17 December 1998 by
Special Resolution passed on 16 December 1998 and from TXU
EASTERN HOLDINGS LIMITED on 12 August 1999 by Special Resolution
passed on 6 August 1999.
<PAGE>
(e) to borrow or raise or secure the payment of money for
the purposes of or in connection with the Company's
business, and for the purposes of or in connection with
the borrowing or raising of money by the Company to
become a member of any building society;
(f) to mortgage and charge the undertaking and all or any
of the real and personal property and assets, present
or future, and all or any of the uncalled capital for
the time being of the Company and to issue at par or at
a premium or discount, and for such consideration and
with and subject to such rights, powers, privileges and
conditions as may be thought fit, debentures or
debenture stock, either permanent or redeemable or
repayable, and collaterally or further to secure any
securities of the Company by a trust deed or other
assurances;
(g) to issue and deposit any securities which the Company
has power to issue by way of mortgage, and also by way
of security for the performance of any contracts or
obligations of the Company or of its customers or other
persons or corporations having dealings with the
Company, or in whose businesses or undertakings the
Company is interested, whether directly or indirectly;
(h) to receive money on deposit or loan upon such terms as
the Company may approve, and to guarantee the
obligations and contracts of customers and others;
(i) to lend money to any company, firm or person and to
give all kinds of indemnities and either with or
without the Company receiving any consideration or
advantage, direct or indirect, for giving, any such
guarantee, to guarantee either by personal convenant or
by mortgaging or charging all or any part of the
undertaking property and assets present and future and
uncalled capital of the Company or by both such
methods, the performance of the obligations and the
payment of the capital or principal (together with any
premium) of and dividends or interest on any debenture
stocks, shares or other securities of any company, firm
or person and in particular (but without limiting the
generality of the foregoing) any company which is for
the time being the Company's holding or subsidiary
company as defined by Section 736 of the Companies Act
1985 or otherwise associated with the Company in
business and whether or not this Company receives
directly or indirectly any consideration or advantage
therefrom;
(j) to establish and maintain or procure the establishment
and maintenance of any non-contributory or contributory
pension or superannuation funds for the benefit of, and
give or procure the giving of donations, gratuities,
pensions, allowances, or emoluments to any persons who
are or were at any time in the employment or service of
the Company, or of any company which is for the time
being the Company's holding or subsidiary company as
defined by Section 736 of the Companies Act 1985 or
otherwise associated with the Company in business or
who are or were at the time directors or officers of
the Company or of any such other company as aforesaid,
and the wives, widows, families and dependents of any
such persons, and also to establish and subsidise or
subscribe to any institutions, associations, clubs or
fund calculated to be for the benefit of or to advance
the interests and well-being of the Company or of any
such other company as aforesaid, or of any such persons
as aforesaid, and to make payments for or towards the
insurance of any such persons as aforesaid, and to
subscribe or guarantee money for charitable or
benevolent objects or for any exhibition or for any
public, general or useful object; and to establish, set
up, support and maintain share purchase schemes or
profit-sharing schemes for the benefit of any employees
of the Company or of any company which is for the time
being the Company's holding or subsidiary company as
defined by Section 736 of the Companies Act 1985 and to
do any of the matters aforesaid; either alone or in
conjunction with any such other company as aforesaid;
(k) to draw, make, accept, endorse, negotiate, discount and
execute promissory notes, bills of exchange and other
negotiable instruments;
(l) to invest and deal with the moneys of the Company not
immediately required for the purposes of its business
in or upon such investments or securities and in any
such manner as may from time to time be determined;
(m) to pay for any property or rights acquired by the
Company, either in cash or in fully or partly paid-up
shares, with or without preferred or deferred or
special rights or restrictions in respect of dividend,
repayment of capital, voting or otherwise, or by any
securities which the Company has power to issue, or
partly in one mode and partly in another, and generally
on such terms as the Company may determine;
(n) to accept payment for any property or rights sold or
otherwise disposed of or dealt with by the Company,
either in cash, by installments or otherwise, or in
fully or partly paid-up shares of any company or
corporation, with or without deferred or preferred or
special rights or restrictions in respect of dividend,
repayment of capital, voting or otherwise, or in
debentures or mortgage debentures or debenture stock,
mortgages or other securities of any company or
corporation, or partly in one mode and partly in
another, and generally on such terms as the Company may
determine, and to hold, dispose of or otherwise deal
with any shares, stock or securities so acquired;
(o) to enter into any partnership or joint-purse
arrangement or arrangement for sharing profits union of
interests or co-operation with any company, firm or
person carrying on or proposing to carry on any
business within the objects of this Company and to
acquire and hold, sell, deal with or dispose of shares,
stock or securities of and to subsidise or otherwise
assist any such company;
(p) to establish or promote or concur in establishing or
promoting any other company whose objects shall include
the acquisition and taking over of all or any of the
assets and liabilities of the Company or the promotion
of which shall be in any manner calculated to advance
directly or indirectly the objects or interests of this
Company, and to acquire and hold or dispose of shares,
stock or securities and guarantee the payment of
dividends, interest or capital of any shares, stock or
securities issued by or any other obligations of any
such company;
(q) to purchase or otherwise acquire and undertake all or
any part of the business, property, assets, liabilities
and transactions of any person, firm or company
carrying on any business which this Company is
authorised to carry on;
(r) to sell, improve, manage, develop, turn to account,
exchange, let on rent, royalty, share of profits or
otherwise, grant licences, easements and other rights
in or over and in any other manner deal with or dispose
of the undertaking and all or any of the property and
assets for the time being of the Company for such
consideration as the Company may think fit;
(s) to amalgamate with any other company whose objects are
or include objects similar to those of this Company,
whether by sale or purchase (for fully or partly paid-
up shares or otherwise) of the undertaking, subject to
the liabilities of this or any such other company as
aforesaid, with or without winding up, or by sale or
purchase (for fully or partly paid-up shares or
otherwise) of all or a controlling interest in the
shares or stock of this or any such other company as
aforesaid, or by partnership, or any arrangement of the
nature of partnership, or in any other manner;
(t) to subscribe or guarantee money for or organise or
assist any national, local, charitable, benevolent,
public, general or useful object, or for any exhibition
or for any purpose which may be considered likely
directly or indirectly to further the objects of the
Company or the interest of its members;
(u) to distribute among the members in specie any property
of the Company, or any proceeds of sale and disposal of
any property of the Company, but so that no
distribution amounting to a reduction of capital be
made except with the sanction (if any) for the time
being required by law;
(v) to give such financial assistance, directly or
indirectly, for the purpose of the acquisition of
shares in the Company or the Company's holding company
as defined by Section 736 of the Companies Act 1985 or
for the purpose of reducing or discharging any
liability incurred by any person for the purpose of the
acquisition of shares in the Company or the Company's
holding company as defined by Section 736 of the
Companies Act 1985 as may be lawful;
(w) to do all or any of the above things in any part of the
world, and either as principals, agents, trustees,
contractors or otherwise, and either alone or in
conjunction with others, and either by or through
agents, trustees, subcontractors or otherwise;
(x) to do all such things as are incidental or conducive to
the above objects or any of the them.
And it is hereby declared that the objects of the Company as
specified in each of the foregoing paragraphs of this
clause (except only if and so far as otherwise expressly
provided in any paragraphs) shall be separate and distinct
objects of the Company and shall not be in any way limited
by reference to any other paragraph or the name of the
Company.
4 The liability of the members is limited.
5 The Company's share capital is *L100 divided into 100
Deferred Shares of L1 each and US$3,000,000,000
divided into 3,000,000,000 Ordinary Shares of US$1 each.
---------------
* The Share Capital of the Company was increased from L1,000
to L2,000,000,000 by Ordinary Resolution passed 26 February
1998.
By Special Resolution passed on 22 May 1998, the authorised
share capital of the Company was changed to L100 and
US$3,000,000,000 by the cancellation of 1,999,999,900
Ordinary Shares of L1 each in the authorised but unissued
share capital, by the creation of 3,000,000,000 new Ordinary
Shares of US$1 and by the conversion of 100 issued Ordinary
Shares of L1 each into 100 Deferred Shares of L1 each.
<PAGE>
WE, the several persons whose names, addresses and descriptions
are subscribed are desirous of being formed into a Company in
pursuance of this Memorandum of Association and we respectively
agree to take the number of shares in the capital of the Company
set opposite our respective names.
-------------------------------------------------------------------
NAMES, ADDRESSES AND NUMBER OF SHARES
DESCRIPTIONS OF SUBSCRIBERS TAKEN BY EACH SUBSCRIBER
-------------------------------------------------------------------
LUCIENE JAMES LIMITED One
83 Leonard Street
London EC2A 4QS
Limited Company
THE COMPANY REGISTRATION AGENTS One
LIMITED
83 Leonard Street
London EC2A 4QS
Limited Company
-------------------------------------------------------------------
DATED 29 January 1998
WITNESS to the above signatures:-
FREDERICK PAUL CURTIS
8 Moreton Road South
Luton LU2 0JL
Company Registration Agent
THE COMPANIES ACT 1985
_________________________
COMPANY LIMITED BY SHARES
__________________________
NEW
ARTICLES OF ASSOCIATION
of
TXU EUROPE LIMITED*
Registered in England - No. 3505836
(Adopted by Special Resolution passed on 22 May 1998)
1 PRELIMINARY
-----------
1.1 In these Articles:
"THE ACT" means the Companies Act 1985 (as amended)
"TABLE A" means Table A in the Companies (Tables A to
F) Regulations 1985 as amended by the Companies (Tables
A to F) (Amendment) Regulations 1985. Reference to
regulations are to regulations in Table A.
* The name of the Company was changed from ERRORFREE LIMITED TO
TU FINANCE (No. 1) LIMITED on 26 February 1998 by Special
Resolution passed on 25 February 1998, from TU FINANCE (No. 1)
LIMITED to TXU EASTERN HOLDINGS LIMITED on 17 December 1998 by
Special Resolution passed on 16 December 1998 and from TXU
EASTERN HOLDINGS LIMITED on 12 August 1999 by Special Resolution
passed on 6 August 1999.
<PAGE>
"THE STATUTES" means the Act and any statutory
modification or re-enactment thereof for the time being
in force and every other Act for the time being in
force concerning companies and affecting the company.
1.2 Subject as hereinafter provided, the regulations
contained in Table A shall apply to the company.
1.3 Regulations 69, 73 to 78 inclusive, 101 and 118 shall
not apply to the company, but the Articles hereinafter
contained and the remaining regulations of Table A,
subject to the modifications hereinafter expressed,
shall constitute the regulations of the company.
2 SHARE CAPITAL
-------------
2.1 The share capital of the company at the date of the
adoption of these Articles is US$3,000,000,000
denominated in US dollars divided into 3,000,000,000
Ordinary Shares of US$1 each and L100 denominated in
sterling divided into 100 Deferred Shares of L1 each.
2.2 The following rights and restrictions shall be attached
to the Deferred Shares:
(a) As regards income
The holders of the Deferred Shares shall not be
entitled to receive any dividend out of the
profits of the company available for distribution
and resolved to be distributed in respect of any
financial year or any other income or right to
participate therein.
(b) As regards capital
On a distribution of assets on a winding-up or
other return of capital (otherwise than on
conversion or redemption or purchase by the
company of any of its shares) the holders of the
Deferred Shares shall be entitled to receive the
amount paid up on their shares after there shall
have been distributed (in cash or specie) to the
holders of the Ordinary Shares the amount of
L100,000,000 in respect of each Ordinary Share
held by them respectively. For this purpose
distributions in currency other than sterling
shall be treated as converted into sterling, and
the value for any distribution in specie shall be
ascertained in sterling, in each case in such
manner as the directors or the company in general
meeting may approve. The Deferred Shares shall
not entitle the holders thereof to any further or
other right of participation in the assets of the
company.
(c) As regards voting
The holders of Deferred Shares shall not be
entitled to receive notice of or to attend (either
personally or by proxy) any general meeting of the
company or to vote (either personally or by proxy)
on any resolution to be proposed thereat.
(d) Variation
The rights attached to the Deferred Shares shall
not be deemed to be varied or abrogated by the
creation or issue of any new shares ranking in
priority to or pari passu with or subsequent to
such shares.
(e) Repurchase
Notwithstanding any other provision of these
Articles, the company shall have the power and
authority at any time to purchase all or any of
the Deferred Shares for an aggregate consideration
of L1.
2.3 Subject to the provisions of Articles 2.4 and 2.5 and to
any directions which may be given by the company in
general meeting, the directors may generally and
unconditionally exercise the power of the company
to allot relevant securities (within the meaning of
section 80(2) of the Act) and without prejudice to the
generality of the foregoing any shares unissued at
the date of adoption of these Articles and any shares
hereafter created shall be under the control of the
directors, who may allot, grant options over or otherwise
dispose of the same to such persons (including the
directors themselves) on such terms and at such times as
they may think proper, provided that no shares shall be
issued at a discount.
2.4 The maximum nominal amount of share capital which or in
respect of which the directors may allot, grant options
or subscription or conversion rights, create, deal or
otherwise dispose of in accordance with this Article
shall be US$3,000,000,000 or such other amount as shall be
authorised by the company in general meeting.
2.5 The authority conferred on the directors by Articles
2.3 and 2.4 shall expire on the day preceding, the fifth
anniversary of the date of adoption of these Articles.
2.6 Pursuant to section 95(l) of the Act the directors may allot
equity securities (within the meaning of section 94 of the
Act) pursuant to the authority in Articles 2.3 and 2.4 as
if section 89(l) of the Act did not apply to the allotment.
3 GENERAL MEETINGS
----------------
3.1 Regulation 37 shall be modified by:
(a) the substitution of the words "four weeks" for the
words "eight weeks"; and
(b) the deletion of the second sentence thereof and by
the addition at the end of the regulation of the
following sentence: "The holder of a majority of
the issued Ordinary Shares shall be entitled at
any time to call a general meeting".
3.2 For all purposes of these Articles apart from the
company has only one member, a general meeting of the
company or of the holders of any class of its shares
shall be valid and effective for all purposes if one
person being a duly authorised representative of two or
more corporations each of which is a member entitled to
vote upon the business to be transacted is present.
Regulation 40 of Table A shall be modified accordingly.
If, and for so long as, the company has only one
member, that member or the proxy for that member or,
where that member is a corporation, its duly authorised
representative shall be a quorum at any general
meeting of the company or of the holders of any class
of shares. Regulation 40 of Table A shall be modified
accordingly.
3.3 A resolution in writing in accordance with regulation
53 shall be deemed to have been duly executed on behalf
of a corporation if signed by one of its directors or
its secretary. In the case of a share held by joint
holders the signature of any one of them on behalf of
all such joint holders shall be sufficient for the
purposes of that regulation. The directors shall cause
a record of each resolution in writing, and of the
signatures to it, to be entered in a book in the same
way as minutes of proceedings of a general meeting of
the company and to be signed by a director or the
secretary of the company.
3.4 A proxy shall be entitled to vote on a show of hands
and regulation 54 shall be modified accordingly.
3.5 The instrument appointing a proxy and (if required by
the directors) any authority under which it is executed
or a copy of the authority, certified notarially or in
some other manner approved by the directors, may be
delivered to the office (or to such other place or to
such person as may be specified or agreed by the
directors) before the time for holding the meeting or
adjourned meeting at which the person named in the
instrument proposes to act or, in the case of a poll
taken subsequently to the date of the meeting or
adjourned meeting, before the time appointed for the
taking of the poll, and an instrument of proxy which is
not so delivered shall be invalid. The directors may
at their discretion treat a faxed or other machine made
copy of an instrument appointing a proxy as such an
instrument for the purpose of this article. Regulation
62 of Table A shall not apply.
4 POWERS AND DUTIES OF DIRECTORS
------------------------------
4.1 Subject to the provisions of the Statutes, a director
may be interested directly or indirectly in any
contract or arrangement or in any proposed contract or
arrangement with the company or with any other company
in which the company may be interested and he may hold
and be remunerated in respect of any office or place of
profit (other than the office of auditor of the company
or any subsidiary thereof) under the company or any
such other company and he or any firm of which he is a
member may act in a professional capacity for the
company or any such other company and be remunerated
therefor. Notwithstanding his interest a director may
vote on any matter in which he is interested and be
included for the purpose of a quorum at any meeting at
which the same is considered and he may retain for his
own benefit all profits and advantages accruing to him.
Regulations 94 and 95 shall be modified accordingly.
5 APPOINTMENT, REMOVAL AND DISQUALIFICATION OF DIRECTORS
------------------------------------------------------
5.1 Without prejudice to the powers of the company under
section 303 of the Act to remove a director by Ordinary
Resolution, the holder or holders for the time being of
more than one half of the issued Ordinary Shares of the
company shall have the power from time to time and at
any time to appoint any person or persons as a director
or directors and to remove from office any director
howsoever appointed. Any such appointment or removal
shall be effected by an instrument in writing signed by
the member or members making the same or (in the case
of a member being a corporation) signed on its behalf
by one of its directors or its secretary and shall take
effect upon lodgment at the registered office of the
company.
5.2 The office of a director shall be vacated if he is
removed from office under Article 5.1. Regulation 81
shall be modified accordingly.
5.3 Unless and until otherwise determined by the company by
Ordinary Resolution, either generally or in any
particular case, no director shall vacate or be
required to vacate his office as a director on or by
reason of his attaining or having attained the age of
70, and any person proposed to be appointed a director
shall be capable of being appointed as a director
notwithstanding that he has attained the age of 70, and
no special notice need be given of any resolution for
the appointment as a director of a person who shall
have attained the age of 70, and it shall not be
necessary to give to the members notice of the age of
any director or person proposed to be appointed as
such.
5.4 Regulation 88 shall be modified by the deletion of the
third sentence thereof.
6 ROTATION OF DIRECTORS
---------------------
6.1 The directors shall not be liable to retire by
rotation, and accordingly the second and third
sentences of regulation 79 shall be deleted.
7 ALTERNATE DIRECTORS
-------------------
7.1 Any director (other than an alternate director) may
appoint any other director, or any other person who is
willing to act, to be an alternate director and may
remove from office an alternate director so appointed
by him. Regulation 65 of Table A shall not apply.
7.2 Any appointment or removal of an alternate director
under Table A shall be delivered at the registered
office of the company.
7.3 If his appointor is for the time being absent from the
United Kingdom or otherwise not available the signature
of an alternate director to any resolution in writing
of the directors shall be as effective as the signature
of his appointor. An alternate director shall be
deemed to be a director for the purpose of signing
instruments pursuant to Article 10. Save as aforesaid,
an alternate director shall not have power to act as a
director nor shall he be deemed to be a director for
the purposes of these Articles.
7.4 An alternate director shall be entitled to contract and
be interested in and benefit from contracts or
arrangements with the company and to be repaid expenses
and to be indemnified to the same extent mutatis
mutandis as if he were a director, but he shall not be
entitled to receive from the company in respect of his
appointment as alternate director any remuneration,
except only such part (if any) of the remuneration
otherwise payable to his appointor as such appointor
may by notice in writing to the company from time to
time direct.
8 PROCEEDINGS OF DIRECTORS
------------------------
8.1 Any director or member of a committee of the directors
may participate in a meeting of the directors or such
committee by means of conference telephone or similar
communications equipment whereby all persons
participating in the meeting can hear each other and
participation in a meeting in this manner shall be
deemed to constitute presence in person at such
meeting.
8.2 The following sentence shall be inserted after the
first sentence of regulation 72: "Any committee shall
have power unless the directors direct otherwise to co-
opt as a member or members of the committee any person
or persons although not being a director of the
company."
8.3 For a signed resolution under regulation 93 to be
effective it shall not be necessary for it to be signed
by a director who is prohibited by the Articles or by
law from voting thereon. Regulation 93 shall be
modified accordingly.
8.4 The directors may delegate any of their powers (with
power to sub-delegate) to committees consisting of such
person or persons (whether directors or not) as they
think fit. Regulation 72 of Table A shall be modified
accordingly and references in Table A to a committee of
directors or to a director as a member of such a
committee shall include a committee established under
this article or such person or persons.
9 THE SEAL
--------
9.1 If the company has a seal, it shall only be used with
the authority of the directors or a committee of the
directors. The directors may determine who shall sign
any instrument to which the seal is affixed and unless
otherwise so determined it shall be signed by a
director and by the secretary or second director. The
obligation under regulation 6 relating to the sealing
of share certificates shall apply only if the company
has a seal.
9.2 If the company has a common seal, the company may also
have an official seal for use abroad under the
provisions of the Act, where and as the directors shall
determine, and the company may by writing under the
common seal appoint any agents or agent, committees or
committee abroad to be the duly authorised agents of
the company, for the purpose of affixing and using such
official seal, and may impose such restrictions on the
use thereof as may be thought fit. Wherever in these
Articles reference is made to the common seal of the
company, the reference shall, when and so far as may be
applicable, be deemed to include any such official seal
as aforesaid.
10 NOTICES
-------
10.1 Every director of the company shall be entitled to
receive notices of general meetings (at his usual
address or such other address as he may notify to the
company) in addition to the persons so entitled under
the Statutes. The words "but otherwise no such member
shall be entitled to receive any notice from the
Company" in the last sentence of regulation 112 shall
be deleted.
10.2 Any notice required by these Articles to be given by
the company may be given by any visible form on paper,
including telex, facsimile and electronic mail, and a
notice communicated by such forms of immediate
transmission shall be deemed to be given at the time it
is transmitted to the person to whom it is addressed.
Regulations 111 and 112 shall be modified accordingly.
10.3 In the first sentence of regulation 112 the words "(or
at such other address, whether within or outside the
United Kingdom, as he may supply to the company for
that purpose)" shall be inserted after "registered
address".
10.4 A notice posted to an address outside the United
Kingdom shall be deemed, unless the contrary is proved,
to be given at the expiration of 7 days after the
envelope containing it was posted and regulation 115
shall be amended accordingly.
10.5 Regulation 116 shall be modified by the substitution of
the words "the address, if any, whether within or
outside the United Kingdom" for the words "the address,
if any, within the United Kingdom" in the first
sentence thereof.
11 INDEMNITY
---------
11.1 Subject to the provisions of, and so far as may be
consistent with, the Statutes, but without prejudice to
any indemnity to which a director may be otherwise
entitled, every director, auditor, secretary or other
officer of the company shall be entitled to be
indemnified by the company against all costs, charges,
losses, expenses and liabilities incurred by him in the
execution and/or discharge of his duties and/or the
exercise of his powers and/or otherwise in relation to
or in connection with his duties, powers or office
including (without prejudice to the generality of the
foregoing) any liability incurred by him in defending
any proceedings, civil or criminal, which relate to
anything done or omitted or alleged to have been done
or omitted by him as an officer or employee of the
company and in which judgment is given in his favour
(or the proceedings are otherwise disposed of without
any finding or admission of any material breach of duty
on his part) or in which he is acquitted or in
connection with any application under any statute for
relief from liability in respect of any such act or
omission in which relief is granted to him by the
Court.
Exhibit 4(g)
LETTER OF TRANSMITTAL
OFFER TO EXCHANGE ANY OR ALL OF ITS
6.15% SENIOR NOTES DUE MAY 15, 2002,
FOR
6.15% EXCHANGE SENIOR NOTES DUE MAY 15, 2002
6.45% SENIOR NOTES DUE MAY 15, 2005
FOR
6.45% EXCHANGE SENIOR NOTES DUE MAY 15, 2005
AND
6.75% SENIOR NOTES DUE MAY 15, 2009
FOR
6.75% EXCHANGE SENIOR NOTES DUE MAY 15, 2009
OF
TXU EASTERN FUNDING COMPANY
GUARANTEED BY TXU EASTERN HOLDINGS LIMITED
---------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON ________, 1999 UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS
MAY BE WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE
EXPIRATION DATE.
---------------------------------------------------------------------
Information about the Exchange Offer can be obtained from:
The Bank of New York, Exchange Agent at
101 Barclay Street, 7E
New York, New York 10286
Attention: Reorganization Section,
Gertrude Jean Pierre
or from a Securities Intermediary
All Tenders of Senior Notes should be delivered according to the
instructions of the tenderer's Securities Intermediary and this Letter of
Transmittal.
The instructions accompanying this Letter of Transmittal should be read
carefully before this Letter of Transmittal is completed.
The undersigned acknowledges that he or she has received and reviewed the
Prospectus dated _____, 1999 (the "Prospectus") of TXU Eastern Funding Company
(the "Issuer") and TXU Eastern Holdings Limited (the "Guarantor") and this
Letter of Transmittal (the "Letter of Transmittal"), which together constitute
the offer (the "Exchange Offer") by the Issuer and the Guarantor to exchange (i)
any and all of the Issuer's outstanding $350,000,000 principal amount of 6.15%
Senior Notes due May 15, 2002 ("6.15% Senior Notes") for an equal principal
amount of its 6.15% Exchange Senior Notes due May 15, 2002 ("6.15% Exchange
Notes"), (ii) any and all of the Issuer's outstanding $650,000,000 principal
amount of 6.45% Senior Notes due May 15, 2005 ("6.45% Senior Notes") for an
equal principal amount of its 6.45% Exchange Senior Notes due May 15, 2005
("6.45% Exchange Notes") and (iii) any and all of the Issuer's outstanding
$500,000,000 principal amount of 6.75% Senior Notes due May 15, 2009 ("6.75%
Senior Notes") for an equal principal amount of its 6.75% Exchange Senior Notes
due May 15, 2009 ("6.75% Exchange Notes"). Hereinafter the 6.15% Exchange Notes,
the 6.45% Exchange Notes and the 6.75% Exchange Notes are referred to together
as the New Notes, and the 6.15% Senior Notes, the 6.45% Senior Notes and the
6.75% Senior Notes are referred to together as the Old Notes. In this Letter of
Transmittal, references to the Old Notes or to any series of the Old Notes and
to the New Notes or to any series of the New Notes will mean beneficial
interests in the book-entry interests that The Depository Trust Company ("DTC")
has in such notes, and references to owners shall be to owners of those
beneficial interests. The global notes representing the New Notes have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a Registration Statement of which the Prospectus is a part. Old
Notes may be tendered only in the principal amount of $10,000 and integral
multiples of $1,000 in excess thereof. Other capitalized terms used but not
defined herein have the meanings given to them in the Prospectus.
An Agent's Message (as defined below) shall be used for tenders of Old
Notes to be made by book-entry transfer into the account of The Bank of New
York, as Exchange Agent (the "Exchange Agent"), at DTC (the "Book-Entry Transfer
Facility") pursuant to the procedures set forth in the EXCHANGE
OFFER--"Book-Entry Transfer" section of the Prospectus. Confirmation of the
book-entry tender of Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility (a "Book-Entry Confirmation") must be received by
the Exchange Agent on or prior to the Expiration Date. See Instruction 1.
Delivery of documents to the Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent.
The term "Agent's Message" means a message, transmitted by the Book-Entry
Transfer Facility and received by the Exchange Agent and forming a part of a
Book-Entry Confirmation, which states that such Book- Entry Transfer Facility
has received an express acknowledgment from the participant in such Book-Entry
Facility tendering the Old Notes which are the subject of such Book-Entry
Confirmation, that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal and that the Issuer and the Guarantor may
enforce such agreement against such participant.
The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer. Owners who wish to tender their Old Notes must so
indicate as instructed by their Securities Intermediaries.
<PAGE>
COMPLETE IF REQUESTED BY YOUR SECURITIES INTERMEDIARY
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING THESE BOXES
- --------------------------------------------------------------------------------
DESCRIPTION OF 6.15% SENIOR NOTES
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
TENDERED
(MUST BE IN
NAMES AND ADDRESS(ES) OF AGGREGATE THE AMOUNT OF $10,000 OR
OWNER(S) PRINCIPAL MULTIPLES OF
(PLEASE FILL IN, IF BLANK) AMOUNT $1,000 IN EXCESS THEREOF)*
- -------------------------------------------------------------------------------
------------------------------------------------
------------------------------------------------
------------------------------------------------
------------------------------------------------
------------------------------------------------
------------------------------------------------
TOTAL
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* Unless indicated in the column labeled "Principal Amount Tendered," any
tendering owner of 6.15% Senior Notes will be deemed to have tendered the
entire aggregate principal amount represented by the column labeled
"Aggregate Principal Amount."
If the space provided above is inadequate, list the principal amounts on a
separate signed schedule and affix the list to this Letter of Transmittal.
The minimum permitted tender is $10,000 in principal amount of 6.15% Senior
Notes. All other tenders must be in integral multiples of $1,000 in excess
of $10,000.
- --------------------------------------------------------------------------------
|_| CHECK HERE IF 6.15% SENIOR NOTES ARE BEING TENDERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND COMPLETE
THE FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS (AS HEREINAFTER DEFINED)
ONLY):
Name of Tendering Institution______________________________________________
DTC Book-Entry Account Number______________________________________________
Transaction Code Number____________________________________________________
<PAGE>
- --------------------------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS TO SECURITIES INTERMEDIARY
(See Instructions 4, 5 and 6)
To be completed ONLY if 6.15% Senior Notes tendered by book-entry which are not
exchanged are to be returned by credit to an account maintained at The
Depository Trust Company ("DTC") other than the account from which they were
tendered.
Credit 6.15% Senior Notes not exchanged and tendered by book-entry to the DTC
account set forth below:
___________________________
DTC Account Number
Name____________________________________________________________________________
(Please Print)
Address_________________________________________________________________________
________________________________________________________________________________
(Include Zip Code)
________________________________________________________________________________
(Tax Identification or Social Security No.)
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
DESCRIPTION OF 6.45% SENIOR NOTES
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
TENDERED
(MUST BE IN THE
AMOUNT OF $10,000
OR
NAMES AND ADDRESS(ES) OF AGGREGATE MULTIPLES OF
OWNER(S) PRINCIPAL $1,000 IN EXCESS
(PLEASE FILL IN, IF BLANK) AMOUNT THEREOF)*
- --------------------------------------------------------------------------------
---------------------------------------------
---------------------------------------------
---------------------------------------------
---------------------------------------------
---------------------------------------------
---------------------------------------------
TOTAL
- --------------------------------------------------------------------------------
* Unless indicated in the column labeled "Principal Amount Tendered," any
tendering owner of 6.45% Senior Notes will be deemed to have tendered the
entire aggregate principal amount represented by the column labeled
"Aggregate Principal Amount."
If the space provided above is inadequate, list the principal amounts on a
separate signed schedule and affix the list to this Letter of Transmittal.
The minimum permitted tender is $10,000 in principal amount of 6.45% Senior
Notes due. All other tenders must be in integral multiples of $1,000 in
excess of $10,000.
- --------------------------------------------------------------------------------
|_| CHECK HERE IF 6.45% SENIOR NOTES ARE BEING TENDERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND COMPLETE
THE FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS (AS HEREINAFTER DEFINED)
ONLY):
Name of Tendering Institution______________________________________________
DTC Book-Entry Account Number______________________________________________
Transaction Code Number____________________________________________________
<PAGE>
- --------------------------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS TO SECURITIES INTERMEDIARY
(See Instructions 4, 5 and 6)
To be completed ONLY if 6.45% Senior Notes tendered by book-entry which are not
exchanged are to be returned by credit to an account maintained at The
Depository Trust Company ("DTC") other than the account from which they were
tendered.
Credit 6.45% Senior Notes not exchanged and tendered by book-entry to the DTC
account set forth below:
___________________________
DTC Account Number
Name____________________________________________________________________________
(Please Print)
Address_________________________________________________________________________
________________________________________________________________________________
(Include Zip Code)
________________________________________________________________________________
(Tax Identification or Social Security No.)
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
DESCRIPTION OF 6.75% SENIOR NOTES
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
TENDERED
(MUST BE IN THE
AMOUNT OF $10,000
OR
NAMES AND ADDRESS(ES) OF AGGREGATE MULTIPLES OF
OWNER(S) PRINCIPAL $1,000 IN EXCESS
(PLEASE FILL IN, IF BLANK) AMOUNT THEREOF)*
- -------------------------------------------------------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
TOTAL
- -------------------------------------------------------------------------------
* Unless indicated in the column labeled "Principal Amount Tendered," any
tendering owner of 6.75% Senior Notes will be deemed to have tendered the
entire aggregate principal amount represented by the column labeled
"Aggregate Principal Amount."
If the space provided above is inadequate, list the principal amounts on a
separate signed schedule and affix the list to this Letter of Transmittal.
The minimum permitted tender is $10,000 in principal amount of 6.75% Senior
Notes due. All other tenders must be in integral multiples of $1,000 in
excess of $10,000.
- --------------------------------------------------------------------------------
|_| CHECK HERE IF 6.75% SENIOR NOTES ARE BEING TENDERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND COMPLETE
THE FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS (AS HEREINAFTER DEFINED)
ONLY):
Name of Tendering Institution______________________________________________
DTC Book-Entry Account Number______________________________________________
Transaction Code Number____________________________________________________
<PAGE>
- --------------------------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS TO SECURITIES INTERMEDIARY
(See Instructions 4, 5 and 6)
To be completed ONLY if 6.75% Senior Notes tendered by book-entry which are not
exchanged are to be returned by credit to an account maintained at The
Depository Trust Company ("DTC") other than the account from which they were
tendered.
Credit 6.75% Senior Notes not exchanged and tendered by book-entry to the DTC
account set forth below:
___________________________
DTC Account Number
Name____________________________________________________________________________
(Please Print)
Address_________________________________________________________________________
________________________________________________________________________________
(Include Zip Code)
________________________________________________________________________________
(Tax Identification or Social Security No.)
- --------------------------------------------------------------------------------
<PAGE>
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the undersigned
hereby instructs its Securities Intermediary to tender to the Issuer and the
Guarantor through its account at DTC the principal amount of Old Notes indicated
above. Subject to and effective upon the acceptance for exchange of the
principal amount of Old Notes tendered in accordance with this Letter of
Transmittal, the undersigned sells, assigns and transfers to, or upon the order
of, the Issuer all right, title and interest in and to the Old Notes tendered
hereby. The undersigned hereby irrevocably constitutes and appoints the Exchange
Agent its agent and attorney-in-fact (with full knowledge that the Exchange
Agent also acts as the agent of the Issuer and the Guarantor) with respect to
the tendered Old Notes with full power of substitution to transfer ownership of
such Old Notes on the account books maintained by DTC to the Issuer and the
Guarantor, deliver all accompanying evidences of transfer and authenticity to,
or upon the order of, the Issuer and the Guarantor and receive all benefits and
otherwise exercise all rights in Old Notes, all in accordance with the terms of
the Exchange Offer. The power of attorney granted in this paragraph shall be
deemed to be irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that it has full power and
authority to tender, sell, assign and transfer the Old Notes tendered hereby and
that the Issuer will acquire good and unencumbered title thereto, free and clear
of all liens, restrictions, charges and encumbrances and not subject to any
adverse claim, when the same are acquired by the Issuer. The undersigned hereby
further represents that (i) any New Notes acquired in exchange for Old Notes
tendered hereby will have been acquired in the ordinary course of business of
the person receiving such New Notes, whether or not that person is the
undersigned, (ii) neither the undersigned nor any such other person is engaging
in or intends to engage in a distribution of the New Notes, (iii) neither the
owner nor any such other person has an arrangement or understanding with any
person to participate in the distribution of such New Notes and (iv) neither the
owner nor any such other person is an "affiliate," as defined in Rule 405 under
the Securities Act, of the Issuer or the Guarantor.
The undersigned also acknowledges that this Exchange Offer is being made in
reliance upon interpretations contained in letters issued to third parties by
the staff of the Securities and Exchange Commission (the "SEC") that the New
Notes issued in exchange for the Old Notes pursuant to the Exchange Offer may be
offered for resale, resold and otherwise transferred by owners thereof (other
than any such owner that is an "affiliate" of the Issuer or the Guarantor within
the meaning of Rule 405 under the Securities Act), without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Notes are acquired in the ordinary course of such owners' business
and such owners are not engaging in and do not intend to engage in a
distribution of the New Notes and have no arrangement or understanding with any
person to participate in a distribution of such New Notes. If the undersigned is
not a broker-dealer, the undersigned represents that it is not engaged in, and
does not intend to engage in, a distribution of New Notes. If the undersigned is
a broker-dealer that will receive New Notes for its own account in exchange for
Old Notes that were acquired as a result of market-making activities or other
trading activities, it acknowledges that it will deliver a prospectus in
connection with any resale of such New Notes; however, by so acknowledging and
by delivering a prospectus, the undersigned will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. Any such
broker-dealer may use the Prospectus, as amended or supplemented, in connection
with any resale of such New Notes.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Issuer and the Guarantor to be
necessary or desirable to complete the assignment, transfer and purchase of the
Old Notes tendered hereby.
If any Old Notes tendered in book-entry form are not accepted for exchange
pursuant to the Exchange Offer for any reason, such unaccepted Old Notes will be
returned by credit to the tendering account or to a different account as may be
indicated herein under "Special Issuance Instructions" as promptly as
practicable after the Expiration Date. The undersigned recognizes that "Special
Issuance Instructions" to transfer any Old Notes from the name of the owner
thereof are instructions to his Securities Intermediary and the Issuer and the
Guarantor have no obligations with respect thereto.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
<PAGE>
The undersigned acknowledges that for purposes of the Exchange Offer, the
Issuer and the Guarantor shall be deemed to have accepted validly tendered Old
Notes when, as and if the Issuer and the Guarantor have given oral or written
notice thereof to the Exchange Agent.
The undersigned has read and agrees to all the terms of the Exchange Offer.
The undersigned understands that tenders of Old Notes pursuant to the procedures
described under the caption EXCHANGE OFFER--"Procedures for Tendering" in the
Prospectus and in the instructions hereto will constitute a binding agreement
between the undersigned and the Issuer and the Guarantor upon the terms and
subject to the conditions of the Exchange Offer.
<PAGE>
PLEASE SIGN HERE ON INSTRUCTIONS OF SECURITIES INTERMEDIARY
X ___________________________ ____________________
Date
X ___________________________ ____________________
Signature(s) of Owner(s) Date
or Authorized Signatory
Area Code and Telephone Number:____________________
The above lines must be signed by owner(s) using this Letter of Transmittal
to instruct his or her Securities Intermediary. If signature is by trustee,
executor, administrator, guardian, attorney-in-fact, officer of a corporation or
other person acting in a fiduciary or representative capacity, then such person
must (i) set forth his or her full title below and (ii) unless waived by the
Securities Intermediary, submit evidence satisfactory to the Securities
Intermediary of such person's authority so to act. See Instruction 4 regarding
the completion of this Letter of Transmittal, printed below.
Name(s):________________________________________________________________________
________________________________________________________________________________
(Please Print)
Capacity:_______________________________________________________________________
Address:________________________________________________________________________
________________________________________________________________________
(Include Zip Code)
Signature(s) Guaranteed by an Eligible Institution (as
hereinafter defined): (If required by Instruction 4)
______________________________________________________________
(Name of Eligible Institution Guaranteeing Signatures)
By____________________________________________________________
(Authorized Signature)
____________________________________________________________
(Printed Name)
____________________________________________________________
(Title)
Dated:____________________, 1999
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OLD NOTES. A confirmation of
a book-entry tender (a "Book-Entry Confirmation") of the Old Notes described in
this Letter of Transmittal must be received by the Exchange Agent at its address
set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date.
The method of delivery of this Letter of Transmittal to an owner's Securities
Intermediary is at the election and risk of the owner; and delivery of a
Book-Entry Confirmation will be deemed made only when actually received or
confirmed by the Exchange Agent. In all cases, sufficient time should be allowed
to assure delivery to the Exchange Agent before the Expiration Date. No Letter
of Transmittal should be sent to the Issuer.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Issuer and the Guarantor in their sole discretion,
which determination will be final and binding. The Issuer and the Guarantor
reserve the absolute right to reject any and all Old Notes of either series not
properly tendered or any Old Notes the Issuer's and the Guarantor's acceptance
of which would, in the opinion of counsel for the Issuer and the Guarantor, be
unlawful. The Issuer and the Guarantor also reserve the right to waive any
irregularities or conditions of tender as to particular Old Notes. The Issuer's
and the Guarantor's interpretation of the terms and conditions of the Exchange
Offer (including the instructions in this Letter of Transmittal) shall be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Issuer and the Guarantor shall determine. Neither the Issuer, the Guarantor, the
Exchange Agent nor any other person shall be under any duty to give notification
of defects or irregularities with respect to tenders of Old Notes, nor shall any
of them incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the Exchange
Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by credit to the
tendering account, unless otherwise provided in this Letter of Transmittal, as
soon as practicable following the Expiration Date.
2. TENDER BY OWNER. Any owner of Old Notes who wishes to tender should
execute and deliver this Letter of Transmittal or otherwise instruct his or her
Securities Intermediary to tender his Old Notes for exchange.
3. PARTIAL TENDERS. Tenders of Old Notes will be accepted only in the
principal amount of $10,000 and integral multiples of $1,000. If less than the
entire principal amount of any owner's Old Notes is tendered, the tendering
owner should fill in the principal amount tendered in the third column of the
box entitled "Description of 6.15% Senior Notes," "Description of 6.45% Senior
Notes" or "Description of 6.75% Senior Notes" above, as the case may be.
4. SIGNATURES ON THE LETTER OF TRANSMITTAL. If this Letter of Transmittal
(or facsimile hereof) or any Old Notes or assignments are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, or officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Issuer and
the Guarantor, evidence satisfactory to the Issuer and the Guarantor of their
authority so to act must be submitted with this Letter of Transmittal.
Except as otherwise provided below, all signatures on this Letter of
Transmittal must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Securities Exchange Act of 1934 (an "Eligible Institution").
Signatures on this Letter of Transmittal need not be guaranteed if such Old
Notes are tendered for the account of an Eligible Institution.
5. SPECIAL ISSUANCE INSTRUCTIONS. Tendering owners of Old Notes should
indicate, in the applicable box or boxes, the name and address to which New
Notes or substitute Old Notes for principal amounts not tendered or not accepted
for exchange are to be credited, if different from the name and address of the
person signing this Letter of Transmittal. In the case of issuance in a
different name, the taxpayer identification or social security number of the
person named must also be indicated.
6. TRANSFER TAXES. The Issuer and the Guarantor will pay all transfer
taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange
Offer. If a transfer tax is imposed for any reason other than the exchange of
Old Notes pursuant to the Exchange Offer, then the amount of any such transfer
taxes (whether imposed on the owner or on any other persons) will be payable by
the tendering owner. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with this Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering owner.
7. WAIVER OF CONDITIONS. The Issuer and the Guarantor reserve the absolute
right to amend, waive or modify specified conditions in the Exchange Offer in
the case of any Old Notes tendered.
8. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for
assistance and requests for additional copies of the Prospectus or this Letter
of Transmittal may be directed to the Exchange Agent at the address specified in
the Prospectus. Owners may also contact their broker, dealer, commercial bank,
trust company, nominee or other Securities Intermediary for assistance
concerning the Exchange Offer.
9. IMPORTANT TAX INFORMATION. Owners who are US taxpayers and who have not
previously furnished a taxpayer identification number to the Paying Agent for
the Old Notes, should furnish such information to the Exchange Agent on
Substitute Form W-9. A copy of such form may be obtained from the Exchange
Agent.
(DO NOT WRITE IN SPACE BELOW)
=====================================
OLD NOTES OLD NOTES
TENDERED ACCEPTED
-------------------------------------
-------------------------------------
=====================================
Delivery Prepared by_____________ Checked By_____________ Date_____________
<PAGE>
GUARANTEE
The undersigned, a member of a registered national securities exchange, or
a member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an officer or correspondent in the
United States, hereby guarantees that timely confirmation of the book-entry
transfer of such Old Notes into the Exchange Agent's account at Depository Trust
Company pursuant to the procedures set forth in the EXCHANGE OFFER--"Guaranteed
Delivery Procedures" section of the Prospectus, together with a properly
completed and duly executed Letter of Transmittal (or a manually signed
facsimile thereof) with any required signature guarantee and any other documents
required by the Letter of Transmittal, will be received by the Exchange Agent at
the address set forth above, no later than five New York Stock Exchange trading
days after the Expiration Date.
_______________________________________ ______________________________
Name of Firm Authorized Signature
_______________________________________ ______________________________
Address Title
_______________________________________
Zip Code Name:_________________________
(Please Type or Print)
Area Code and Tel. No._________________ Dated:________________________
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in this Registration Statement on
Form S-4 of TXU Eastern Funding Company and TXU Europe Limited
(formerly known as TXU Eastern Holdings Limited) and Subsidiaries
of our reports (i) dated June 30, 1999 relating to the financial
statements of TXU Europe Limited (formerly known as TXU Eastern
Holdings Limited) and Subsidiaries; (ii) dated April 26, 1999
relating to the financial statements of Eastern Group plc; and
(iii) dated April 26, 1999 relating to the financial statements
of Energy Group Overseas BV, which appear in such Registration
Statement. We also consent to the references to us under the
headings "Independent Accountants" and "Selected Financial
Data" in such Registration Statement.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
London, England
October 26, 1999
