SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
- OR -
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001 - 15709
TXU Europe Limited
Incorporated under the I.R.S.Employer Identification
Laws of England and Wales No. 98-0188080
The Adelphi, 1-11 John Adam Street, London, England WC2N 6HT
011-44-207-879-8081
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __x__ No ____
Common Stock outstanding at August 10, 2000 - 2,455,705,299 shares,
at US$1 par value, and 100 deferred shares, at pounds 1
par value.
<PAGE>
TABLE OF CONTENTS
Part I. Financial Information Page
----
Item 1. Financial Statements
Condensed Statements of Consolidated Income -
Three and Six Months Ended June 30, 2000 and 1999 ...... 2
Condensed Statements of Consolidated Comprehensive
Income - Three and Six Months Ended
June 30, 2000 and 1999 .................................. 3
Condensed Statements of Consolidated Cash Flows -
Six Months Ended June 30, 2000 and 1999 .................. 4
Condensed Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999 ...................... 5
Notes to Financial Statements ............................ 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............ 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ........................................ 21
Part II. Other Information
Item 1. Legal Proceedings ........................................ 21
Item 6. Exhibits and Reports on Form 8-K ......................... 21
Signatures ........................................................... 22
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
-------- -------- -------- -------
(pounds million) (pounds million)
<S> <C> <C> <C> <C>
OPERATING REVENUES .................... 821 813 1,972 1,986
------- -------- -------- -------
OPERATING EXPENSES
Energy purchased for resale and
fuel consumed ....................... 581 513 1,344 1,311
Operation and maintenance ............. 96 123 273 270
Depreciation and other amortization ... 41 36 84 75
Goodwill amortization ................. 22 21 44 42
------- -------- -------- -------
Total operating expenses .............. 740 693 1,745 1,698
------- -------- -------- -------
OPERATING INCOME ...................... 81 120 227 288
OTHER INCOME (DEDUCTIONS) - NET ....... 43 (11) 44 (10)
------- -------- -------- -------
INCOME BEFORE INTEREST, INCOME
TAXES, DISTRIBUTIONS AND
MINORITY INTEREST ................... 124 109 271 278
INTEREST INCOME ....................... 16 14 32 29
INTEREST EXPENSE ...................... 91 79 180 166
------- -------- -------- -------
INCOME BEFORE INCOME TAXES, DISTRIBUTIONS
AND MINORITY INTEREST................ 49 44 123 141
INCOME TAX EXPENSE .................... 16 26 49 56
------- -------- -------- -------
INCOME BEFORE DISTRIBUTIONS AND
MINORITY INTEREST ................... 33 18 74 85
DISTRIBUTIONS ON PREFERRED SECURITIES OF
SUBSIDIARY PERPETUAL TRUST........... 2 - 3 -
MINORITY INTEREST ..................... 5 (1) 12 9
------- -------- -------- -------
NET INCOME ............................ 26 19 59 76
======= ======== ======== =======
<FN>
See Notes to Financial Statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Six Months
Ended Ended
June 30, June 30,
--------------- --------------
2000 1999 2000 1999
------- ------ ------ ------
(pounds million)
<S> <C> <C> <C> <C>
NET INCOME ........................ 26 19 59 76
OTHER COMPREHENSIVE INCOME (LOSS) -
Net change during period, net of
tax effects:
Unrealized holding gains
(losses) on investments
classified as available for
sale .......................... 7 (3) 41 (6)
Currency translation
adjustments ................... 2 - 1 -
------- ------ ------ ------
COMPREHENSIVE INCOME .............. 35 16 101 70
======= ====== ====== ======
<FN>
See Notes to Financial Statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Six Months
Ended
June 30,
----------------
2000 1999
------- -------
(pounds million)
<S> <C> <C>
OPERATING ACTIVITIES
Net income ................................. 59 76
Adjustments to reconcile net income
to cash provided by operating
activities:
Depreciation and amortization ............ 128 117
Deferred income taxes .................... 27 31
Net gain on sale of assets ............... (46) -
Minority interest ........................ 12 9
Changes in operating assets and
liabilities ............................ 12 180
Other .................................... (36) (35)
------- -------
Cash provided by operating activities... 156 378
------- -------
INVESTING ACTIVITIES
Investments ................................ (138) (60)
Construction expenditures .................. (95) (124)
Proceeds from sale of assets ............... 72 -
Other ...................................... (6) 2
------- -------
Cash used in investing activities ...... (167) (182)
------- -------
FINANCING ACTIVITIES
Net borrowings under the:
Senior notes ............................. - 921
Sterling credit facility - Term loan ..... - 750
Sterling credit facility - Tranche B ..... 206 233
EMTN Note ................................ 225 -
Other long-term debt ..................... 43 109
Issuance of preferred securities of
subsidiary perpetual trust ............... 95 -
Retirements of:
Acquisition facility ..................... - (750)
Sterling credit facility - Tranche B ..... (400) -
TXU Corp. note payable ................... - (682)
Other long-term debt ..................... (207) (377)
Change in notes payable - banks ............ 249 (280)
Change in other short-term loans ........... (96) -
Debt financing costs ....................... (6) (9)
------- -------
Cash provided by (used for) financing
activities ........................... 109 (85)
------- -------
EFFECT OF EXCHANGE RATES ON CASH AND
CASH EQUIVALENTS ........................... (1) -
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS ...... 97 111
CASH AND CASH EQUIVALENTS - BEGINNING BALANCE. 285 467
------- -------
CASH AND CASH EQUIVALENTS - ENDING BALANCE ... 382 578
======= =======
<FN>
See Notes to Financial Statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
2000 December 31,
(unaudited) 1999
----------- ------------
(pounds million)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT, (net of
accumulated depreciation: 2000 -
pounds 340 million; 1999 - pounds 262
million) ................................... 2,713 2,718
--------- --------
INVESTMENTS
Goodwill (net of accumulated
amortization: 2000 - pounds 183 million;
1999 - pounds 138 million) ............... 3,381 3,422
Restricted cash ............................ 729 740
Other ...................................... 698 520
--------- --------
Total investments ...................... 4,808 4,682
--------- --------
CURRENT ASSETS
Cash and cash equivalents .................. 382 285
Accounts receivable (net of allowance
for uncollectible accounts) .............. 380 469
Inventories ................................ 111 122
Prepayments ................................ 63 58
Other current assets ....................... 92 57
--------- --------
Total current assets ................... 1,028 991
--------- --------
OTHER ASSETS
Prepayments for pensions ................... 251 250
Currency risk management assets............. 178 98
Deferred debits ............................ 218 166
--------- --------
Total other assets ..................... 647 514
--------- --------
Total ............................... 9,196 8,905
========= ========
<FN>
See Notes to Financial Statements.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
June 30,
2000 December 31,
(unaudited) 1999
----------- ------------
(pounds million)
<S> <C> <C>
CAPITALIZATION
Common stock (authorized - 3,000,000,000
shares at US$1 par and 100 deferred shares
at pounds1 par; issued and outstanding -
2,455,705,299 shares and 100 deferred
shares) ..................................... 1,467 1,467
Retained earnings ............................. 272 213
Accumulated other comprehensive income (loss).. 35 (7)
-------- --------
Total common stock equity ................... 1,774 1,673
Preferred securities of subsidiary perpetual
trust ....................................... 95 -
Minority interest ............................. 253 243
Long-term debt, less amounts due currently .... 4,544 4,629
-------- --------
Total capitalization ........................ 6,666 6,545
-------- --------
CURRENT LIABILITIES
Notes payable - banks ......................... 500 251
Other short-term loans ........................ 81 177
Long-term debt due currently .................. 324 380
Accounts payable .............................. 470 507
Taxes accrued ................................. 206 194
Other current liabilities ..................... 190 217
-------- --------
Total current liabilities ................... 1,771 1,726
-------- --------
DEFERRED CREDITS AND OTHER NONCURRENT
LIABILITIES
Deferred income taxes ......................... 453 409
Provision for unfavorable contracts ........... 80 89
Other deferred credits and noncurrent
liabilities ................................. 226 136
-------- --------
Total deferred credits and other noncurrent
liabilities ............................... 759 634
-------- --------
CONTINGENCIES (Note 7)
-------- --------
Total ..................................... 9,196 8,905
======== ========
<FN>
See Notes to Financial Statements.
</FN>
</TABLE>
6
<PAGE>
TXU EUROPE LIMITED
Notes to Financial Statements
1. BUSINESS, ACQUISITIONS AND DISPOSITIONS
TXU Europe Limited (TXU Europe) is an indirect, wholly-owned subsidiary
of TXU Corp., a Texas corporation. TXU Corp. is a holding company that,
through its subsidiaries, is engaged in the generation, purchase,
transmission, distribution and sale of electricity; the purchase,
transmission, distribution and sale of natural gas; energy services; and
telecommunications and other businesses, primarily in the United States (US),
Europe and Australia. TXU Europe is a holding company for TXU Corp.'s United
Kingdom (UK) and other European operations. Almost all of TXU Europe's
operating income is derived from, and consolidated assets are held by, TXU
Europe Group plc (TXU Europe Group) and TXU Europe Group's subsidiaries.
The business and operations of TXU Europe and its subsidiaries consist of
two main businesses, energy and networks, which are divided into three
principal operating segments, as follows:
ENERGY -
(i) The Energy Retail business which supplies electricity and gas to
residential, industrial and commercial customers;
(ii) The Energy Management and Generation business which manages an
integrated portfolio of generation assets, physical gas assets and contracts
throughout Europe; and
NETWORKS -
(iii) The Networks business which owns, manages and, through its networks
management joint venture, operates the electricity distribution system in the
UK.
These businesses are carried out mainly in the UK with interests
increasingly being developed throughout the rest of Europe.
In December 1999, TXU Europe Group and EDF London Investments plc, a
subsidiary of Electricité de France, entered into an arrangement for
the creation of an equally held joint venture company for the management,
operation and maintenance of their subsidiaries' respective electricity
distribution networks. In March 2000, final approval was received from the
Office of Gas and Electricity Markets covering England, Scotland and Wales
(OFGEM). The new joint venture has been named "24seven" and began operations
on April 7, 2000. TXU Europe accounts for its investment in 24seven by the
equity method of accounting. 24seven serves over five million electricity
customers in London and the eastern counties of England. Employees of the
joint venturers' subsidiaries, Eastern Electricity plc (Eastern Electricity)
and London Electricity plc, have been transferred to 24seven. The physical
distribution system assets, as well as all operating licenses, continue to be
owned by Eastern Electricity and London Electricity plc, respectively. (See
Note 3 for a discussion of restructuring and other nonrecurring charges.)
On March 13, 2000, TXU Europe (Espana) S.L., a subsidiary of TXU Europe,
announced its intention to make a cash offer to acquire all of the shares of
Hidroelectrica del Cantabrico, SA (Hidrocantabrico) that TXU Europe did not
then own. Later in March 2000, after a competing bid had been subsequently
issued, TXU Europe announced that it would not pursue its offer. In a series
of private transactions since that date, TXU Europe acquired additional shares
in Hidrocantabrico and currently directly or indirectly holds approximately
19.2% of the outstanding shares. TXU Europe has a preemptive option to
acquire an additional 4.9% of the stock in Hidrocantabrico currently held by
Electrabel SA, an electricity company in Belgium, if Electrabel were to sell
its interests to another company. TXU Europe also has a conditional put
option whereby it may be required to purchase the full 10.0% interest in
Hidrocantabrico held by Electrabel if Electrabel is required to dispose of
its holding by the European Union or Spanish Competition Authorities. The
7
<PAGE>
conditions of this put option include a reasonable notice period before
execution. Results of operations for the six months ended June 30, 2000
include approximately pounds 7 million of costs incurred in connection with the
offer for Hidrocantabrico.
On August 3, 2000, the Spanish Stock Market Commission (CNMV) announced
it was opening an investigation as to whether TXU Europe and Electrabel acted
in concert over share purchases in order to avoid making a formal takeover
bid. If the two utilities are found to be in violation of Spanish securities
law, they could face a substantial fine and other restrictions. The
investigation is expected to last several months. TXU Europe is unable to
determine what impact there may be, if any, as a result of the investigation.
In the meantime, TXU Europe has not received any formal notification of
whether the two companies' political rights (including voting rights) in
Hidrocantabrico have been suspended. TXU Europe does not believe there has
been any violation of Spanish securities laws and is fully cooperating with
the investigation. TXU Europe has also indicated that it would support a full
offer for Hidrocantabrico by a third party that has the support of
Hidrocantabrico's Board of Directors.
In June 2000, TXU Europe entered into an agreement to sell its 21.9%
interest in Severomoravska energetika, a.s. (SME), the largest Czech
electricity distribution and supply company. The sale is expected to be
completed in the third quarter of 2000.
The increase in market price of Hidrocantabrico's and SME's shares has
resulted in a significant increase in the unrealized holding gains reflected
in other comprehensive income for the six months ended June 30, 2000.
On July 13, 2000, TXU Europe announced it had agreed to buy 51% of
Stadtwerke Kiel AG, a German municipal utility, for approximately pounds 143
million. The state parliament of Kiel unanimously approved the sale. The city
government of Kiel, the state capital, will retain the remaining 49% of the
utility, which has approximately 250,000 gas and electricity customers, 175
megawatts of power generation and 2.7 billion cubic feet of gas storage
capacity. Final approval is needed from the European Union regulators before
the acquisition can close. Such approval may take several months.
On August 3, 2000, TXU Europe announced its unconditional purchase
of United Utilities' retail energy supply business, Norweb Energi (Norweb), for
pounds 310 million. Financing was provided through existing bank lines. TXU
Europe's existing supply business, Eastern Energy, has 2.7 million electricity
and 0.7 million gas customers. Combined with Norweb's 1.8 million electricity
and 0.4 million gas customers, the acquisition will create the UK's second
largest energy retailer with 5.6 million accounts. The transaction also
includes the assumption of Norweb's power purchase agreements, which will be
integrated into TXU Europe's energy portfolio. On August 9, 2000, the Office
of Gas and Electricity Markets issued a consultation paper on the
regulatory issues involved in the acquisition. As the transaction is
unconditional, TXU Europe has assumed the risk of, and responsibility for,
obtaining all necessary regulatory approvals.
Also on August 3, 2000, TXU Europe announced it had contracted its
customer services operation to Vertex, United Utilities' customer services
business. Customer services include call centers, billing, credit
management and debt collection. Eastern Energy's 1,250 customer
services staff will transfer to Vertex on September 1, 2000.
2. SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements of TXU Europe and its
subsidiaries have been prepared in accordance with accounting principles
generally accepted in the US (US GAAP) and on the same basis as the audited
financial statements included in its 1999 Annual Report on Form 10-K and, in
the opinion of TXU Europe's management, all adjustments, including the
nonrecurring charges discussed elsewhere herein and other normal recurring
accruals, necessary for a fair presentation of the results of operations and
financial position have been included therein. Certain information and
footnote disclosures normally included in annual consolidated financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the rules and regulations of the
8
<PAGE>
Securities and Exchange Commission. Certain prior year amounts have been
reclassified to conform to current classifications.
3. RESTRUCTURING CHARGES AND OTHER COSTS
During the six months ended June 30, 2000, TXU Europe recorded
restructuring charges and other costs of approximately pounds 56 million
pre-tax (pounds 41 million after-tax). Of this amount, pounds 49 million
pre-tax (pounds 34 million after-tax) of restructuring costs have been charged
to operation and maintenance expense. Approximately pounds 7 million of costs
incurred in connection with the offer for Hidrocantabrico have been included
in Other Income (Deductions) - Net.
The restructuring costs consisted of asset writedowns and other exit and
redundancy costs (severance benefits paid to staff under voluntary retirement
programs and related pension benefits) primarily as a result of the creation
of the 24seven joint venture and for certain other staff reorganizations. As
of June 30, 2000, TXU Europe had recorded pre-tax redundancy costs of
approximately pounds 22 million related to voluntary termination benefits for
442 employees that have accepted the voluntary benefits. In addition, other
pre-tax restructuring charges consisting of pounds 16 million of asset
writedowns and pounds 11 million of other exit costs have been recorded.
Further restructuring charges are expected to be incurred through the end of
2000.
As of June 30, 2000, pounds 9.4 million of redundancy costs and pounds 8.6
million of other exit costs charged during the six months then ended have been
paid.
4. SHORT-TERM FINANCING
Short-term Facilities - In June 2000, TXU Europe Group renegotiated the
terms and amounts it could borrow under a short-term facility. The amended
facility, which now expires in December 2000, allows for aggregate borrowings
of euro 506 million which can be borrowed by TXU Europe (up to euro200 million)
and TXU Europe Group (up to euro 306 million) at variable interest rates based
on LIBOR plus a margin. The amount outstanding at June 30, 2000 was euro 506
million (pounds 318 million) at an annual interest rate of 4.80%.
TXU Europe and TXU Finance (No.2) Limited (TXU Finance), 90% owned by TXU
Europe, have a joint sterling-denominated line of credit with a group of
banking institutions under a credit facility agreement (Sterling Credit
Agreement). In March 2000, the Tranche A 364-day revolving credit facility
under the Sterling Credit Agreement expired. In May 2000, TXU Europe entered
into a six-month pounds 200 million revolving credit facility with a commercial
bank expiring October 2000 to serve as a replacement for the former Tranche A
facility. Borrowings may be made in any available currency and interest is
based on LIBOR plus a margin. As of June 30, 2000, euro 140 million (pounds
87 million) was outstanding at an annual interest rate of 4.76%.
Accounts Receivable - Under facilities providing financing through trade
accounts receivable, Eastern Electricity continually sells additional
receivables to replace those collected. At June 30, 2000, accounts receivable
of Eastern Electricity of pounds 219 million had been sold under the program.
A further pounds 81 million, reflected as other short-term loans on the balance
sheet, were collateralized by future receivables. These amounts bear interest
at an annual rate based on commercial paper rates plus 0.225%, which was 6.12%
at June 30, 2000.
5. LONG-TERM DEBT
Lines of Credit - As of June 30, 2000, the amended Sterling Credit
Agreement provides for borrowings of up to pounds 1.075 billion and has two
facilities: a pounds 750 million term facility and a pounds 325 million
revolving credit facility (Tranche B), both of which terminate on March 2,
2003. The Sterling Credit Agreement allows for borrowings in various
currencies with interest rates based on the prevailing rates in effect in the
countries in which the borrowings originate. As of June 30, 2000, pounds 750
9
<PAGE>
million of borrowings were outstanding under the term facility at an interest
rate of 6.89% per annum. The outstanding Tranche B borrowing and interest
rate in effect at June 30, 2000 consisted of pounds 56 million of Norwegian
kroner at 7.21% per annum.
TXU Europe has a euro 2.0 billion Euro Medium Term Note (EMTN) program.
Under the EMTN program, TXU Europe may from time to time issue notes to one or
more dealers in an aggregate principal amount of up to euro 2.0 billion. As of
June 30, 2000, pounds 225 million of 7.25% Sterling Eurobonds due March 8,
2030, were outstanding. An interest rate swap is in place that converts the
interest on the Sterling Eurobond to a variable rate based on LIBOR for the
first five years and at a rate based on EURIBOR for the remainder of the
term. The effective interest rate at June 30, 2000 after the swap was 6.37%.
6. PREFERRED SECURITIES OF SUBSIDIARY PERPETUAL TRUST
In March 2000, TXU Europe Capital I, a statutory business trust,
established as a financing subsidiary for TXU Europe, issued to investors
US$150 million (pounds 95 million) of 9 3/4% Trust Originated Preferred
Securities (Preferred Securities), in 6,000,000 units. In a series of
related transactions, the proceeds from this issuance were invested in
Preferred Partnership Securities issued by TXU Europe Funding I,L.P.,a limited
partnership of which TXU Europe is the general partner. TXU Europe Funding
I, L.P. in turn, used those funds, along with a capital contribution of
approximately US$26 million (pounds 16 million) from TXU Europe, to purchase
junior subordinated debentures issued by TXU Eastern Funding Company and TXU
Europe Group. The Preferred Securities have a liquidation preference of US$25
per unit. The only assets of the trust are the Preferred Partnership
Securities. The Trust has a perpetual existence, subject to certain
termination events as provided in its Amended and Restated Trust Agreement.
The Preferred Securities are subject to mandatory redemption upon payment of
the Preferred Partnership Securities which may be redeemed at the option of
TXU Europe, in whole, or in part, at any time on or after March 2, 2005. TXU
Europe has issued certain limited guarantees of the Preferred Securities,
the Preferred Partnership Securities and the junior subordinated debentures
held by TXU Europe Funding I, L.P. The trust uses distributions it receives
on the Preferred Partnership Securities to make cash distributions on the
Preferred Securities. On June 30, 2000, TXU Europe Capital I declared and
paid its first quarterly distribution of approximately pounds 3 million on
its Preferred Securities.
7. CONTINGENCIES
Legal Proceedings - In February 1997, the official government
representative of pensioners (Pensions Ombudsman) made a final determination
against the National Grid Company plc (National Grid) and its group trustees
with respect to complaints by two pensioners in National Grid's section of the
Electricity Supply Pension Scheme (ESPS). The determination related to the
use of the pension fund surplus resulting from the March 31, 1992 actuarial
valuation of the National Grid section to meet certain costs arising from the
payment of pensions on early retirement upon reorganization or downsizing.
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 to the
Court of Appeal and judgment was received. The judgment endorsed the Pensions
Ombudsman's determination that the corporation was not entitled to
unilaterally deal with any surplus. National Grid has made an appeal to the
House of Lords although the case is not likely to be heard until the first
quarter of 2001. If a similar complaint were to be made against TXU Europe
Group in relation to its use of actuarial surplus in its section of the ESPS,
it would vigorously defend the action, ultimately through the courts.
However, if a determination were finally to be made against it and upheld by
the courts, TXU Europe Group could have a potential liability to repay to its
section of the ESPS an amount estimated by TXU Europe Group to be up to
pounds 45 million, exclusive of any applicable interest charges.
On January 25, 1999, the Hindustan Development Corporation issued
arbitration proceedings in the Arbitral Tribunal in Delhi, India against The
Energy Group PLC (TEG)(now Energy Holdings (No.3) Limited), claiming damages
10
<PAGE>
of pounds 255 million for breach of contract following the termination of a
Joint Development Agreement dated March 20, 1997 relating to the construction,
development and operation of a lignite based thermal power plant at
Barsingsar, Rajasthan. TXU Europe is vigorously defending this claim and
cannot predict the outcome of these proceedings. The arbitration has been
completed and the decision of the arbitrators is expected in September 2000.
In November 1998, five complaints were filed in the High Court of Justice
in London, Queens Bench Division, Commercial Court, against subsidiaries of
TXU Europe Group by five of their former sales agencies. The agencies claimed
a final total of pounds 133 million arising from the summary termination for
the claimed fundamental breach of their respective contracts in April 1998.
The five agencies claimed damages for failure to give reasonable notice and
for compensation under the UK Commercial Agents Regulations 1994. The
substantial claims made by the five sales agencies were settled in June 2000
on a full and final basis following a mediation ordered by the High Court. TXU
Europe Group paid the sales agencies pounds 6 million. This amount was
equivalent to the legal and forensic accountants' costs which TXU Europe Group
estimated it would have incurred had the case been taken to a full trial.
There was no impact on the current income statement, as TXU Europe Group had
previously made provisions for such estimated expenses.
General - In addition to the above, TXU Europe and its subsidiaries are
involved in various other legal and administrative proceedings which, in the
opinion of management, should not have a material effect on its financial
position, results of operations or cash flows.
Financial Guarantees - TXU Europe has guaranteed up to US$110 million
(pounds 72 million) at June 30, 2000 of certain liabilities that may be
incurred and payable by the purchasers of its former US and Australian coal
business and US Energy marketing operations sold in 1998 with respect to the
Peabody Holding Company Retirement Plan for Salaried Employees, the Powder
River Coal Company Retirement Plan and the Peabody Coal UMWA Retirement Plan,
subject to certain specified conditions.
TEG entered into various guarantees of obligations of affiliates of its
former subsidiary Citizens Power LLC, arising under power purchase agreements
and note purchase agreements in connection with various Citizens Power energy
restructuring projects, as well as various indemnity agreements in connection
with such projects. TXU Europe and Energy Holdings (No.3) Limited continue to
be either the guarantor or the indemnifying party, as the case may be, under
these various agreements.
8. SEGMENT INFORMATION
TXU Europe has two major businesses, energy and networks, which consist
of three reportable operating segments. Beginning in 2000, as reflected in
the following tables, the income contribution for each segment has been
redefined as operating and other income on a US GAAP basis, before interest,
income taxes, distributions and minority interests, but after a notional
charge for the cost of capital (income before interest). Amounts for the
three and six months ended June 30, 1999 have been reclassified to conform
to the new presentation.
11
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<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------------------
2000 1999
------------------- --------------------
Income Income
before before
Revenues Interest Revenues Interest
-------- --------- -------- ---------
(pounds million)
<S> <C> <C> <C> <C>
Energy retail ............... 401 25 487 9
Energy management
and generation ............ 403 38 416 66
Inter-segment eliminations -
energy .................... (21) - (118) -
-------- --------- -------- ---------
Total energy ............ 783 63 785 75
-------- --------- -------- ---------
Networks .................... 78 19 100 38
Other........................ 5 30 4 1
Inter-segment eliminations... (45) - (76) -
-------- --------- -------- ---------
Total ................. 821 112 813 114
======== --------- ======== ---------
Cost of capital elimination.. 39 35
Unallocated corporate costs.. (27) (40)
--------- ---------
Income before interest,
income taxes, distributions
and minority interest ..... 124 109
========= =========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------------
2000 1999
------------------- --------------------
Income Income
before before
Revenues Interest Revenues Interest
-------- --------- -------- ---------
(pounds million)
<S> <C> <C> <C> <C>
Energy retail ............... 928 32 1,170 (32)
Energy management
and generation ............ 1,051 134 983 229
Inter-segment eliminations -
energy .................... (102) - (223) -
-------- --------- -------- ---------
Total energy ............ 1,877 166 1,930 197
-------- --------- -------- ---------
Networks .................... 201 82 220 95
Other........................ 17 31 7 2
Inter-segment eliminations... (123) - (171) -
-------- --------- -------- ---------
Total ................. 1,972 279 1,986 294
======== --------- ======== ---------
Cost of capital elimination.. 77 68
Unallocated corporate costs.. (85) (84)
--------- ---------
Income before interest,
income taxes, distributions
and minority interest ..... 271 278
========= =========
</TABLE>
12
<PAGE>
TXU Europe Limited
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
ACQUISITIONS AND OTHER CHANGES IN THE BUSINESS
On March 13, 2000, TXU Europe (Espana) S.L., a subsidiary of TXU Europe,
announced its intention to make a cash offer to acquire all of the shares of
Hidroelectrica del Cantabrico, SA (Hidrocantabrico) that TXU Europe did not
then own. Later in March 2000, after a competing bid had been subsequently
issued, TXU Europe announced that it would not pursue its offer. In a series
of private transactions since that date, TXU Europe acquired additional shares
in Hidrocantabrico and currently directly or indirectly holds approximately
19.2% of the outstanding shares. TXU Europe has a preemptive option to
acquire an additional 4.9% of the stock in Hidrocantabrico currently held by
Electrabel SA, an electricity company in Belgium, if Electrabel were to sell
its interests to another company. TXU Europe also has a conditional put
option whereby it may be required to purchase the full 10.0% interest in
Hidrocantabrico held by Electrabel if Electrabel is required to dispose of
its holding by the European Union or Spanish Competition Authorities. The
conditions of this put option include a reasonable notice period before
execution. Results of operations for the six months ended June 30, 2000
include approximately pounds 7 million of costs incurred in connection with the
offer for Hidrocantabrico.
On August 3, 2000, the Spanish Stock Market Commission (CNMV) announced
it was opening an investigation as to whether TXU Europe and Electrabel acted
in concert over share purchases in order to avoid making a formal takeover
bid. If the two utilities are found to be in violation of Spanish securities
law, they could face a substantial fine and other restrictions. The
investigation is expected to last several months. TXU Europe is unable to
determine what impact there may be, if any, as a result of the investigation.
In the meantime, TXU Europe has not received any formal notification of
whether the two companies' political rights (including voting rights) in
Hidrocantabrico have been suspended. TXU Europe does not believe there has
been any violation of Spanish securities laws and is fully cooperating with
the investigation. TXU Europe has also indicated that it would support a full
offer for Hidrocantabrico by a third party that has the support of
Hidrocantabrico's Board of Directors.
In June 2000, TXU Europe entered into an agreement to sell its 21.9%
interest in Severomoravska energetika, a.s. (SME), the largest Czech
electricity distribution and supply company. The sale is expected to be
completed in the third quarter of 2000.
On July 13, 2000, TXU Europe announced it had agreed to buy 51% of
Stadtwerke Kiel AG, a German municipal utility, for approximately pounds 143
million. The state parliament of Kiel unanimously approved the sale. The city
government of Kiel, the state capital, will retain the remaining 49% of the
utility, which has approximately 250,000 gas and electricity customers, 175
megawatts of power generation and 2.7 billion cubic feet of gas storage
capacity. Final approval is needed from the European Union regulators before
the acquisition can close. Such approval may take several months.
On August 3, 2000, TXU Europe announced its unconditional purchase
of United Utilities' retail energy supply business, Norweb Energi (Norweb), for
pounds 310 million. Financing was provided through existing bank lines. TXU
Europe's existing supply business, Eastern Energy, has 2.7 million electricity
and 0.7 million gas customers. Combined with Norweb's 1.8 million electricity
and 0.4 million gas customers, the acquisition will create the UK's second
largest energy retailer with 5.6 million accounts. The transaction also
includes the assumption of Norweb's power purchase agreements, which will be
integrated into TXU Europe's energy portfolio. On August 9, 2000, the Office
of Gas and Electricity Markets issued a consultation paper on the
regulatory issues involved in the acquisition. As the transaction is
unconditional, TXU Europe has assumed the risk of, and responsibility for,
obtaining all necessary regulatory approvals.
Also on August 3, 2000, TXU Europe announced it had contracted its
customer services operation to Vertex, United Utilities' customer services
business. Customer services include call centers, billing, credit
13
<PAGE>
management and debt collection. Eastern Energy's 1,250 customer services
staff will transfer to Vertex on September 1, 2000.
TXU Europe has disclosed over the last twelve months that its strategy in
the UK market is to rebalance its energy portfolio through retail growth, long
term wholesale sales and, possibly, physical plant disposal. In April 2000,
TXU Europe announced that it would seek bids for its UK power stations in
order to evaluate possible plant disposals. The generation plant divestment
process continues, and it is expected that a further update will be made later
in the third quarter when current negotiations with potential buyers are
closer to finalization. However, no decisions have yet been made as to whether
any disposals will in fact be made.
TXU Europe will pursue potential investment opportunities from time to
time when it concludes that such investments are consistent with its business
strategies and will dispose of nonstrategic assets to allow redeployment of
resources into faster growing opportunities in an effort to enhance the
long-term return to its stakeholders.
RESULTS OF OPERATIONS
Results for the three- and six-month periods presented herein are
not necessarily indicative of expectations for a full year's operations
because of seasonal and other factors, including variations in maintenance and
other operating expense patterns. No significant changes or events which might
affect the financial condition of TXU Europe have occurred subsequent to
year-end other than as disclosed in other reports of TXU Europe or included
herein.
Six Months Ended June 30, 2000 Compared With Six Months Ended June 30, 1999
Overview - Net income for the six months ended June 30, 2000 was pounds 59
million compared with pounds 76 million for the same period in 1999. Income
before interest, income taxes, distributions and minority interest (income
before interest) was pounds 271 million for the six months ended June 30, 2000.
Results for the 2000 year-to-date period were adversely affected by costs of
pounds 56 million (pounds 41 million after-tax), mostly restructuring charges
associated with the creation of the joint venture to operate TXU Europe Group's
distribution network (24seven) as that business continues the process of
streamlining its merged operations, and for other staff reorganizations, and
for costs associated with the offer for Hidrocantabrico. These costs were
partially offset by the gain from the sale of the metering business of pounds
29 million (pounds 21 million after-tax). Excluding these items, income
before interest for the six months ended June 30, 2000 was pounds 298 million
compared with pounds 278 million for the same period of 1999.
Despite the inclusion of the restructuring costs, operating and
maintenance expenses for the six months ended June 30, 2000 were relatively
unchanged from the 1999 six month period as underlying costs benefited from
the effects of staff reductions and on-going cost savings programs throughout
TXU Europe.
As of June 30, 2000, pounds 9.4 million of redundancy costs and pounds 8.6
million of other exit costs charged during the six months then ended have been
paid.
Other income (deductions) - net for the six months ended June 30, 2000
includes gains from the sale of the metering business and other investment
assets and from other transactions aggregating pounds 46 million (pounds 32
million after-tax).
14
<PAGE>
Interest expense for the six months ended June 30, 2000 was higher than
for the same period for 1999 primarily due to higher variable interest rates
and a higher level of debt.
Total income tax expense of TXU Europe for the six months ended June 30,
2000 was pounds 49 million compared with pounds 56 million for the six months
ended June 30, 1999. The effective tax rate in both periods is affected by
amortization of goodwill and other non-deductible expenses primarily related
to a capital lease. The effective tax rate in the 2000 period is also
adversely impacted by non-deductible expenses related to Hidrocantabrico.
The 2000 period also includes the payment of the first quarterly
distribution on the preferred securities issued by TXU Europe Capital I in
March 2000.
See Note 8 to Financial Statements for information on revenues and income
before interest by operating segment.
Energy Retail - Revenues were pounds 928 million in the six months ended
June 30, 2000 compared with pounds 1,170 million in the six months ended June
30, 1999. The decrease is primarily due to a reduction in customers in the
residential market and to a reduction in electricity volumes sold in the
industrial and commercial markets due to competition and focus on profitable
customers. Income before interest for the six months ended June 30, 2000 was
pounds 32 million compared with a loss of pounds 32 million in the six months
ended June 30, 1999. This increase from the prior year period is due to a
change in the basis of calculating the prices charged for the intracompany
transfer of electricity from the energy management and generation segment
(pounds 41 million), favorable price margin variances (pounds 36 million), and
operating cost savings (pounds 15 million), partially offset by adverse volume
variances due to the decrease in customers (pounds 28 million).
TXU Europe may vary the basis of transfer pricing (i.e. prices charged
for electricity from the energy management and generation segment to the
energy retail segment) to reflect changes in markets, prices and other current
economic conditions.
Energy Management and Generation - Revenues for the six months ended June
30, 2000 were pounds 1,051 million compared with pounds 983 million in the six
months ended June 30, 1999. The increase is primarily due to an increase in
sales volume in the wholesale gas portfolio in the first quarter 2000 relative
to the first quarter of 1999. Income before interest for the six months ended
June 30, 2000 was pounds 134 million compared with pounds229 million in the six
months ended June 30, 1999. This decrease is due to a change in the basis of
calculating the prices charged for the intracompany transfer of electricity to
the energy retail segment (pounds 41million), a decrease in contribution from
electricity and gas sales (pounds 57million), partially offset by operating
cost savings (pounds 12 million). The results for the six months ended June 30,
2000 also include restructuring charges of pounds 9 million.
Networks - Revenues were pounds 201million in the six months ended June
30, 2000 compared with pounds 220 million in the six months ended June 30,
1999. The decrease in revenues primarily reflects the impact of the OFGEM
Distribution Price Controls which became effective April 1, 2000. Income
before interest in the six months ended June 30, 2000 was pounds 82 million
compared with pounds 95 million in the six months ended June 30, 1999. The
decrease primarily reflects the impact of the OFGEM Distribution Price
Controls (pounds 22 million), offset by a reduction in operating costs
(pounds 9 million).
Other - Income before interest from other business operations was pounds 31
million in the six months ended June 30, 2000 compared with pounds 2 million in
the six months ended June 30, 1999. The increase primarily reflects the
disposal of the metering business of TXU Europe.
15
<PAGE>
Unallocated corporate costs for the six months ended June 30, 2000
include restructuring costs incurred, net of gains on sales of other assets
and other transactions, aggregating approximately pounds 31 million pre-tax.
Three Months Ended June 30, 2000 Compared With Three Months Ended June 30,
1999
Overview - Net income for the three months ended June 30, 2000 was
pounds 26 million compared with pounds 19 million for the same period in 1999.
Income before interest was pounds 124 million for the three months ended June
30, 2000. Results for the 2000 three months period were adversely affected by
costs of pounds 13 million (pounds 9 million after-tax), composed primarily of
restructuring charges associated with the creation of 24seven and other staff
reorganizations. This was offset by the gain from the sale of the metering
business. Excluding these items, income before interest for the three months
ended June 30, 2000 was pounds 108 million compared with pound s109 million for
the same period in 1999. Despite the inclusion of the restructuring costs,
operating and maintenance expenses for the three months ended June 30, 2000
were 22% lower than for the comparable period of 1999. The impact of the
restructuring activities on the number of employees, plus other staff
reductions and on-going cost savings programs have also contributed to the
favorable reduction in operating and maintenance expenses from pounds 123
million for the three months ended June 30, 1999 to pounds 96 million for the
three months ended June 30, 2000.
Other income (deductions) - net for the three months ended June 30, 2000
includes gains from the sale of the metering business and other investment
assets and from other transactions aggregating pounds 46 million (pounds 32
million after-tax).
Energy Retail - Revenues were pounds 401 million in the three months ended
June 30, 2000 compared with pounds 487 million in the three months ended June
30, 1999. This decrease is primarily due to a reduction in customers in the
residential market and reduction in electricity volumes sold in the industrial
and commercial markets as a result of competition and focusing on profitable
customers. Income before interest for the three months ended June 30, 2000
was pounds 25 million compared with pounds 9 million in the three months ended
June 30, 1999. This increase is due to a change in the basis of calculating
the prices charged for the intracompany transfer of electricity from the
energy management and generation segment (pounds 17 million), favorable price
margin variances (pounds 13 million), and operating cost savings (pounds 7
million), partially offset by adverse volume variances due to the decrease in
customers (pounds 21 million).
Energy Management and Generation - Revenues declined slightly to
pounds 403 million in the three months ended June 30, 2000 compared with
pounds 416 million in the three months ended June 30, 1999. Income before
interest for the three months ended June 30, 2000 was pounds 38 million
compared with pounds 66 million in the three months ended June 30, 1999. This
decrease is due to a change in the basis of calculating the prices charged for
the intracompany transfer of electricity to the energy retail segment
(pounds 17 million) and a decrease in contribution from electricity and gas
sales (pounds 19 million), partially offset by operating cost savings (pounds 9
million). The three months ended June 30, 2000 also includes restructuring
charges of pounds 1 million.
The increase in wholesale energy sales as shown in the operating
statistics below is not fully reflected in revenue because these sales have
only been recognized at their gross margin level.
Networks - Revenues were pounds 78 million in the three months ended June
30, 2000 compared with pounds 100 million in the three months ended June 30,
1999. This decrease primarily reflects the impact of the OFGEM Distribution
Price Controls which became effective April 1, 2000. Income before interest
in the three months ended June 30, 2000 was pounds 19 million compared with
pounds 38 million in the three months ended June 30, 1999. This decrease
primarily reflects the reduction in revenue following the implementation of
16
<PAGE>
the OFGEM Distribution Price Controls partially offset by a reduction in
operating costs associated with the savings from the new operating cost
structure of the 24seven joint venture.
Other - Income before interest from other business operations was
pounds 30 million in the three months ended June 30, 2000 compared with pounds
1 million in the three months ended June 30, 1999. This increase primarily
reflects the sale of the metering business.
Unallocated corporate costs for the three months ended June 30, 2000
include restructuring costs incurred, net of gains on sales of other assets
and other transactions, aggregating a net gain of approximately pounds 3
million pre-tax.
<PAGE>
<TABLE>
<CAPTION>
OPERATING STATISTICS
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
SALES VOLUMES
Electricity (gigawatt-
hours) - (GWh):
Industrial and
commercial ............. 3,602 5,386 7,191 10,653
Residential .............. 2,399 3,506 6,973 8,682
------ ------- ------ -------
Total electricity ...... 6,001 8,892 14,164 19,335
====== ======= ====== =======
Gas (billion cubic feet)- (Bcf):
Industrial and 13 12 31 44
commercial .............
Residential .............. 8 11 28 26
------ ------- ------ -------
Total gas .............. 21 23 59 70
====== ======= ====== =======
Wholesale energy sales:
Electricity (GWh) ......... 33,263 17,694 57,698 41,759
====== ======= ====== =======
Gas (Bcf) ................. 242 96 428 208
====== ======= ====== =======
Electricity units
distributed (GWh) ......... 7,621 7,974 16,825 17,206
====== ======= ====== =======
CUSTOMERS (end of period
& in thousands)
Electricity (retail) .... 2,717 3,235
Gas ..................... 714 802
</TABLE>
17
<PAGE>
Comprehensive Income
The unrealized holding gains on investments in the six month - period
ended June 30, 2000 are primarily related to the substantial appreciation in
market value of the investments in marketable equity securities of
Hidrocantabrico and SME.
LIQUIDITY AND CAPITAL RESOURCES
Six Months Ended June 30, 2000 Compared with Six Months Ended June 30, 1999
For information concerning liquidity and capital resources, see Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations in TXU Europe's 1999 Form 10-K. Results for the six-month periods
presented herein are not necessarily indicative of expectations for a full
year's operations because of seasonal and other factors, including variations
in maintenance and other operating expense patterns. No significant changes or
events which might affect the financial condition of TXU Europe have occurred
subsequent to year-end other than as disclosed in other reports of TXU Europe
or included herein.
Net cash generated by operating activities was pounds 156 million for the
six months ended June 30, 2000 compared with pounds 378 million for the same
period of 1999. Changes in operating assets and liabilities provided pounds 12
million for the six months ended June 30, 2000 compared with pounds 180 million
for the same period of 1999. The amount for the 1999 six month period
includes pounds 255 million representing the sale of accounts receivables under
a receivables financing program revised in March 1999, which previously had
used the receivables as collateral on short-term borrowings. Cash flows
provided by operating activities before changes in operating assets and
liabilities were pounds 144 million for the six months in 2000 and pounds 198
million for the six months in 1999.
Cash used in investing activities was pounds 167 million for the six
months ended June 30, 2000 compared with pounds 182 million for the same period
of 1999. Construction expenditures were pounds 95 million for the six months
ended June 30, 2000 compared with pounds 124 million for the six-month period
of 1999. Cash used for investments in 2000 of pounds 138 million primarily
reflects the purchase of additional shares in Hidrocantabrico. The 1999
period included pounds 60 million for investments primarily in other European
assets. Proceeds from the sales of the metering business and other investment
assets were pounds 72 million for the six months of 2000.
Cash provided by financing activities for the six months ended June 30,
2000 was pounds 109 million compared with cash used of pounds85 million for the
same period of 1999. For the first six months of 2000, long-term debt
borrowings were pounds 474 million (including pounds 225 million in new
borrowings under the EMTN program) and repayments of long-term debt were
pounds 607 million (primarily to pay down the Tranche B borrowings). In
addition, there was pounds 95 million of Preferred Securities of Subsidiary
Perpetual Trust issued in March 2000. For the six months ended June 30, 1999,
borrowings of long-term debt were approximately pounds 2.0 billion and
repayments were approximately pounds 1.8 billion, reflecting the refinancing of
the original TXU Corp. acquisition financing. For the six months ended June
30, 2000, changes in short-term bank loans and other short-term loans provided
pounds 153 million compared with repayments of pounds 280 million in the 1999
period. The 1999 repayments were made primarily from the proceeds of the sale
of receivables mentioned above. The short-term borrowings in the second
quarter of 2000 were used primarily to finance the purchase of the additional
Hidrocantabrico shares.
18
<PAGE>
Financing Arrangements
In June 2000, TXU Europe Group renegotiated the terms and amounts it
could borrow under a short-term facility. The amended facility, which now
expires in December 2000, allows for aggregate borrowings of euro 506 million
which can be borrowed by TXU Europe(up to euro200 million) and TXU Europe Group
(up to euro 306 million) at variable interest rates based on LIBOR plus a
margin. The amount outstanding at June 30, 2000 was euro 506 million (pounds
318 million) at an annual interest rate of 4.80%.
TXU Europe and TXU Finance (No.2) Limited (TXU Finance), 90% owned by TXU
Europe, have a joint sterling-denominated line of credit with a group of
banking institutions under a credit facility agreement (Sterling Credit
Agreement). In March 2000, the Tranche A 364-day revolving credit facility
under the Sterling Credit Agreement expired. In May 2000, TXU Europe entered
into a six-month pounds 200 million revolving credit facility with a commercial
bank expiring October 2000 to serve as a replacement for the former Tranche A
facility. Borrowings may be made in any available currency and interest is
based on LIBOR plus a margin. Amounts outstanding as of June 30, 2000 were
euro 140 million (pounds 87 million) at an annual interest rate of 4.76%.
Additional short-term facilities may be entered into before these facilities
expire.
See Notes 4 and 5 to Financial Statements for more information concerning
available sources of short-term and long-term financing.
Regulation and Rates
Utilities Bill - TXU Europe expects a new Utilities Bill to receive
Royal Assent in July 2000. The implementation of this legislation will result
in the replacement of the existing Public Electricity Supply (PES) Licence
with separate Distribution and Supply Licences which must be held by separate
legal entities within TXU Europe Group. Work is currently under way to
finalise the transfer schedules conveying assets from the existing PES Licence
holder to the new entities. The Utilities Bill will also underpin the
introduction of NETA (see below).
New Electricity Trading Arrangements (NETA) - The implementation of NETA
is now scheduled for November 21, 2000. The arrangements provide those
wishing to buy and sell electricity the freedom to enter into directly
negotiated contracts instead of having to trade through a central electricity
pool. It is expected that under the new arrangements bulk electricity will be
traded on one or more exchanges and through a variety of bilateral and
multilateral contracts and that market participants will include not only
generators and suppliers but also traders with physical positions, i.e. energy
wholesalers.
The new arrangements provide mechanisms for near real-time clearing and
settlement of differences between contractual and physical positions of those
buying, selling, producing and consuming electricity. A balancing mechanism
will enable the system operator (National Grid Company) to change levels of
generation and demand near to real-time; and a mechanism for imbalance
settlement will provide for the settling of the differences between net
physical and net contractual position of parties. The detailed rules
associated with these mechanisms will be contained in the Balancing and
Settlement Code.
TXU Europe is working to improve its demand forecasting process that
will, in turn, be used to determine its exposure to the NETA balancing
mechanism. The new processes include software designed to enable TXU Europe
to schedule its power stations in a commercially optimal manner. The
implementation phase that is now commencing will be challenging for all market
participants as the requirements for testing data systems are defined and a
roll-out program is established.
19
<PAGE>
TXU Europe has participated in the development program for the Balancing
and Settlement framework over a period of approximately eighteen months and
has completed its procurement process for its own new systems requirements.
TXU Europe has established a major acceptance testing program, which will
ensure that the new TXU Europe systems capabilities meet market requirements
and that they successfully interface and integrate with the central systems.
The expenditure on NETA for the year 2000 will be approximately pounds 5
million, some of which will be capitalized, with ongoing system support costs
of approximately pounds 0.5million annually.
TXU Europe is unable to determine, at this time, what impact the
implementation of NETA will have on its financial position, results of
operations or cash flows.
Good Behavior License Condition - TXU Europe accepted the generation
license condition designed to avoid "market abuse" after lengthy discussion
with the UK regulator. Two other companies (AES and British Energy) have been
referred to the Competition Commission by the UK regulator for refusing to
accept the condition. At this stage it is not expected that the condition will
have any material financial impact on TXU Europe.
CHANGES IN ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as extended and amended,
is effective for TXU Europe beginning January 1, 2001. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires the recognition of derivatives as either
assets or liabilities in the statement of financial position and the
measurement of those instruments at fair value. TXU Europe is currently
evaluating the impact the adoption of this standard will have on its financial
position and results of operations.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by TXU Europe contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Although TXU Europe believes that in making
any such statement its expectations are based on reasonable assumptions, any
such statement involves uncertainties and is qualified in its entirety by
reference to factors contained in the Forward-Looking Statements section of
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations in the TXU Europe 1999 Form 10-K as well as general
economic and business conditions in the UK and in the service area for Eastern
Electricity which has been opened to competition; unanticipated changes in
interest rates, in rates of inflation, or in foreign exchange rates;
prevailing governmental, statutory, regulatory or administrative policies and
initiatives affecting TXU Europe, its subsidiaries or the UK or European
electric and gas utility industries; general industry trends; regulation
issues; power costs and availability; changes in business strategy,
development plans or vendor relationships; availability of qualified
personnel; changes in, or the failure or inability to comply with,
governmental regulations, including, without limitation, environmental
regulations; changes in tax laws; and access to adequate transmission
facilities to meet changing demands, among others, that could cause the actual
results of TXU Europe to differ materially from those projected in such
forward-looking statements.
Any forward-looking statement speaks only as of the date on which such
statement is made, and TXU Europe does not undertake any obligation to update
any forward-looking statement to reflect events or circumstances after the
date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time and it is not
possible for TXU Europe to predict all of such factors, nor can it assess the
impact of each such factor or the extent to which any factor, or combination
of factors, may cause results to differ materially from those contained in any
forward-looking statement.
20
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required hereunder is not significantly different from
the information as set forth in Item 7A. Quantitative and Qualitative
Disclosures About Market Risk included in the TXU Europe 1999 Form 10-K and is
therefore not presented herein. Certain changes in interest rate risk
management resulting from financing transactions since the end of 1999 are
discussed in Note 5 to the Financial Statements. Other than as described
below, since December 31, 1999 there has been basically no change in the
contractual terms and notional amounts of foreign currency contracts as
disclosed in the TXU Europe 1999 Form 10-K. The estimated fair value of such
contracts has improved to a favorable pounds 43 million at June 30, 2000
compared with an unfavorable pounds 23 million at December 31, 1999. This
change in estimated valuation is principally the result of the impact on the
currency swaps in place on US dollar denominated debt resulting from the
decline in the exchange rate for UK pound sterling into US dollars since
December 31, 1999.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In November 1998, five complaints were filed in the High Court of Justice
in London, Queens Bench Division, Commercial Court, against subsidiaries of
TXU Europe Group by five of their former sales agencies. The agencies claimed
a final total of pounds 133 million arising from the summary termination for
the claimed fundamental breach of their respective contracts in April 1998.
The five agencies claimed damages for failure to give reasonable notice and
for compensation under the UK Commercial Agents Regulations 1994. The
substantial claims made by the five sales agencies were settled in June 2000
on a full and final basis following a mediation ordered by the High Court. TXU
Europe Group paid the sales agencies pounds 6 million. This amount was
equivalent to the legal and forensic accountants' costs which TXU Europe Group
estimated it would have incurred had the case been taken to a full trial.
There was no impact on the current income statement, as TXU Europe Group had
previously made provisions for such estimated expenses.
Item 6. Exhibits and Reports On Form 8-K
(a)Exhibits filed as a part of Part II are:
27 Financial Data Schedule
(b) Reports on Form 8-K filed since March 31, 2000, are as
follows:
None
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
TXU EUROPE LIMITED
By /s/ Paul C. Marsh
---------------------------
Paul C. Marsh
Principal Financial Officer
By /s/Scott R.J. Longhurst
---------------------------
Scott R. J. Longhurst
Principal Accounting Officer
Date: August 10, 2000
22
