Registration No. 333-36484
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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TXU AUSTRALIA HOLDINGS (PARTNERSHIP)
LIMITED PARTNERSHIP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Victoria, Australia
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
7389
(Primary Standard Industrial Classification Code Number)
98-0203436
(I.R.S. Employer Identification No.)
452 Flinders Street, Melbourne, Victoria Australia 3000
Tel: 011-613-9229-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT A. WOOLDRIDGE, Esq. PETER B. TINKHAM, Esq. ROBERT J. REGER, JR.,
Worsham Forsythe Executive Vice President Esq.
Wooldridge LLP TXU Business Services Thelen Reid & Priest LLP
1601 Bryan Street Company 40 West 57th Street
Dallas, Texas 75201 1601 Bryan Street New York, New York 10019
(214) 979-3000 Dallas, Texas 75201 (212) 603-2000
(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. J.G. ATKIN
Winthrop, Stimson, Putnam & Roberts Treasurer
One Battery Park Plaza TXU Australia Pty Ltd
New York, New York 10004-1490 452 Flinders Street, Melbourne,
(212) 858-1000 Victoria Australia 3000
011-613-9229-6000
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<PAGE>
SUBJECT TO COMPLETION, DATED , 2000
---
PROSPECTUS
US$300,000,000 AGGREGATE AMOUNT
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
% JUNIOR MATURING PRINCIPAL SECURITIES DUE
-----------------------
The % JUnior Maturing Principal Securities (JUMPSRM) Due will mature on
20 . Distributions on the JUMPS are payable on , , , and of each year
--
commencing .
TXU Australia Holdings (Partnership) Limited Partnership (TXU
Australia) has the right to defer distributions on the JUMPS for up to 20
consecutive quarters.
A brief description of the JUMPS can be found under "Summary " in this
prospectus.
Application will be made to list the JUMPS on the New York Stock Exchange
under the symbol ' '. We expect trading of the JUMPS to begin within 30 days
after they are first issued.
INVESTING IN THE JUMPS INVOLVES RISKS. RISK FACTORS BEGIN ON PAGE 12.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE OR THE
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION HAS APPROVED OR DISAPPROVED OF
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PER JUMPS TOTAL
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Public offering price......................... US$ US$
Underwriting discount......................... US$ US$
Proceeds to TXU Australia Holdings (Partnership)
Limited Partnership (before expenses)....... US$ US$
Distributions on the JUMPS will accrue from the date of initial delivery.
-----------------------
We expect the JUMPS will be ready for delivery in book-entry form only
through The Depository Trust Company on or about , 2000.
-----------------------
SALOMON SMITH BARNEY
, 2000
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.
<PAGE>
TABLE OF CONTENTS
SUMMARY......................................................................3
RISK FACTORS................................................................12
PRESENTATION OF FINANCIAL AND OTHER INFORMATION.............................18
EXCHANGE RATES..............................................................18
TXU AUSTRALIA GENERAL OVERVIEW..............................................19
USE OF PROCEEDS.............................................................30
CAPITALIZATION..............................................................30
FORWARD-LOOKING STATEMENTS..................................................32
OVERVIEW OF THE GAS AND ELECTRIC INDUSTRIES IN VICTORIA, AUSTRALIA..........34
OVERVIEW OF THE ELECTRIC INDUSTRY IN SOUTH AUSTRALIA, AUSTRALIA.............42
BUSINESS OF TXU AUSTRALIA GROUP.............................................49
TXU AUSTRALIA GROUP OPERATING STATISTICS....................................53
SECURITY OWNERSHIP..........................................................78
MANAGEMENT OF TXU AUSTRALIA.................................................78
DESCRIPTION OF THE JUMPS....................................................82
MATERIAL INCOME TAX CONSIDERATIONS..........................................97
UNDERWRITING...............................................................101
EXPERTS....................................................................102
LEGALITY...................................................................102
WHERE YOU CAN FIND MORE INFORMATION........................................102
INDEX TO FINANCIAL STATEMENTS..............................................F-1
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. TXU
AUSTRALIA HAS NOT, AND THE UNDERWRITERS 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. TXU AUSTRALIA IS NOT, AND
THE UNDERWRITERS ARE NOT, MAKING AN OFFER OF THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT
COVER OF THIS PROSPECTUS ONLY. THE BUSINESS PROFILE, FINANCIAL CONDITION,
RESULTS OF OPERATIONS AND PROSPECTS OF TXU AUSTRALIA MAY HAVE CHANGED SINCE THAT
DATE.
TXU AUSTRALIA HAS NOT AUTHORIZED OR TAKEN ANY ACTION TO CAUSE THE ISSUANCE
OR DISTRIBUTION OF THIS PROSPECTUS (OR ANY OTHER DOCUMENT INVITING APPLICATIONS,
SUBSCRIPTION OFFERS OR OFFERS FOR PURCHASE OF THESE JUMPS) IN THE COMMONWEALTH
OF AUSTRALIA, ANY OF ITS STATES, TERRITORIES, POSSESSIONS OR POLITICAL
SUBDIVISIONS (AUSTRALIA), OR TO ANY RESIDENT OF AUSTRALIA. ACCORDINGLY, THESE
JUMPS MAY NOT BE SOLD IN AUSTRALIA AND NEITHER THIS PROSPECTUS NOR ANY OTHER
DOCUMENT MAY BE ISSUED OR DISTRIBUTED IN AUSTRALIA OR TO ANY RESIDENT OF
AUSTRALIA FOR THE PURPOSE OF INVITING APPLICATIONS OR OFFERS TO SUBSCRIBE FOR OR
PURCHASE THESE JUMPS. NO PROSPECTUS RELATING TO THESE JUMPS HAS BEEN FILED WITH
OR REGISTERED BY THE AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION.
IN CONNECTION WITH THE DISTRIBUTION OF THE JUMPS, EACH OF THE UNDERWRITERS
WILL SEVERALLY REPRESENT AND AGREE THAT IT HAS NOT AND WILL NOT, DIRECTLY OR
INDIRECTLY, OFFER FOR SUBSCRIPTION OR PURCHASE, ISSUE INVITATIONS TO SUBSCRIBE
FOR OR PURCHASE OR SELL JUMPS IN AUSTRALIA OR TO ANY RESIDENT OF AUSTRALIA
(INCLUDING CORPORATIONS AND OTHER ENTITIES ORGANIZED UNDER THE LAWS OF AUSTRALIA
BUT NOT INCLUDING A PERMANENT ESTABLISHMENT OF THOSE CORPORATIONS OR OTHER
ENTITIES LOCATED OUTSIDE OF AUSTRALIA.)
Until (25 days after the date of this prospectus), all dealers that effect
transactions in these securities, whether or not participating in this offering,
may be required to deliver a prospectus. This is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
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SUMMARY
This summary may not contain all the information that may be important to
you. You should read the entire prospectus, including the financial statements
and related notes, before making an investment decision.
The issuer of the JUMPS is TXU Australia, whose ultimate corporate parent
is TXU Corp. TXU Corp. is a Dallas, Texas-based holding company which, through
its subsidiaries, engages in the generation, transmission and distribution of
electricity; the processing, transmission and distribution of natural gas; and
energy marketing, telecommunications, power development and other businesses.
TXU Corp. operates primarily in the United States, the United Kingdom and
Australia.
The following diagram is a summary of the TXU Corp. corporate structure as
it relates to the TXU Australia Group. Only the holding and operating companies
of the TXU Australia Group discussed in this prospectus are shown in the
diagram, and several intermediate holding companies are omitted where their only
activity is as holding companies for one or more of the operating companies. All
ownership interests are 100% unless otherwise indicated. The terms we use in
this prospectus to describe the companies in the TXU Australia Group are set
forth next to those companies' names in the diagram. In addition, "TXU Australia
Group" or "Group" is a reference to TXU Australia and all of the holding
companies and operating companies directly or indirectly owned by TXU Australia.
Companies in TXU Australia Group are shaded in the diagram. Companies in TXU
Australia Group other than TXU Australia are sometimes referred to individually
as a "Group company" and collectively as the "Group companies." The terms "us",
"we", and "our" refer to TXU Australia and, unless the context requires
otherwise, the Group companies. The shaded entities in the chart are not
guarantors of the JUMPS.
3
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TXU CORP AND THE TXU AUSTRALIA GROUP CORPORATE STRUCTURE
[GRAPHIC OMITTED]
4
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TXU AUSTRALIA
TXU Australia is a limited partnership established in 1999 under the laws
of the State of Victoria, Australia. Its general partner is AGP, a limited
liability corporation established under the laws of the State of Victoria,
Australia. Its limited partners are TXU Australia (LP) No. 1 Limited and TXU
Australia (LP) No. 2 Limited, both of which are limited liability companies
incorporated under the laws of England and Wales. AGP is solely responsible for
the management and direction of TXU Australia. TXU Australia's assets consist
primarily of shares in Holdings. Since under Victorian law a limited
partnership cannot hold title to property in its own name, these shares are held
by AGP acting as the general partner of TXU Australia. AGP does not directly own
any other ordinary shares or any of the assets of other significant Group
companies.
TXU Australia Group purchases, distributes, markets and sells electricity
and gas, primarily in the State of Victoria, and generates electricity in the
State of South Australia, Australia. The Group's core businesses of Networks,
Retail, Energy Trading and Generation are conducted through four principal
operating Group companies:
o TXU ELECTRICITY LIMITED, formerly called Eastern Energy Limited, which
purchases, distributes, and sells electricity to approximately 512,000
customers, mainly in Victoria;
o TXU NETWORKS (GAS) PTY LTD , formerly called Westar Pty Ltd, which
distributes natural gas to approximately 400,000 customers in central
and west Victoria;
o TXU PTY LTD, formerly called Kinetik Energy Pty Ltd, which sells
natural gas to approximately 414,000 customers in Victoria; and
o TXU (SOUTH AUSTRALIA) PTY LTD, which generates electricity at the
Torrens Island power station in South Australia.
Since December 1995, TXU Australia Group has been pursuing a strategy of
building a diverse energy portfolio encompassing generation of electricity and
distribution, retailing and access to peak supplies of electricity and gas. TXU
Australia Group believes this portfolio will give it a competitive advantage,
particularly through economies of scale, the ability to offer both electricity
and gas for sale and diversification of risk.
THE JUMPS*
The JUMPS will be issued under an indenture dated as of , 2000 between
TXU Australia and The Bank of New York, which we refer to as the "indenture". We
may amend and/or supplement the indenture in the future.
The JUMPS........................ US$300,000,000 principal amount of
junior subordinated, unsecured debt
securities of TXU Australia.
Maturity......................... The JUMPS will mature on 20 .
The Issuer....................... TXU Australia.
Distributions; Distribution Dates Distributions on the JUMPS will accrue
at a rate of % per annum and will be
payable quarterly on , , , and
of each year, beginning .
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* "JUMPS RM" is a registered service mark of Solomon Smith Barney, Inc.
5
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Distribution Deferrals........... TXU Australia has the right to defer
distributions on the JUMPS for up to 20
consecutive quarters. A deferral of
distributions cannot extend, however,
beyond the maturity date of the JUMPS.
During a deferral period, deferred
distributions will accrue additional
distributions at the same rate as the
JUMPS, compounded quarterly, to the date
of payment.
If TXU Australia defers distributions on
the JUMPS, no payment (interest,
distributions, redemption, repurchase or
otherwise) may be declared or paid by
TXU Australia on or with respect to its
partnership interests or any other
securities, guarantees or other
obligations of TXU Australia ranking
junior to or equal with the JUMPS.
During a deferral period, holders of the
JUMPS will continue to recognize income
for US federal income tax purposes
before they receive any cash relating to
deferred distributions, even if they are
cash basis taxpayers.
Ratings.......................... The JUMPS are expected to be assigned
ratings of "BBB-" by Standard & Poor's
Corporation (Standard & Poor's), and
"Baa3"by Moody's Investors' Services,
Inc. (Moody's). These ratings will
have been obtained with the
understanding that the rating agencies
will continue to monitor the credit
rating of TXU Australia, 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
JUMPS. 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.
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Ranking.......................... The JUMPS will be unsecured and junior
subordinated obligations of TXU
Australia. The JUMPS will rank equal in
right of payment with all other
obligations issued under the indenture
and any of TXU Australia's securities
which are specifically unsecured,
"junior" and "subordinate" by their
terms, but will otherwise rank
subordinate and junior in right of
payment to all other debt instruments of
TXU Australia. Because TXU Australia is
a holding partnership, the JUMPS will
also be effectively subordinated to
existing and future liabilities and
preference share capital of the Group
companies.
The indenture does not limit the amount
of debt TXU Australia or any of the
Group companies may incur. As of June
30, 2000, TXU Australia had A$2,375
million (US$1,418 million) of senior
debt and A$413 million (US$247 million)
of subordinated debt outstanding. The
senior debt would be senior to the
JUMPS, and the subordinated debt would
rank equally with the JUMPS. However,
the subordinated debt has the benefit of
a guaranty from TXU Corp., while the
JUMPS do not. As of June 30, 2000, the
Group companies had an aggregate of
A$483 million (US$288 million) in debt
outstanding that would be senior to the
JUMPS. As of June 30, 2000, neither TXU
Australia nor any Group company had any
preference share capital outstanding.
TXU Australia derives substantially all
of its income from the Group companies.
Therefore, TXU Australia's ability to
make payments on the JUMPS depends on
the cash flows from the Group companies.
Additional Amounts............... Any payments made by TXU Australia on
the JUMPS generally will be made without
withholding or deduction for taxes
unless required by law. If TXU Australia
is required to withhold or deduct taxes
from payments due on the JUMPS, then,
subject to exceptions specified in the
indenture, TXU Australia 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.
References in this prospectus to
payments made on the JUMPS include any
Additional Amounts that are required to
be paid unless the context requires
otherwise.
Optional Redemption.............. The JUMPS may be redeemed in whole or in
part at a redemption price equal to the
principal amount plus accrued and unpaid
distributions and Additional Amounts, if
any, at any time on or after , 2005.
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Tax Event Redemption............. TXU Australia may redeem all of the
outstanding JUMPS, in whole but not in
part, at a redemption price equal to the
principal amount plus accrued and unpaid
distributions and Additional Amounts, if
any, at any time within 90 days
following the occurrence of a Tax Event.
Listing.......................... TXU Australia will apply to list the
JUMPS on the New York Stock Exchange
under the symbol " ".
Form and Denomination............ The JUMPS will be issued in minimum
principal amounts of US$25 and multiples
of US$25. The JUMPS will be represented
by one or more global securities that
will be deposited with and registered in
the name of The Depository Trust Company
(DTC) or its nominee. This means that
you will not receive a certificate for
your JUMPS and that your broker will
maintain your position in the JUMPS. TXU
Australia expects that the JUMPS will be
ready for delivery through DTC on or
about , 2000.
Trustee and Paying Agent......... The Bank of New York.
Use of Proceeds.................. TXU Australia will use the proceeds from
the issuance and sale of the JUMPS to
refinance short-term debt including
short-term debt estimated to be A$413
million (US$247 million) outstanding
plus accrued interest to June 30, 2000
under subordinated facilities provided
to TXU Australia and its subsidiaries
and, to the extent there is excess, to
repay senior debt facilities.
Transfer Agent and Registrar..... TXU Business Services Company.
Governing Law.................... The JUMPS and the indenture will be
governed by the laws of the State of New
York.
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TXU AUSTRALIA GROUP
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected historical consolidated financial information presented below
for the six months ended June 30, 2000 and 1999 are from our condensed
consolidated financial statements and related notes included in this prospectus
starting at page F-35. The condensed consolidated financial statements for the
six months ended June 30, 2000 and 1999 are unaudited. These condensed
consolidated financial statements were prepared in accordance with generally
accepted accounting principles in the United States of America (US GAAP).
The information for the six months ended June 30, 2000 reflects the
acquisition of the business of Optima Energy Pty Ltd (Optima Energy) by TXU
Australia Group on May 4, 2000 from the South Australian government. All amounts
for 2000 include the Optima Energy operations only from the date of acquisition.
The selected historical consolidated financial information presented below
for each of the three years in the period ended December 31, 1999 has been
derived from our consolidated financial statements for the same years, which
have been audited by Deloitte Touche Tohmatsu, independent auditors. These
financial statements were prepared in accordance with generally accepted
accounting principles in the United States of America (US GAAP) and are included
on pages F-4 to F-34 of this prospectus.
You should read the selected consolidated financial information together
with our historical consolidated financial statements and the section of this
prospectus entitled MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The selected consolidated financial information for the years ended
December 31, 1996 and 1995 is unaudited. The consolidated financial information
for the year ended December 31, 1995 reflects the financial position and results
of operations of Eastern Energy while it was owned by the Victorian government.
TXU Australia Group acquired Eastern Energy in December 1995 from the Victorian
government. The consolidated income statement data for the year ended December
31, 1995, includes the pre-acquisition and post-acquisition results of
operations for Eastern Energy. The consolidated balance sheet data at December
31, 1995 reflects the application of purchase accounting, including all
financing transactions, in connection with the acquisition. The information for
the year ended December 31, 1999 reflects the acquisition of Westar and Kinetik
Energy by TXU Australia Group on February 24, 1999 from the Victorian
government. All amounts for 1999 include Westar and Kinetik Energy only from the
date of acquisition.
The selected consolidated income statement data presented below reflects
the continuing operations of TXU Australia Group. The discontinued operations of
Enetech have not been reflected in such information.
For the convenience of the reader, June 30, 2000 and December 31, 1999
amounts are shown in US dollars, converted as of June 30, 2000, at a rate of
A$1.00 = US$0.5971.
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<TABLE>
<CAPTION>
Six Months ended June 30, Year ended December 31,
----------------------------- ------------------------------------------------------------------------
1995 1995
Post- Pre-
2000 1999 1999 1998 1997 1996 acquistion acquisition
----------------------------- ------------------------------------------------------------------------
A$ US$ A$ US$
-------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
(MILLIONS OF A$)
Operating revenues A$581.7 US$347.3 A$384.1 A$887.7 US$530.0 A$ 646.8 A$621.2 A$ 600.0 A$39.9 A$546.5
Operating income 141.8 84.7 79.7 181.2 108.2 174.1 154.1 135.4 7.7 126.2
Net interest expense (121.8) (72.7) (89.7) (204.1) (121.9) (92.7) (97.2) (110.0) (9.8) (34.7)
Income before interest and
income taxes 148.3 88.5 78.2 178.4 106.5 174.6 154.4 135.8 8.0 125.9
Income/(loss) from
continuing operations 18.8 11.2 (12.6) (5.9) (3.5) 46.2 26.1 9.2 (1.5) 78.2
CASH FLOW STATEMENT DATA
(MILLIONS OF A$)
Cash provided by (used in)
operating activities from Not Not
continuing operations (27.0) (16.1) (183.6) (64.1) (38.3) 136.1 149.0 65.8 Available Available
Cash provided by (used in)
financing activities from Not Not
continuing operations 234.5 140.0 1,942.0 2,052.0 1,225.2 25.2 (64.5) (43.8)Available Available
Cash used in investing
activities from continuing Not Not
operations (336.2) (200.7) (1,745.4 (1,862.4) (1,112.0) (153.9) (66.9) (47.6)Available Available
</TABLE>
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<TABLE>
<CAPTION>
Six Months ended June 30, Year ended December 31,
-------------------------------- -----------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------------------------------- -----------------------------------------------------------------
A$ US$ A$ US$
--------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIODS)
(MILLIONS OF A$ )
Net property, plant and
equipment A$2,898.0 US$1,730.4 A$2,634.1 A$2,697.0 US$1,610.4 A$1,551.8 A$1,446.3 A$1,457.8 A$1,464.8
Total assets 4,997.7 2,984.2 4,464.3 4,600.2 2,746.8 2,334.8 2,205.8 2,184.8 2,240.8
Short-term debt 879.5 525.1 1,296.9 805.5 481.0 201.5 252.5 74.5 50.0
Long-term debt 2,391.4 1,427.9 1,836.4 2,408.4 1,438.1 966.4 890.1 1,132.1 1,212.1
Owner's equity 1,158.1 691.5 906.1 947.6 565.8 926.0 880.9 853.7 832.5
OTHER DATA
(MILLIONS OF A$, EXCEPT RATIOS
AND PERCENTAGE )
Ratio of earnings to fixed charges 1.2 1.2 0.9(1) 0.9(2) 0.9(2) 1.9 1.6 1.2 3.0
Consolidated debt/debt and equity 74% 74% 78% 77% 77% 56% 56% 59% 60%
Earnings before interest, taxes,
depreciation and amortization
(EBITDA) (3) 218.4 130.4 130.5 295.7 176.6 240.8 217.8 197.1
</TABLE>
(1) TXU Australia Group incurred a loss from continuing operations of A$12.6
million (US$7.5 million) for the six months ended June 30, 1999. The
primary cause of the loss was the effect of the Group's expansion program,
where EBITDA was insufficient to offset increases in depreciation, interest
expense and goodwill amortization. The ratio of earnings to fixed charges
of 0.9 for the six months ended June 30, 1999 was less than one to one
coverage by A$11.3 million (US$6.7 million).
(2) TXU Australia Group incurred a loss from continuing operations of A$5.9
million (US$3.5 million) for the year ended December 31, 1999, compared
with income from continuing operations of A$46.2 million (US$27.6 million)
for the year ended December 31, 1998. The primary cause of the loss was the
effect of the Group's expansion program, where EBITDA was insufficient to
offset increases in depreciation, interest expense and goodwill
amortization. The ratio of earnings to fixed charges of 0.9 for the year
ended December 31, 1999 was less than one to one coverage by A$25.7 million
(US$15.3 million).
(3) EBITDA equals earnings before interest income, interest expense, income
taxes, depreciation and amortization. This information is provided for
informational purposes only. EBITDA is not a measure defined under US GAAP
and has not been presented in accordance with US GAAP. EBITDA should not be
construed as an alternative to income from operations 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. EBITDA is a
widely accepted financial indicator of a company's ability to incur and
service debt. However, EBITDA may not be comparable to similar measures
presented by other companies.
For more detailed information, see NOTES to the CONSOLIDATED FINANCIAL
STATEMENTS and NOTES to the CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
11
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RISK FACTORS
In addition to the other information in this prospectus, you should
consider the following factors before purchasing the JUMPS.
IF THE GROUP COMPANIES ARE UNABLE TO PROVIDE SUFFICIENT CASH TO TXU
AUSTRALIA, TXU AUSTRALIA MAY NOT BE ABLE TO MAKE PAYMENTS ON THE JUMPS.
Almost all of TXU Australia's consolidated assets are held by, and
operating income comes from, Eastern Energy, Westar, Kinetik Energy and other
Group operating companies. Accordingly, TXU Australia's primary sources of cash
to service its debt and other obligations, including its obligations under the
JUMPS, are the dividends and other distributions it receives from the Group
companies. These companies will have no obligation to pay any amounts due on the
JUMPS or to make any funds available for those payments.
Unexpected declines in future business of the Group companies, which may
result from, among other things, the increasingly competitive environment in the
Victorian, South Australian and Australian electric and gas utility industries,
increases in operating or capital costs, changes in regulatory policies or the
inability to borrow additional funds as well as other factors referred to under
FORWARD-LOOKING STATEMENTS, could impair the ability of the Group operating
companies to meet their debt service obligations, or to pay dividends and make
other payments to TXU Australia. If the Group operating companies are unable to
provide cash sufficient to permit TXU Australia to service its debt and other
obligations, TXU Australia may have no source for amounts due on the JUMPS.
TXU AUSTRALIA GROUP'S SENIOR FINANCING DOCUMENTS MAY LIMIT TXU AUSTRALIA'S
ABILITY TO MAKE PAYMENTS ON THE JUMPS AND LIMIT THE ABILITY OF HOLDERS OF JUMPS
TO EFFECTIVELY EXERCISE REMEDIES AGAINST TXU AUSTRALIA IN THE EVENT OF A DEFAULT
UNDER THE JUMPS.
TXU Australia Group's senior financing documents restrict the ability of
TXU Australia to make payments or other distributions in relation to
subordinated debt, including the JUMPS, unless specific conditions, including
lack of defaults under such senior financing documents and satisfaction of
interest coverage ratios, are met. The events of default under the senior
financing documents are broadly defined and they can be construed in a manner
that would allow the senior lenders under the senior financing documents to
declare defaults and stop payments on the JUMPS in a wide variety of
circumstances. Please see TXU AUSTRALIA GENERAL OVERVIEW - CAPITALIZATION OF TXU
AUSTRALIA - "DEED OF COMMON TERMS" for an illustrative list of circumstances in
which the senior lenders can declare a default under the senior financing
documents. The subordination provisions contained in the indenture also require
holders of the JUMPS to turn over to the trustee under the senior financing
documents all moneys received or recovered through the exercise of remedies at
any time when there is a default under the senior financing documents, until
such time such default is cured or waived or the senior lenders are paid in
full. Please see DESCRIPTION OF THE JUMPS - "SUBORDINATION PROVISIONS." In the
case of a default involving the bankruptcy or other winding up of any Group
company or of TXU Australia, it is likely that the senior lenders would require
payment in full on the senior debt prior to any payments being made on any
subordinated securities, including the JUMPS. As of June 30, 2000, TXU Australia
and the Group companies had approximately A$2,040 million (US$1,218 million) of
debt outstanding under these senior financing documents. In addition, there is
no protection for holders of the JUMPS against the Group companies amending the
existing senior financing documents or entering into additional restrictive
financing agreements including financial arrangements which would limit the
ability of the Group companies to make dividend and other payments to TXU
Australia. SEE TXU AUSTRALIA GENERAL OVERVIEW - CAPITALIZATION OF TXU AUSTRALIA
- "DEED OF COMMON TERMS".
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TXU AUSTRALIA GROUP FACES A NUMBER OF REGULATORY AND COMPETITIVE RISKS
ASSOCIATED WITH ITS BUSINESSES.
a. PRICE REGULATION OF THE ELECTRICITY AND GAS DISTRIBUTION BUSINESSES
MAY LEAD TO PRICING ARRANGEMENTS BELOW CURRENT LEVELS WHICH MAY
DIMINISH TXU AUSTRALIA'S ABILITY TO MEET ITS OBLIGATIONS.
Westar and Eastern Energy levy regulated distribution charges on users of
their distribution networks. In the gas industry, distribution and retail
functions are performed by separate legal entities. Accordingly, Westar levies
distribution charges on users of its distribution network, including Kinetik
Energy. In the electricity industry, both distribution and retail functions are
performed within the same legal entity. Accordingly, Eastern Energy levies
distribution charges on its own retail customers within its distribution area,
as well as on third party retailers for sales by those retailers to
"contestable" customers in the Eastern Energy distribution area. By contestable,
we mean those gas or electric customers who are free to choose a retailer for
their gas and/or electricity needs. In contrast, those customers who are unable
to choose a retailer for electricity and/or gas and are required to remain with
their current retailer are referred to as "non-contestable" or "franchise"
customers.
The distribution network charges are levied in accordance with tariff
orders which are subject to regulation by the Office of the Regulator General in
Victoria (ORG).
The ORG is required to periodically review and, if appropriate, change, the
distribution network charges. The ORG published its final determination for the
first electricity price review on September 21, 2000, containing significant
network charge reductions. See OVERVIEW OF THE GAS AND ELECTRIC INDUSTRIES IN
VICTORIA, AUSTRALIA - ELECTRIC NETWORK PRICE REVIEW. The changes apply from
January 1, 2001. The final determination for the first gas price review has not
yet been scheduled. Any changes resulting from that review will apply for five
years from January 1, 2003. After the initial reviews, reviews will take place
at intervals of not less than 5 years for electricity and as nominated by Westar
and accepted by the ORG for gas. The outcomes of future reviews are uncertain.
There is a risk that the ORG could determine pricing arrangements below current
levels. If this occurs for Eastern Energy or Westar, that company's ability to
meet its obligations and to provide cash to TXU Australia would be diminished.
See BUSINESS OF TXU AUSTRALIA GROUP -- "NETWORKS BUSINESS SEGMENT."
b. PRICE REGULATION AND COMPETITION IN THE ELECTRICITY AND GAS SUPPLY
BUSINESSES MAY LEAD TO REDUCED RETAIL PROFIT MARGINS.
When the Victorian electricity and gas businesses were privatized, the
majority of customers were non-contestable and retail prices were regulated by
tariff orders approved by the regulator. The Victorian Government established a
timetable by which various customer groups would become contestable. The
regulated prices apply until the date on which a specific customer group becomes
contestable. After that date, the retail prices for that customer group are
intended to be determined by market forces without regulatory oversight.
Eastern Energy's customers who consume electricity in excess of 160 MWh per
year are already fully contestable and can choose a supplier of their choice,
with the remainder becoming contestable in stages commencing on January 1, 2001.
Kinetik Energy's customers who consume gas in excess of 10,000 GJ per year
are already fully contestable. The remainder of Kinetik Energy's customers are
expected to become contestable on September 1, 2001.
Prior to a customer becoming contestable, Eastern Energy and Kinetik Energy
can charge that customer no more than the regulated prices set in their
respective tariff orders. As a result, they are unable to pass all cost
increases on to customers who are not yet contestable. After contestability,
Eastern Energy and Kinetik Energy will be exposed to increased competition from
other retailers. There is a risk that competitive forces may result in the loss
of customers and the reduction of retail profit margins. Experience to date has
indicated that large electric customers, once becoming contestable, have
successfully negotiated price reductions with retailers.
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c. TXU AUSTRALIA GROUP MAY NOT BE ABLE TO EFFECTIVELY HEDGE AGAINST
ELECTRICITY PRICE VOLATILITY AND MAY SUFFER LOSSES IF THE PRICES AT
WHICH IT SELLS ELECTRICITY ARE LOWER THAN THE PRICES AT WHICH IT
PURCHASES ELECTRICITY.
Eastern Energy obtains the electricity to satisfy its energy supply
obligations primarily by purchases from the electricity pool into which all
electricity output from generators within Victoria, New South Wales and South
Australia is centrally pooled and scheduled to meet the electricity demand in
those States in the National Electricity Market. Because the price of
electricity purchased from the pool can be volatile, Eastern Energy can be
exposed to risks arising from the differences between the prices at which it
sells and the prices at which it purchases electricity, unless it effectively
hedges such exposure. Eastern Energy actively manages these risks in order to
hedge most of its supply obligations and to monitor the volume and financial
risk of its unhedged position. No assurance can be given that the risks relating
to energy supply obligations may be effectively hedged in the future. See
BUSINESS OF TXU AUSTRALIA GROUP -- "THE RETAIL BUSINESS SEGMENT" and
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - "QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK."
d. OTHER REGULATORY RISKS COULD RESULT IN INCREASED COSTS TO THE GROUP
COMPANIES.
Each of Eastern Energy, Westar and Kinetik Energy is required to operate
within the terms of its distribution and/or retail licenses. The licenses
require the companies to comply with applicable legislation and codes, tariff
orders, and standards and procedures determined by the ORG. Material breaches of
the terms of the licenses could result in increased cost to the companies in the
form of fines or other penalties adverse to the companies and, in worst cases,
could result in the revocation of licenses by the ORG. Notwithstanding that the
ORG may consult the industry prior to making changes, there is a risk that the
terms of these licenses could be changed without the agreement of the Group
companies, resulting in increased cost to the Group companies.
Similar risks apply in respect of licenses issued by regulators in states
other than Victoria.
THE VICTORIAN GAS SUPPLY COULD BE INTERRUPTED, WHICH COULD REDUCE THE GROUP'S
REVENUES AND NET INCOME.
The Victorian gas network is highly dependent on one source of supply - the
Bass Strait gas fields, where gas is pumped onshore and processed at Longford in
Eastern Victoria. In September 1998, an explosion occurred at the Esso Australia
Resources Limited (Esso) gas processing plant at Longford, which caused almost
total loss of supply to the principal Victorian gas transmission system for
almost two weeks. There is a risk that the gas supply from this major source
could be interrupted again. See BUSINESS OF TXU AUSTRALIA GROUP -- "THE ENERGY
TRADING BUSINESS SEGMENT" and -- "LITIGATION."
TXU AUSTRALIA'S LEVEL OF INDEBTEDNESS MAY LIMIT ITS ABILITY TO SERVICE ITS DEBT
IN THE FUTURE.
The JUMPS will be treated as debt securities for US GAAP purposes. At June
30, 2000, after giving effect to the issuance of the JUMPS and the application
of the proceeds from their sale to reduce existing debt, the ratio of TXU
Australia Group's consolidated net debt to consolidated net debt plus equity as
determined in accordance with US GAAP was approximately 74%. See SUMMARY --
"SELECTED CONSOLIDATED FINANCIAL INFORMATION" and USE OF PROCEEDS. The degree to
which TXU Australia and the Group companies may be leveraged in the future could
affect their ability to service debt and other obligations, to make
distributions on the JUMPS, to make capital investments, to take advantage of
certain business opportunities, to respond to competitive pressures or to obtain
additional financing. TXU Australia and the Group companies may incur
substantial additional debt 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."
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IN THE EVENT OF A LIQUIDATION OR REORGANIZATION OF A TXU AUSTRALIA SUBSIDIARY,
CLAIMS OF THAT SUBSIDIARY'S CREDITORS AND HOLDERS OF ITS PREFERENCE SHARE
CAPITAL COULD BE SENIOR TO THOSE OF HOLDERS OF THE JUMPS AND WOULD BE PAID
BEFORE PAYMENTS ARE MADE ON THE JUMPS.
TXU Australia has no direct operations. All of TXU Australia's assets,
consisting primarily of shares in Holdings, are owned through AGP. Because TXU
Australia is a holding partnership and conducts its operations through
subsidiaries, the holders of the JUMPS will have a position junior to the claims
of creditors and preference stockholders of the operating subsidiaries. Upon
liquidation or reorganization of an operating subsidiary, the claims of that
subsidiary's creditors and holders of its preference share capital would then be
senior to the claims of the holders of the JUMPS or other creditors of TXU
Australia. The financial statements of TXU Australia Group included in this
prospectus show the aggregate amount of Group company debt as of the date of
those statements. At June 30, 2000, senior and subordinated debt of TXU
Australia totaled approximately A$2,788 million (US$1,665 million) and the Group
companies' debt aggregated approximately A$483 million (US$288 million). At May
31, 2000, there was no preference share capital outstanding within TXU Australia
Group. TXU Australia and the Group companies have the ability to incur
substantial additional debt and other obligations such as those under leases,
letters of credit and other instruments. In addition, the indenture imposes no
restrictions:
o on the ability of TXU Australia to enter into transactions with its
affiliates,
o on the ability of TXU Australia to pay dividends or make other
distributions or make other payments (except during a deferral
period),
o that would afford protection to the holders of JUMPS in the event of a
highly-leveraged transaction or change of control involving TXU
Australia, or
o on subsidiaries of TXU Australia with respect to the incurrence of
debt, imposition of liens on their properties or any of their
activities.
The senior debt instruments by which TXU Australia is bound restrict TXU
Australia Group companies from taking specified actions without senior lender
consent. These prohibitions could prevent the Group companies from taking
actions they deem to be in their best interests. See MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- "LIQUIDITY AND
CAPITAL RESOURCES."
CHANGES IN CURRENCY EXCHANGE RATES MAY AFFECT TXU AUSTRALIA'S ABILITY TO MAKE
PAYMENTS ON THE JUMPS.
TXU Australia's revenues will be received in Australian dollars. The
proceeds to be paid to TXU Australia for the JUMPS will be paid in US dollars,
and the distributions and principal payment obligations on the JUMPS will be
payable in US dollars. As a result, any change in the currency exchange rate
that reduces the amount in Australian dollars obtained upon conversion of the US
dollar-based net proceeds of the JUMPS or that increases the effective principal
and distribution payment obligations represented by the JUMPS upon conversion of
Australian dollar-based revenues into US dollars may, if not appropriately
hedged, have a material adverse effect on TXU Australia or on its ability to
make payments on the JUMPS. Although TXU Australia expects to enter into
transactions to hedge risks associated with exchange rate fluctuations, there
can be no assurance that TXU Australia will be successful in entering into such
transactions or will be successful in reducing those risks. See EXCHANGE RATES
for information concerning the Noon Buying Rate for Australian dollars expressed
in US dollars.
TXU AUSTRALIA HAS THE OPTION TO DEFER DISTRIBUTIONS WHICH MAY HAVE TAX
CONSEQUENCES FOR JUMPS HOLDERS AND MAY AFFECT THE TRADING PRICE OF THE JUMPS.
TXU Australia will have the right, at any time and from time to time, to
defer distributions on the JUMPS for up to 20 consecutive quarters. A deferral
of distributions cannot extend, however, beyond the maturity date of the JUMPS.
If TXU Australia defers distributions on the JUMPS, you will continue to
recognize income in the form of original issue discount for US federal income
tax purposes before you receive any cash relating to deferred distributions,
even if you use the cash method of accounting. If you sell your JUMPS before the
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record date for the payment of deferred distributions at the end of a deferral
period, you will not receive the cash related to those distributions. You should
consult your own tax advisor about these and other tax consequences of an
investment in the JUMPS.
TXU Australia has no current intention of deferring distributions on the
JUMPS. However, if TXU Australia exercises its right in the future, the JUMPS
may trade at a price that does not fully reflect the value of accrued but unpaid
distributions. If you sell the JUMPS during a distribution deferral period, you
may not receive the same return on investment as someone else who continues to
hold the JUMPS. Moreover your adjusted tax basis in the JUMPS that you sell will
be increased by the amount of accrued original issue discount attributable to
deferred distributions. If your selling price is less than your adjusted tax
basis, you will recognize a capital loss. Your ability to deduct capital losses
for US federal income tax purposes is subject to limitations. In addition, the
existence of TXU Australia's right to defer payments of distributions on the
JUMPS may mean that the market price for the JUMPS may be more volatile than
other securities that do not have these rights.
THE JUMPS MAY BE REDEEMED AT ANY TIME IF SPECIFIED CHANGES IN TAX LAW OCCUR OR
IF ADDITIONAL AMOUNTS ARE OR WILL BE PAYABLE, AND YOU MAY NOT BE ABLE TO
REINVEST YOUR REDEMPTION PROCEEDS AT A RATE OF RETURN THAT IS AS HIGH AS THE
RATE OF RETURN ON THE JUMPS.
If specified changes in tax law occur and are continuing, or if Additional
Amounts are or will be payable, TXU Australia will have the right to redeem the
JUMPS at the principal amount plus accrued and unpaid distributions and
Additional Amounts, if any, in whole but not in part, at any time within 90 days
of the occurrence of the changes. If TXU Australia redeems the JUMPS, you may
not be able to reinvest your redemption proceeds at a rate of return that is as
high as the rate you were earning on your JUMPS. See also DESCRIPTION OF JUMPS -
"TAX EVENT REDEMPTION" for more information.
THE JUMPS MAY BE REDEEMED AT THE OPTION OF TXU AUSTRALIA AND YOU MAY NOT BE ABLE
TO REINVEST YOUR REDEMPTION PROCEEDS AT A RATE OF RETURN THAT IS AS HIGH AS THE
RATE ON THE JUMPS.
At the option of TXU Australia, the JUMPS may be redeemed, in whole, at any
time or in part, from time to time, on or after , 2005, at a redemption price
equal to the principal amount to be redeemed plus accrued and unpaid
distributions and Additional Amounts, if any, to the redemption date. You should
assume that TXU Australia will exercise its redemption option if TXU Australia
is able to refinance at a lower interest rate or it is otherwise in TXU
Australia's best interest to redeem the JUMPS. If TXU Australia redeems the
JUMPS, you may not be able to reinvest your redemption proceeds at a rate of
return that is as high as the rate you were earning on your JUMPS.
A PUBLIC MARKET FOR THE JUMPS MAY NOT DEVELOP AND THERE MAY NOT BE AN ACTIVE
MARKET FOR THE JUMPS.
No public market for the JUMPS existed before this offering. Although the
JUMPS are expected to be listed on the New York Stock Exchange, there can be no
assurance that an active public market for the JUMPS will develop. If an active
trading market for the JUMPS does develop, there can be no assurance that it
will be sustained after this offering.
AUSTRALIAN COURTS MIGHT NOT ENFORCE JUDGMENTS RENDERED OUTSIDE OF AUSTRALIA
WHICH MAY MAKE IT DIFFICULT TO COLLECT ON JUDGMENTS RENDERED AGAINST TXU
AUSTRALIA.
TXU Australia is organized under the laws of the State of Victoria,
Commonwealth of Australia. Substantially all the assets of TXU Australia are
located outside the United States. TXU Australia has appointed Thelen Reid &
Priest LLP, New York, New York, as its authorized agent upon which process may
be served in any action arising out of or based upon the indenture or the JUMPS
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
has consented to the jurisdiction of those courts in any of those actions.
However, it may not be possible for investors to enforce against TXU Australia,
in original actions or in actions for enforcement of judgments of US courts,
civil liabilities based upon US securities laws.
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TXU AUSTRALIA'S FUTURE EARNINGS MAY NOT COVER ITS FIXED CHARGES, INCLUDING THOSE
ON THE JUMPS.
TXU Australia's future earnings may be insufficient to cover fixed charges.
TXU Australia's ratio of earnings to fixed charges for the year ended December
31, 1999 was 0.9. The deficiency was A$25.7 million (US$15.3 million). For the
six months ended June 30,2000 TXU Australia's ratio of earnings to fixed charges
was 1.2, a surplus of A$26.3 million (US$15.7 million). There is no assurance
that future earnings will be sufficient to cover fixed charges, including those
on the JUMPS.
THE AMOUNT AND TIMING OF INCLUSION OF INCOME FROM THE JUMPS MAY BE TAXABLE UNDER
THE ORIGINAL ISSUE DISCOUNT (OID) RULES, WHICH MAY BE DIFFERENT FROM THE
HOLDER'S NORMAL TAX ACCOUNTING RULES, EVEN IF TXU AUSTRALIA DOES NOT EXERCISE
ITS OPTION TO DEFER DISTRIBUTIONS.
TXU Australia's right to defer distributions on the JUMPS should not cause
the JUMPS to be treated as issued with an OID for US federal income tax
purposes. It is possible, however, that the IRS could take a contrary position.
If the JUMPS were treated as issued with OID, a US holder (as defined herein)
would be required to include in income, on an economic accrual basis over the
term of the JUMPS, an amount equal to the sum of all scheduled distributions on
the JUMPS, plus the excess, if any, of the principal amount of the JUMPS over
their issue price, regardless of the holder's regular method of accounting for
tax purposes. In that case, the amount and timing of inclusion of the interest
income that a US holder was required to include in income in a particular
taxable year could differ from the amount and timing of inclusion of the
distributions that the US holder received in that year. US holders should
consult their tax advisors regarding the tax consequences to them, in light of
their particular situations, of treating the JUMPS as issued with OID. See
MATERIAL INCOME TAX CONSIDERATIONS - "MATERIAL US INCOME TAX CONSIDERATIONS -
ORIGINAL ISSUE DISCOUNT."
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PRESENTATION OF FINANCIAL AND OTHER INFORMATION
CERTAIN TERMS
We use the following terms in this prospectus as described below:
o "A$" , "$" OR "AUSTRALIAN DOLLARS" are the currency of the
Commonwealth of Australia.
o "GJ" - Gigajoule. A unit of gas energy equal to one billion joules.
o "GWH" - A unit of electric energy equal to one thousand MWh.
o "MWH" - A unit of electric energy equal to one million watts of power
for one hour.
o "PJ" - Petajoule. A unit of gas energy equal to one million GJ.
o "US$" OR "US DOLLARS" are the currency of the United States.
o "US GAAP" means US generally accepted accounting principles.
EXCHANGE RATES
The following table sets out, for the periods indicated, information
concerning the exchange rates between Australian dollars and US dollars based on
the noon buying rate in New York City for cable transfers in Australian dollars
as certified for customs purposes by the Federal Reserve Bank of New York (Noon
Buying Rate). The "Average" is the average of the Noon Buying Rates in effect on
the last business day of each month during the relevant period.
FISCAL YEAR ENDED PERIOD END AVERAGE HIGH LOW
----------------- ---------- ------- ---- ---
(US$ PER A$1.00)
1995 0.7432 0.7407 0.7407 0.7088
1996 0.7944 0.7846 0.8137 0.7443
1997 0.6615 0.7393 0.7840 0.6615
1998 0.6123 0.6300 0.6852 0.5700
1999 0.6560 0.6445 0.6620 0.6205
o On October 13, 2000, the Noon Buying Rate was A$1.00 = US$ 0.5297.
For the convenience of the reader, this prospectus contains translations of
certain Australian dollar amounts into US dollars at the exchange rate as of
June 30, 2000 of A$1.00 = US$0.5971 unless otherwise specified. TXU Australia
does not make any representation that the Australian dollar amounts have been,
could have been or could be converted into US dollars at the rates indicated or
at any other rates.
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TXU AUSTRALIA GENERAL OVERVIEW
GENERAL
In January 1999, TXU Corp., through a series of subsidiaries, created TXU
Australia to acquire and hold, either directly or indirectly, all of its
Australian investments. Prior to this time, TXU Corp. principally conducted
business in Australia through TXU APL and its wholly-owned subsidiaries. In
connection with the acquisition of Westar and Kinetik Energy, TXU Australia
Group was restructured and TXU Australia was interposed as the ultimate holding
entity in Australia for TXU Australia Group.
TXU Australia is a limited partnership established pursuant to a limited
partnership deed, dated January 27, 1999, and formed and registered under the
Partnership Act 1958 of the State of Victoria, Australia (Partnership Act). Its
general partner, AGP, is a limited liability corporation, established under the
laws of the State of Victoria, Australia. Its limited partners are TXU Australia
(LP) No. 1 Limited and TXU Australia (LP) No. 2 Limited, both of which are
limited liability companies incorporated under the laws of England and Wales.
AGP is solely responsible for the management and direction of TXU Australia. TXU
Australia's assets consist primarily of shares in Holdings. Since under
Victorian law a limited partnership cannot hold title to property in its own
name, these shares are held by AGP acting as the general partner of TXU
Australia. AGP does not directly own any of the assets, including other ordinary
shares, of other significant Group companies.
TXU Australia's headquarters is located at 452 Flinders Street, Melbourne,
Victoria, Australia 3000. Its telephone number is 613-9229-6000.
TXU Australia Group purchases, distributes, markets and sells electricity
and gas, primarily in the State of Victoria, and generates electricity in the
State of South Australia, Australia. The Group's core businesses of Networks,
Retail, Energy Trading and Generation are conducted through four principal
operating Group companies:
o EASTERN ENERGY, which purchases, distributes, and sells electricity to
approximately 512,000 customers, mainly in Victoria;
o WESTAR, which distributes natural gas to approximately 400,000
customers in central and west Victoria;
o KINETIK ENERGY, which sells natural gas to approximately 414,000
customers in Victoria; and
o TXU SOUTH AUSTRALIA, which generates electricity at the Torrens Island
power station in South Australia.
TXU Australia's ultimate corporate parent is TXU Corp. TXU Corp. is a
Dallas, Texas-based holding company which, through its subsidiaries, engages in
the generation, transmission and distribution of electricity; the processing,
transmission and distribution of natural gas; and energy marketing,
telecommunications, power development and other businesses. TXU Corp. operates
primarily in the United States, Europe and Australia.
The following diagram illustrates the relationship of TXU Australia to TXU
Corp., and to significant Group companies (all ownership interests are 100%
unless otherwise indicated).
This diagram is a summary of the TXU Corp. corporate structure as it
relates to TXU Australia Group. Only the holding and operating companies of TXU
Australia Group discussed in this prospectus are shown in the diagram, and
several intermediate holding companies are omitted where their only activity is
as holding companies for one or more of these operating companies. The shaded
entities in the chart are not guarantors of the JUMPS.
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TXU CORP. AND THE TXU AUSTRALIA GROUP CORPORATE STRUCTURE
[GRAPHIC OMITTED]
ACQUISITION OF WESTAR AND KINETIK ENERGY
In February 1999, TXU Australia Group completed the acquisition of the gas
distribution and retail assets and businesses of Westar and Kinetik Energy from
the Victorian Government. This acquisition was preceded by a competitive tender
arrangement run by the Victorian Government for the disposal of these businesses
and assets.
Prior to the acquisition of Westar and Kinetik Energy, the business of TXU
Australia Group was conducted by TXU APL. In connection with the acquisition of
Westar and Kinetik Energy, TXU Australia Group was restructured and TXU
Australia was interposed as the ultimate holding entity in Australia for TXU
Australia Group.
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CAPITALIZATION OF TXU AUSTRALIA
PARTNERSHIP INTERESTS
TXU Australia (LP) No.1 Limited is a limited partner holding 49.75% of the
interests in TXU Australia.
TXU Australia (LP) No.2 Limited is a limited partner holding 49.75% of the
interests in TXU Australia.
AGP is the general partner and holds 0.5% of the interests in TXU
Australia.
SENIOR DEBT FUNDING
As a result of a financial restructuring completed in February 2000, TXU
Australia Group consolidated a significant portion of its debt at the TXU
Australia level. TXU Australia entered into various loan agreements with senior
lenders (Senior Lenders). These loan agreements are referred to in this
prospectus as Senior Debt.
These Senior Debt arrangements consist generally of the following
facilities (all amounts have been converted at the noon buying rate at June 30,
2000 of A$1.00 = US$0.5971):
FACILITY A
Under a Syndicated Facilities Agreement dated February 24, 1999, a banking
syndicate has made available to TXU Australia A$825 million (US$493 million).
The facilities include:
o a three-year revolving variable rate loan note subscription facility
for A$220 million (US$131 million); and
o a three-year non-revolving variable rate loan note subscription
facility for A$605 million (US$361 million), both with a maturity date
of February 24, 2002.
At June 30, 2000, Facility A was fully drawn at an interest rate of 6.88%
per annum.
FACILITY B
Under a Syndicated Facility Agreement dated February 22, 2000, a banking
syndicate has made available to TXU Australia A$625 million (US$373 million).
The facility comprises a fully revolving variable rate loan note subscription
facility with a maturity date of October 31, 2001.
At June 30, 2000, A$608 million (US$363 million) was drawn against Facility
B at an interest rate of 6.98% per annum.
FACILITY C
Under three separate Working Capital Facility Agreements each dated
February 22, 2000 with each of National Australia Bank Limited, Australia and
New Zealand Banking Group Limited and Westpac Banking Corporation, TXU Australia
has the ability to borrow an aggregate amount of A$100 million (US$60 million).
The facilities are all multi-option variable rate working capital facilities and
all expire 364 days from (and including) the date of the agreements. The funding
provided by each bank is as follows:
o National Australia Bank Limited - A$50 million (US$30 million);
o Australia and New Zealand Banking Group Limited - A$25 million (US$15
million); and
o Westpac Banking Corporation - A$25 million (US$15 million).
As of June 30, 2000, A$12 million (US$7 million) was drawn against Facility
C at an average interest rate of 6.80% per annum.
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FACILITY D
Under a Syndicated Loan Facility dated April 30, 1999, TXU Australia has
the ability to borrow A$200 million (US$119 million) at variable rates from The
Chase Manhattan Bank and Commonwealth Bank of Australia. The maturity date for
this facility was December 29, 2000.
At June 30, 2000, Facility D was fully drawn at an interest rate of 7.12%
per annum.
On September 22, 2000, TXU Australia repaid Facility D in full and
cancelled the commitment following an issue of medium-term notes as described
below under - "SHORT-TERM/MEDIUM-TERM NOTE PROGRAM."
FACILITY E
Under a Loan Agreement dated February 22, 2000, TXU Australia has the
ability to borrow the aggregate amount of A$275 million (US$164 million) at
variable rates from National Australia Bank Limited and Westpac Banking
Corporation (comprising an aggregate of A$137.5 million (US$82 million) for each
bank). The maturity date for this facility was December 29, 2000.
As of June 30, 2000, Facility E was fully drawn at an interest rate of
6.70% per annum.
On September 22, 2000, TXU Australia repaid Facility E in full and
cancelled the commitment, following an issue of medium-term notes as described
below under - "SHORT-TERM/MEDIUM-TERM NOTE PROGRAM."
FACILITY F
Under a Loan Agreement dated April 27, 2000, TXU Australia has the ability
to borrow A$120 million (US$72 million) at variable rates from Citibank, N.A.
The maturity date for this facility is December 29, 2000. As of June 30, 2000,
Facility F was fully drawn at an interest rate of 6.57% per annum.
TXU Australia has agreed in principle with Citibank to extend the maturity
date of Facility F to September 30, 2001, and is negotiating the specific terms
of such extension.
The interest rate under each of the above Facilities A - F is reset at the
end of an interest period. Interest periods generally are not less than 30 and
not more than 180 days. The interest rate for an interest period is the bank
bill rate for the applicable interest period plus a margin.
All funds borrowed by TXU Australia were used to subscribe for shares in
Holdings. Holdings lent the funds it received from TXU Australia to TXU (No. 8)
Pty Ltd (TXU8), the internal treasury arm of TXU Australia Group, in the form of
intercompany loans. TXU8, in turn, then onlends those funds to the operating
companies in the Group on an as needed basis.
SECURITY STRUCTURE
No direct security interest has been granted to the Senior Lenders over the
assets of the operating companies of TXU Australia Group. However, two
subsidiaries of TXU Australia, TXU Australia Holdings Pty Ltd and TXU8 granted a
guarantee and indemnity of the obligations of TXU Australia in favor of the
Senior Lenders.
DEED OF COMMON TERMS
All Senior Debt ranks equally and is governed by common terms set forth
under a separate Deed of Common Terms dated February 24, 1999, as amended on
February 24, 2000 (DCT). The key representations, warranties, covenants,
undertakings, events of default and related provisions for all of the loan
facilities with each Senior Lender are contained in the DCT. The facility
documents relating to the Senior Debt and the DCT are jointly referred to as the
"Financing Documents."
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<PAGE>
Under the DCT, there are no restrictions on TXU Australia's raising further
debt from alternative sources and independent of the terms of the DCT, provided
that financial ratio tests for interest coverage, leverage and minimum equity
(which are calculated on a consolidated basis for the TXU Australia Group) are
being complied with. TXU Australia is currently in compliance with these ratios.
Notes issued under TXU Australia's short-term/medium term note program and TXU
Australia's senior US dollar notes are all senior debt permitted by the terms of
the DCT. Please see - "SHORT-TERM/MEDIUM-TERM NOTE PROGRAM" and - "SENIOR US
DOLLAR NOTES" below.
In addition, TXU Australia is able to raise "qualifying subordinated debt"
(as defined in the DCT) that is fully subordinated to Senior Debt. The JUMPS
will be "qualifying subordinated debt" and holders of JUMPS and the trustee
under the indenture for the JUMPS will be required to agree to certain
subordination provisions which satisfy the terms of the DCT. Please see
DESCRIPTION OF THE JUMPS - "SUBORDINATION PROVISIONS."
The DCT contains detailed subordination provisions which, in effect,
restrict repayment of principal and payment of distributions on qualifying
subordinated debt when the principal amount of qualifying subordinated debt
exceeds 15% of the aggregate of consolidated Senior Debt and consolidated net
worth of the Group Companies and TXU Australia.
If the aggregate of qualifying subordinated debt does not exceed this 15%
threshold, TXU Australia may pay distributions in respect of such subordinated
debt provided that:
o no amount owing to the Senior Lenders is due but unpaid;
o no event of default or other event which, with the giving of notice or
the lapsing of time, would become an event of default (potential
event of default) exists under the DCT; and
o the distribution rate on the subordinated debt is determined on normal
arm's length commercial terms.
If the aggregate of qualifying subordinated debt exceeds the 15% threshold,
TXU Australia cannot prepay or repay, in whole or in part, the principal amount
in respect of any qualifying subordinated debt before payment in full of amounts
owing to the Senior Lenders, unless such subordinated debt is effectively repaid
and refinanced and replaced by other debt, or pay any distributions in respect
of any part of the principal amount of qualifying subordinated debt which
exceeds the 15% threshold, unless the following conditions are satisfied:
o no event of default or potential event of default exists under the
DCT, or under the terms of any other funding considered to be Senior
Debt; and
o the following Senior Debt interest coverage ratios are satisfied:
o on and after each of the following dates and until the next
specified date: June 30, 2000, September 30, 2000 and December
31, 2000 - not less than 1.90:1; and
o on or after March 31, 2001 - not less than 2.00:1
The relevant Senior Debt interest coverage ratios are calculated in
accordance with Australian GAAP on the basis of the proportion that earnings of
TXU Australia Group, on a consolidated basis and before abnormal and
extraordinary items, interest expense, income taxes, depreciation and
amortization, bears to debt service on the amount owing to the Senior Lenders
and any other unsubordinated indebtedness of TXU Australia Group for the
twelve-month period ending on each specified date.
At December 31, 1999, the ratio of all qualifying subordinated debt of TXU
Australia Group to the aggregate of Senior Debt and consolidated net worth was
11%. The issuance of the JUMPS will not materially affect this ratio because the
proceeds of the JUMPS will be used to repay qualifying subordinated debt. Nor
does TXU Australia currently have any plans to incur any further subordinated
indebtedness that might result in its aggregate subordinated indebtedness
23
<PAGE>
exceeding this 15% threshold. Accordingly, payment of distributions on the JUMPS
should not be affected if TXU Australia were unable to meet the above Senior
Debt interest coverage ratio tests.
The occurrence of an event of default or potential event of default under
the Financing Documents will prevent any payment on any subordinated debt,
including the JUMPS. In the context of a default, amounts owing under the
Financing Documents must be paid in full before any subordinated debt, including
the JUMPS, can be serviced or repaid. The following are the material events of
default under the DCT. TXU Australia, its general and limited partners, Westar,
Kinetik Energy, Eastern Energy and other subsidiaries of TXU Australia are
obligors under the DCT.
o (PAYMENT): an obligor under the DCT does not pay any money payable
(excluding interest) when due or, in the case of interest, any
interest due under a Senior Finance Document (as defined in the DCT)
within two business days of notice of the non-payment being given to
the non-paying obligor;
o (BREACH OF FINANCIAL UNDERTAKINGS): TXU Australia or its general
partner or limited partners fail at any time to comply with the
consolidated interest coverage ratios;
o (INSOLVENCY EVENT): an insolvency event occurs in respect of an
obligor, except in the cases of the voluntary winding up,
deregistration or dissolution of a solvent entity which owns no
assets;
o (CESSATION OF BUSINESS): an obligor stops payment generally, ceases
to carry on its business or a material part of it, or threatens to
do either of those things, except to effect a voluntary winding up,
deregistration, dissolution, reconstruction or amalgamation while
solvent on terms approved by the senior debt trustee;
o (CHANGE IN GROUP STRUCTURE): subsidiaries of TXU Australia or its
general partner or limited partners who are obligors under the DCT
cease to be wholly-owned subsidiaries of TXU Australia;
o (INVESTIGATION): a person is appointed under applicable law to
investigate any part of the affairs of an obligor, unless the obligor
subsidiary has demonstrated to the reasonable satisfaction of the
senior debt trustee within 10 business days of the appointment that no
material adverse effect will, or is likely to, result from the
investigation or as a consequence thereof;
o (LICENSES): if
(i) TXU Australia or its material subsidiaries who are license
holders (each, a License Holder) fail to take any step necessary
or desirable to preserve a license or to avoid a license being
placed in jeopardy;
(ii) a license is varied in a material adverse respect without
the prior written consent of the senior debt trustee or is
suspended, cancelled, transferred (except to TXU Australia or its
material subsidiaries), revoked or allowed to lapse;
(iii) any person (other than an obligor under the DCT) is issued
a distribution license in respect of all or any part of a
borrower's distribution area and the issue of the license is
likely to have a material adverse effect on the obligor;
(iv) a License Holder receives any notice of revocation of a
license;
(v) an administrator is appointed to all or any part of the
business of a License Holder under the Gas Industry Act 1994, or
the Electricity Industry Act 1993 or any corresponding
legislation in a jurisdiction other than Victoria, Australia;
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<PAGE>
(vi) the receipt by a License Holder of a notice of intention to
serve a provisional or final enforcement order or the receipt by
a License Holder of a provisional or final enforcement order
under the Office of the Regulator-General Act 1994 or any
corresponding legislation in a jurisdiction other than Victoria,
Australia; and
(vii) a material clause in a License is or becomes wholly or
partly void, voidable or unenforceable, or is claimed to be so by
TXU Australia or its affiliates or by anyone on their behalf and,
if capable of remedy, that state of affairs is not remedied
within 10 business days of TXU Australia or its affiliates
becoming aware of it; or
o (LEGISLATION): any legislation is passed or amended (including,
without limitation, any amendment to the Gas Industry Act 1994, the
Electricity Industry Act 1993, the Office of the Regulator-General Act
1994) which has a material adverse effect on the ability of an obligor
under the DCT to fulfill its obligations under the DCT, carry out its
business as it is being conducted or on the rights of the Senior
Lenders under the DCT.
o (REGULATORY EVENTS): an obligor fails to comply with any applicable
legislation, regulatory requirement, instrument, license or code or
fails to give notice to the senior debt trustee of any breaches of any
of the foregoing and such failure has or is likely to lead to the
revocation or cancellation of a license or the termination of a
material contract to which the obligor is a party or have a material
adverse effect on the ability of the obligor to fulfill its
obligations under the DCT, or carry out its business as it is being
conducted or on the rights of the Senior Lenders under the DCT;
o (OTHER DEFAULTS): an obligor breaches, defaults or fails to perform or
observe any of its obligations under the DCT and the breach or default
remains unremedied at the end of any applicable grace period after the
obligor receives notice from the senior debt trustee of the breach or
default;
o (CROSS DEFAULT): any indebtedness of TXU Australia (other than the
Senior Debt or JUMPS) or of any other obligor exceeding in aggregate
A$10 million (US$6.1 million) is not satisfied when due or becomes
payable before it is due by its terms;
o (EXECUTION AGAINST PROPERTY): a court order, judgment, security
interest or other legal right is executed, levied, enforced or becomes
enforceable against any property of an obligor for an amount exceeding
A$5 million (US $3 million) and in the case of a levy or an order, is
not stayed, withdrawn or satisfied within 10 business days of being
made;
o (MISREPRESENTATION): any representation, warranty or statement of an
obligor in a Senior Finance Document in favor of a Senior Lender
proves to have been untrue, incorrect or misleading in any material
respect when made;
o (REDUCTION OF CAPITAL): an obligor, without the prior consent of the
senior debt trustee, takes any action to reduce its capital or passes
a resolution to do so;
o (SHARE BUY-BACK): an obligor, without the prior written consent of the
senior debt trustee, effects, enters or attempts to enter or effect a
buy-back of its shares, or passes a resolution to do so or applies to
a court to approve any such resolution (in each case, other than an
employee share or odd-lot buy-back scheme);
o (INVALIDITY): (a) any party (other than a Senior Lender) to a Finance
Document claims that a Finance Document or a material clause in such
a document is void or unenforceable, or (b) a Finance Document or a
material clause in such a document becomes void or unenforceable and
is not remedied by the applicable party;
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<PAGE>
o (CHANGE IN CIRCUMSTANCES): a change occurs in the business, assets or
financial condition of an obligor or any other event or series of
events occurs which has, or is likely to have, a material adverse
effect on the ability of the obligor to fulfill its obligations under
the DCT, carry out its business as it is being conducted or on the
rights of the Senior Lenders under the DCT and such change or event is
not remedied within the applicable grace period after TXU Australia
receives notice of such change or event;
o (CHANGE OF CONTROL): TXU Corp. ceases to ultimately control the
composition of the board of directors and to have management and
operational control of the general partner of TXU Australia;
o (CHANGE OF CONSTITUTION): TXU Australia, without the consent of the
senior debt trustee, materially changes or passes a resolution to
materially change its partnership deed;
o (SEIZURE): all or any material part of the assets of an obligor are
seized, appropriated or taken into custody by any governmental agency
or the borrower is prevented from exercising normal control over all
or a material part of its assets or loses any of the rights necessary
to maintain its existence or to carry on its business and such
seizure, appropriation or assumption of custody will have a material
adverse effect on the ability of the obligor to fulfill its
obligations under the DCT or carry out its business as it is being
conducted or on the rights of the Senior Lenders under the DCT;
o (ENVIRONMENTAL EVENT): any governmental agency takes any action under
any environmental law, or there is a claim or substantial expenditure
or alteration of activity under any environmental law, or there is any
breach or threatened breach of any authorization, which, if capable of
remedy, is not satisfactorily remedied by TXU Australia or the
applicable party within 30 days of their becoming aware of any such
action, claim, breach or threatened breach and which is likely to have
a material adverse effect on the ability of TXU Australia or any of
the obligors to fulfill its obligations under the DCT, carry out its
business as it is being conducted or on the rights of the Senior
Lenders under the DCT;
o (VOIDABLE PROVISIONS): a material contract or any material provision
of a material contract of an obligor becomes void, voidable or
unenforceable;
o (BREACH): there occurs a breach or event of default under any of an
obligor's material contracts or an obligor fails to exercise or
enforce its rights under any of them, and the breach or failure has or
is likely to have a material adverse effect on the ability of the
obligor to fulfill its obligations under the DCT or carry out its
business as it is being conducted or on the rights of the Senior
Lenders under the DCT;
o (HEDGE AGREEMENT): an event of default occurs under a hedge agreement;
o (SUSPENSION): an event of default or default event occurs in relation
to a license holder under the applicable rules or code which is likely
to lead to the suspension of the license holder under those rules or
that code; or
o (SECURITY INTEREST): any security interest, other than a permitted
security interest under the DCT, is created or allowed to exist in any
part of an obligor's present or future property and the security
interest is not discharged and released within 30 days after the
obligor receives a notice of such event from the senior debt trustee.
Operating companies within the TXU Australia Group have restrictions
imposed under the terms of the DCT on their ability to raise further external
debt, other than transactional banking facilities, guarantees and indemnities
issued in the ordinary course of business and certain equipment leases. TXU
Australia Group has agreed not to grant any further security interests over any
of their assets except permitted security interests.
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<PAGE>
SUBORDINATED DEBT
TXU Australia and Eastern Energy entered into a Subordinated Facility
Agreement dated February 24, 1999 with a banking syndicate to borrow funds which
were used to pay a portion of the purchase price for the Westar and Kinetik
Energy assets and businesses. This agreement was amended and restated in June
2000 with the effect that Eastern Energy repaid its portion of the borrowings,
and TXU Australia borrowed the same amount. This facility now matures on June
29, 2001. Under the amended and restated agreement, TXU Australia has borrowed
A$413 million (US$247 million) at variable rates from a syndicate of lenders.
This facility is fully subordinated to Senior Debt, including the TXU Australia
notes discussed below under - "SHORT-TERM/MEDIUM-TERM NOTE PROGRAM" and "SENIOR
US DOLLAR NOTES", and would rank equally with the JUMPS, with the exception that
this facility is guaranteed by TXU Corp.
At June 30, 2000, the interest rate on this facility was 7.10% per annum.
SHORT-TERM/MEDIUM-TERM NOTE PROGRAM.
In March 2000, TXU Australia established a A$750 million (US$448 million)
combined short-term/medium-term note program, primarily aimed at the Australian
capital markets. These notes are unsecured obligations of TXU Australia and rank
equally with all other senior debt of TXU Australia, including the Senior Debt
and any notes issued in the exchange offer described below under - "SENIOR US
DOLLAR NOTES" and would be senior to the JUMPS. In August 2000, TXU Australia
increased the size of the program to A$1,500 million (US$896 million).
SHORT-TERM NOTES
As of June 30, 2000, A$335 million (US$200 million) of short-term notes
were outstanding under the program at a weighted average interest rate of 6.34%
per annum. The interest rate is negotiated for each issuance of notes. The
average maturity of the short-term notes from their date of issue was 114 days.
The average number of days outstanding as of June 30, 2000 was 56, with the
longest maturity date of any single note being November 14, 2000.
Notwithstanding the absolute size of the combined short-term/medium term
note program, the volume of short-term notes issued under the program at any
point in time is restricted to the unused amount of short-term note liquidity
support facilities, plus unused debt facilities capable of being drawn in the
event of a disruption to the market for short-term notes. No comparable
restriction applies to medium-term notes.
As of June 30, 2000, TXU Australia had A$380 million (US$227 million) of
short-term note liquidity support facilities, all of which were undrawn.
Additionally, the undrawn portions of Facility B of A$17 million (US$10 million)
and Facility C of A$88 million (US$53 million) qualified as liquidity support
for short-term notes. Therefore, as of June 30, 2000, TXU Australia had an
ability to issue up to A$485 million (US$290 million) of short-term notes,
compared with actual issuance of A$335 million (US$200 million). TXU Australia
pays line fees on the undrawn support facilities at a weighted average rate of
0.22% per annum.
MEDIUM-TERM NOTES
As of June 30, 2000, no medium-term notes had been issued under the
program.
On September 22, 2000, TXU Australia issued two series of medium-term notes
in the Australian market:
o A$200 million (US$119 million) 7% fixed rate notes maturing September
2005, and
o A$275 million (US$164 million) floating rate notes maturing September
2007.
Both series of notes are guaranteed by MBIA Insurance Corporation (MBIA),
and they are rated "AAA" by Standard & Poor's and "Aaa" by Moody's. The terms of
the arrangement between TXU Australia and MBIA are subject to a Reimbursement
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<PAGE>
Agreement dated September 11, 2000. The terms of the Reimbursement Agreement are
substantially identical to the DCT and impose substantially
identical obligations on TXU Australia as does the DCT (as summarised above -
"DEED OF COMMON TERMS"). These obligations are guaranteed by TXU Australia
Holdings Pty Ltd and TXU8. The obligations of TXU Australia to MBIA rank equally
with all other senior debt, including the Senior Debt. These obligations would
be senior to the JUMPS.
TXU Australia plans to issue on October 30, 2000, A$30 million (US$ 18
million) of floating rate medium term notes maturing in October 2003. These
notes will not be guaranteed by MBIA and will be rated "BBB+" by Standard and
Poor's and "Baa2" by Moody's. The proceeds of the issuance will be used for
general corporate purposes.
The interest rate on the 2003 and 2007 floating rate notes is set quarterly
at the bank bill rate plus a margin. The initial interest rate on the 2007
floating rate notes was 7.02% per annum. The initial interest rate on the 2002
floating rate notes is not currently know, but is expected to be approximately
7.1% per annum. The notes are denominated in Australian dollars. Proceeds from
the issuance of the 2005 and 2007 notes were used to retire bank debt as
described above under - "FACILITY D AND FACILITY E."
SENIOR US DOLLAR NOTES
As of June 30, 2000, Eastern Energy had US$350 million of senior notes
outstanding, comprising US$250 million of 6.75% senior notes due December 2006,
and US$100 million of 7.25% senior notes due December 2016. These senior notes
were issued by Eastern Energy in 1996 in the United States pursuant to Rule 144A
promulgated under the Securities Act of 1933, as amended. The US$350 million
fixed interest rate liability was swapped into a floating rate Australian dollar
liability of A$483 million via fixed to floating US dollar interest rate swaps
and US dollar to Australian dollar cross-currency swaps. At June 30, 2000, the
weighted average Australian dollar interest rate on the Eastern Energy senior
notes was 6.85% per annum.
In July 2000, TXU Australia made an offer to the holders of both tranches
of the Eastern senior notes to exchange their senior notes for senior notes
issued by TXU Australia. A cash component of 1% of the principal amount was
payable on the senior notes due 2006 accepted for exchange, and 2% of the
principal amount on the senior notes due 2016 so accepted. Following completion
of the exchange offer in September 2000, new TXU Australia senior notes
outstanding are as follows:
o TXU Australia 6.75% senior notes due December 2006 - A$132.8 million
(US$92.25 million); and
o TXU Australia 7.25% senior notes due December 2016 - A$74.1 million
(US$60.0 million).
Eastern Energy's senior notes outstanding on completion of the exchange
offer include:
o Eastern Energy 6.75% senior notes due December 2006 - A$227.1 million
(US$157.75 million); and
o Eastern Energy 7.25% senior notes due December 2016 - A$49.4 million
(US$40.0 million).
The US$60 million 7.25% senior notes and US$92.25 million 6.75% senior
notes of Eastern Energy exchanged in the exchange offer continue to be
outstanding and are held by TXU Australia Group.
The US dollar denominated senior notes have been converted to Australian
dollars using the exchange rates applicable to the US dollar to Australian
dollar cross-currency swaps.
TXU Australia is in the process of arranging to transfer the appropriate
proportion of the fixed to floating US$ interest rate swaps and the US dollar to
Australian dollar cross-currency swaps from Eastern Energy to TXU Australia.
The TXU Australia senior notes issued under the exchange offer rank equally
with the Senior Debt and would be senior to the JUMPS.
TXU AUSTRALIA' S PARTNERSHIP DEED AND THE VICTORIAN PARTNERSHIP ACT
The liability of each of the limited partners under the partnership deed is
generally limited to the partner's partnership interest in TXU Australia,
together with the amount of any capital contribution remaining to be paid by
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such partner. The limitation on the liability of each limited partner extends to
any obligation incurred in connection with the conduct of the partnership
business outside of the State of Victoria. AGP as the general partner of TXU
Australia is generally liable for claims against TXU Australia. AGP is a limited
liability company with nominal capitalization.
TXU Australia will continue for so long as the partnership business is
carried on or until the general partner dissolves the partnership. However, the
general partner cannot dissolve the partnership while the DCT remains in place
except with the consent of the Trustee under the DCT. See -"CAPITALIZATION OF
TXU AUSTRALIA - SENIOR DEBT FUNDING" and "----SUBORDINATED DEBT." In addition,
the partners have agreed that TXU Australia will not be dissolved upon the
happening of any of the events set out in the Victoria Partnership Act.
TXU Australia will dissolve and commence winding up and liquidating
generally upon an insolvency of a partner, provided however, that dissolution
will not occur, and TXU Australia will not be required to be wound up, if within
90 days after the insolvency occurs, the general partner gives notice in writing
to all partners of the continuation of TXU Australia, at a time when there is at
least one general partner and one limited partner to continue the partnership
business.
A limited partner cannot dissolve TXU Australia by notice.
A partner may dispose of or encumber the whole or any part of its interests
in TXU Australia only:
o with the prior written consent of the other partners; and
o in accordance with the DCT.
To acquire an interest in TXU Australia or any of its property a new
partner must execute a deed in favor of the existing partners in the form
required by the general partner.
A new partner in TXU Australia cannot be added without the prior written
consent of the partners and the Trustee under the DCT.
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USE OF PROCEEDS
TXU Australia will use the proceeds from the issuance of the JUMPS in the
following manner:
o to refinance short-term debt due June 29, 2001, bearing an interest rate of
7.10% per annum as of June 30, 2000, estimated to be A$413 million (US$247
million) outstanding under subordinated facilities provided to TXU
Australia by a syndicate of lenders (see GENERAL OVERVIEW OF TXU AUSTRALIA
- "CAPITALIZATION OF TXU AUSTRALIA - SUBORDINATED DEBT" for a more detailed
description of the debt being repaid with the proceeds of the JUMPS); and
o to the extent there is excess (estimated to be approximately A$72 million
(US$43 million)), to repay senior debt facilities due October 31, 2001 and
bearing an interest rate of 6.98% per annum as of June 30, 2000.
CAPITALIZATION
The following table describes the actual consolidated capitalization of TXU
Australia Group at June 30, 2000, and the consolidated capitalization of TXU
Australia Group adjusted to reflect the proposed issuance of A$502 million
(US$300 million) in JUMPS and the use of the proceeds, net of estimated expenses
and underwriting commissions of A$17 million (US$10 million), to repay A$413
million (US$247 million) of short term subordinated debt and A$72 million (US$43
million) of other debt. See "TXU AUSTRALIA GENERAL OVERVIEW - TXU AUSTRALIA
JUMPS."
Amounts have been converted at the Noon Buying Rate on June 30, 2000 of
A$1.00 = US$0.5971. This table should be read in conjunction with "TXU AUSTRALIA
GROUP - SELECTED CONSOLIDATED FINANCIAL INFORMATION," "TXU AUSTRALIA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the "CONSOLIDATED FINANCIAL STATEMENTS OF TXU AUSTRALIA" and
accompanying notes of TXU Australia Group included elsewhere in this prospectus.
Except as disclosed in the "As Adjusted" columns, there have been no material
changes in the capitalization of TXU Australia Group since June 30, 2000.
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--------------------------------------------------------------------------------
(MILLIONS OF DOLLARS, EXCEPT PERCENTAGES (UNAUDITED))
--------------------------------------------------------------------------------
AS ADJUSTED
--------------------------------------------------------------------------------
OUTSTANDING AT
JUNE 30,2000 AMOUNT PERCENTAGE
---------------------- ---------- ----------- ---------- ------------ ----------
A$ US$ A$ US$ %
---------------------- ---------- ----------- ---------- ------------ ----------
Long-term senior debt A$2,391 US$1,428 A$2,391 US$1,428 54%
---------------------- ---------- ----------- ---------- ------------ ----------
Short-term senior debt A$467 US$279 A$395 US$236 9%
---------------------- ---------- ----------- ---------- ------------ ----------
Short-term
subordinated debt A$413 US$247 A$0 US$0 0%
---------------------- ---------- ----------- ---------- ------------ ----------
Proposed JUMPS
(long-term
subordinated debt) A$0 US$0 A$502 US$300 11%
---------------------- ---------- ----------- ---------- ------------ ----------
Owner's equity A$1,158 US$691 A$1,158 US$691 26%
---------------------- ---------- ----------- ---------- ------------ ----------
TOTAL CAPITALIZATION A$4,429 US$2,645 A$4,446 US$2,655 100%
---------------------- ---------- ----------- ---------- ------------ ----------
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FORWARD-LOOKING STATEMENTS
Certain statements contained in this prospectus are forward-looking statements.
We have based these forward-looking statements on our current expectations and
projections about future events and on assumptions we believe to be reasonable.
These forward-looking statements are not statements of historical fact.
Forward-looking statements involve risks, uncertainties and assumptions that may
cause our actual financial condition, results of operations, business or
performance to be materially different from the expectations of future financial
condition, results of operations, business or performance we express or imply in
any forward-looking statements. Some of the important factors that could cause
our actual financial condition, results of operations, business or performance
to differ materially from our expectations include:
o general economic and business conditions in Australia and in the areas
serviced by TXU Australia's principal operating subsidiaries;
o changes in interest rates, in rates of inflation, or in foreign
exchange rates;
o changes in prevailing governmental, statutory, regulatory or
administrative policies and initiatives affecting TXU Australia, its
subsidiaries or the Australian, South Australian or Victorian electric
and gas industries;
o general industry trends;
o competition;
o power and natural gas costs and availability;
o changes in business strategy, development plans or vendor
relationships;
o availability, terms and deployment of capital and capital market
conditions, including the amount of TXU Australia's outstanding
indebtedness;
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 or the ability of TXU Australia Group to utilize
its carryforward tax losses;
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 natural gas and electricity transmission facilities
to meet changing demand;
o unanticipated changes in operating expenses and capital expenditures
and the availability and terms of any financing thereof;
o counterparties to financial hedging agreements upon which TXU
Australia relies to hedge various market risks not being able to meet
their obligations under those agreements;
o changes in technology used and services offered by TXU Australia and
its competitors;
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o force majeure events such as interruption of gas or electricity
supplies; and
o other factors described in this prospectus.
Any forward-looking statements speak only as of the date of this
prospectus.
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OVERVIEW OF THE GAS AND ELECTRIC INDUSTRIES IN VICTORIA, AUSTRALIA
GENERAL
The gas and electric industries in the State of Victoria, Australia have
historically been State-owned, vertically-integrated enterprises (except for
private enterprise gas producers), controlling the production, transmission,
distribution and ultimate sale of gas and electricity to end-users. Beginning in
the early 1990s following a pronouncement towards competitive markets at the
national level, the State of Victoria began the restructuring and privatization
of the electric industry to prepare for a fully competitive market. More
recently, Victoria has restructured and privatized the gas industry in the same
manner.
In moving towards a fully-competitive market, the Victorian Government has
established a phase-in schedule for electric and gas customers to become
"contestable," or free to choose their own gas or electricity retail provider.
Generally, the larger industrial and commercial customers are the first to
become contestable with residential customers becoming contestable, in the case
of electricity, in stages commencing January 1, 2001 and in the case of gas, on
September 1, 2001.
The following table sets forth the timetables for customer contestability:
<TABLE>
<CAPTION>
VICTORIAN ELECTRICITY AND GAS CONTESTABILITY TIMETABLES
-----------------------------------------------------------------------------------------
ELECTRICITY GAS
-------------------------------- --------------------------------
DATE CUSTOMER SIZE % OF MARKET(1) CUSTOMER SIZE % OF MARKET(1)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Currently contestable >160 MWh/year 49% >10,000 GJ/year 45%
Commencing January 1, All customers 100% n/a
2001 (in stages)
September 1, 2001 n/a All customers 100%
-----------------------------------------------------------------------------------------
</TABLE>
(1) Estimated cumulative percentage of the market by volume
In December 1998, the National Electricity Market was established by
Queensland, Victoria, New South Wales, South Australia, and the Australian
Capital Territory. It is expected that Tasmania will join the National
Electricity Market when an undersea cable is built between the Victorian
Electricity Grid and the Tasmanian Electricity Grid. The purpose of the National
Electricity Market is to establish a single interstate wholesale market for
electricity, characterized by non-discriminatory open access to transmission and
distribution assets without regard to State borders. See NATIONAL REGIMES FOR
GAS AND ELECTRIC INDUSTRIES - ELECTRIC INDUSTRY below for a description of the
national electricity market and its interaction with the Victorian legislative
regime.
GAS INDUSTRY
GAS INDUSTRY PARTICIPANTS. With the exception of the private enterprise gas
producers, all areas of the gas industry in Victoria have historically been run
by government-owned entities, the Gas and Fuel Corporation, and later GASCOR.
After a series of reforms, formal disaggregation of the old government entities
occurred on December 11, 1997 when the gas industry was formally separated into
various legal entities with specific allocated assets and functions.
PRODUCERS. The Gippsland basin in Bass Strait, Victoria, contains most of
Victoria's natural gas reserves. The Gippsland basin production permits are held
by a joint venture between BHP Petroleum (Bass Strait) Pty Ltd. (BHPP) and Esso,
with Esso as the principal operator. The balance of Victoria's gas requirements
are supplied from gas reserves in the Otway basin in western Victoria, or is
carried into Victoria through the interconnect pipeline between Victoria and New
South Wales.
TRANSMISSION. Gas is piped from the offshore fields and conveyed through
raw gas pipelines to the processing facility operated by Esso at Longford in the
southeast of Victoria. This gas is then delivered into the high pressure
34
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transmission pipeline owned since privatization by GPU GasNet (formerly
Transmission Pipelines of Australia).
DISTRIBUTION. The gas is transferred from the high pressure transmission
system into the lower pressure distribution system, from which it is conveyed to
the customer's premises. The distribution systems in Victoria are owned by three
privatized gas distributors: Westar, Envestra (formerly Stratus Networks) and
Multinet Partnership (formerly Multinet Gas).
RETAIL. There are three privatized gas retailers: Kinetik Energy, Origin
Energy (formerly Boral Energy) and Ikon Energy. Each of these three gas
retailers is entitled to sell gas to non-contestable customers located within
its franchise territory, and to contestable customers anywhere in Victoria.
Additionally, other persons who have been granted a gas retail license
(described below) are permitted to sell gas to contestable customers anywhere in
Victoria. As of September 30, 2000, ten additional entities have been issued gas
retail licenses by the ORG.
RELATIONSHIPS AMONG INDUSTRY PARTICIPANTS. Generally, the gas industry in
Victoria operates in the following manner. The three initial retailers purchase
gas under contracts with GASCOR, which in turn acquires gas from Esso/BHPP (one
other retailer has also acquired an entitlement to purchase gas from GASCOR).
The retailers then sell and purchase any excess gas purchased under these
contracts in the Victorian wholesale gas market operated by Victorian Energy
Networks Corporation (VENCorp). Other persons who have gas retail licenses but
do not have contracts with the producers for purchase of gas, are also able to
register as market participants in the wholesale gas market, and purchase gas in
the market. Retailers then pay for the use of the transmission and distribution
systems and charge their customers for the supply and sale of gas. These
commercial relationships are regulated under a series of legislative acts,
regulations and legal documents which form the regulatory framework for gas
industry participants, as described below.
CROSS-OWNERSHIP PROVISIONS. Complicated cross-ownership restrictions are
present in the Victorian gas industry. In particular, the ability of substantial
producers, such as Esso and BHP, and persons who have a 20% interest in
substantial producers, to own other gas industry entities is heavily regulated.
The ability of the transmission company, GPU GasNet, and VENCorp to own
interests in other gas industry bodies is also regulated.
The following cross-ownership provisions apply to distributors such as
Westar and to individuals, corporations or other entities who have an interest
of more than 20% in such distributors. Generally, such an entity:
o must not own a 20% interest in GPU GasNet;
o must not own more than 5% of a retailer if it already owns greater than a
20% interest in one other retailer;
o must not own interests of 5% in more than two retailers; and
o must not own more than a 20% interest in one other distributor or more than
a 5% interest in more than one other distributor.
Analogous cross-ownership provisions apply to retailers such as Kinetik
Energy, and to individuals, corporations or other entities who have an interest
of more than 20% in such retailers. Generally, such an entity:
o must not own a 20% interest in GPU GasNet;
o must not own more than 5% of a distributor if it already owns greater than
a 20% interest in one other distributor;
o must not own interests of 5% in more than two distributors; and
o must not own more than a 20% interest in one other retailer or more than a
5% interest in more than one other retailer.
35
<PAGE>
The interest of a person in a gas company is traced through interposed
entities by the application of various tracing rules promulgated under gas
industry legislation. There are also rules that would result in a person being
deemed to have an interest in a gas company if that person, either itself, or
through the tracing rules, is entitled to voting shares in the gas company or
shares in the gas company conferring a right to a dividend or other property, or
if the person is able, either alone or with other persons, to dominate or
control the gas company or its financial and operating policies, management or
other activities.
However, commencing July 1, 2002, the ORG may permit cross-ownership among
gas industry participants if it is satisfied that the resulting cross-ownership
would not substantially lessen competition in the Victorian gas market.
The following key governmental and regulatory bodies play a major role in
the gas transmission, distribution and retail industries in Victoria:
o the Office of Gas Safety, the statutory authority responsible for
monitoring gas safety standards;
o the Office of the Regulator-General, the regulatory body primarily
responsible for regulating gas industry licensing, distribution
pricing and retail pricing for franchise customers and referred to as
the ORG;
o VENCorp, the State-owned market and transmission system operator; and
o GASCOR, the State owned entity which continues to be primarily
responsible for the sale of gas to non-contestable customers, although
it has appointed Kinetik Energy, Boral Energy and Ikon Energy to act
as its agents for the sale of that gas within their respective
franchise territories.
REGULATORY FRAMEWORK. Entities operating in the gas industry in Victoria
operate under a series of legislative acts, regulations and legal documents
which form the regulatory framework. This regulatory framework is outlined
below.
GAS INDUSTRY ACT (VIC) 1994. The Gas Industry Act (Vic) 1994 is the primary
legislation governing the reformed gas industry in Victoria. It sets up the
Victorian regulatory framework, which complements the national regulatory
framework (see NATIONAL REGIMES FOR GAS AND ELECTRIC INDUSTRIES below). In
particular, it contains the provisions relating to the privatization of the gas
industry, establishes the functions of the key regulatory bodies in the industry
and provides for the establishment of the key regulatory instruments taking
effect under the Act, including the Market and System Operations Rules, the
Victorian Gas Industry Tariff Order and the distribution and retail licenses. It
also contains industry cross-ownership restrictions and government emergency
powers.
OFFICE OF THE REGULATOR-GENERAL ACT (VIC) 1994. This Act establishes the
ORG, which has general regulatory authority over regulated industries in
Victoria, including gas distribution and retailing. The ORG has the power to
issue licenses authorizing the distribution and retailing of gas in Victoria,
and to enforce and administer the various codes applicable to these licenses.
The ORG also administers the application of the Victorian Gas Industry Tariff
Order to gas distributors and retailers.
MSO RULES. An integral part of the reform of the Victorian gas industry was
the establishment of a gas market administered by VENCorp. The market comprises
a net pool through which participants in the market sell and purchase excess gas
purchased under contract with the gas producers. The Market and System
Operations (MSO) Rules comprise the market rules for the Victorian gas market to
be administered by VENCorp, and also contain rules relating to technical
operation of the gas transmission system.
DISTRIBUTION LICENSES. The Gas Industry Act provides that a person must not
distribute gas without being issued a distribution license by the ORG. The
license requires distributors to comply with all relevant laws and any
guidelines issued by the ORG. In particular, the license holder must comply with
the Distribution System Code issued by the ORG. This Code prescribes minimum
standards for the operation and use of the distribution system including
36
<PAGE>
requirements for the installation and maintenance of connections and metering
installations, disconnections and reconnections and the provision of metering
data.
TARIFF ORDER. The Victorian Gas Industry Tariff Order 1998 regulates the
prices that the transmission company and distribution companies such as Westar
may charge for the use of their systems, the tariffs VENCorp may charge for its
market and systems operations functions and the charges that retailers such as
Kinetik Energy may make for the supply and sale of gas to non-contestable
customers, including sales as agent for GASCOR.
The ORG is responsible for regulating the distribution and retail tariffs
set out in the Tariff Order. The Australian Competition and Consumer Commission
(ACCC) is responsible for regulating transmission tariffs.
The initial tariffs as specified in the Tariff Order are subject to a "CPI
- X" mechanism by which they are adjusted yearly during the period for which the
tariff order applies. The "CPI - X" mechanism adjusts the previous year's tariff
by a factor equal to movements in the Consumer Price Index, minus a prescribed
efficiency factor "X" which is separately determined for each company.
Until the tariffs are reset, they may only be varied (apart from the CPI -
X formula) to allow for a pass through of certain new taxes, with the consent of
the ORG. The tariffs charged by retailers to non-contestable customers may also
be varied, with the consent of the ORG, in the case of certain force majeure
events.
The retail tariffs cease applying to a customer when that customer becomes
contestable, after which point only the transmission and distribution tariffs
remain regulated.
The distribution tariffs applying to Westar are effective until December
31, 2002, at which time a price review process will occur prior to new tariffs
being approved by the ORG for the next five-year period. After the next period,
prices will be set for periods nominated by Westar and approved by the ORG. See
NATIONAL REGIMES FOR GAS AND ELECTRIC INDUSTRIES below.
The Tariff Order also regulates certain other charges by distributors for
"excluded services," that is, services other than gas transportation services,
such as connection or metering services or services beyond the minimum
specifications prescribed. These services are not prescriptively regulated in
the same way the "use of system" services are regulated. However, there are some
initial prices for excluded services set out in the Tariff Order and
distributors must charge these prices unless varied by the ORG. The balance of
the excluded services must be charged on a "fair and reasonable" basis.
RETAIL LICENSES. The Gas Industry Act provides that a person must not
supply gas to customers without a retail license issued by the ORG. Kinetik
Energy's license gives it the right to sell gas to non-contestable customers
within its franchise territories and to contestable customers anywhere in
Victoria. It obligates Kinetik Energy to supply non-contestable customers upon
request and to purchase enough gas to meet the requirements of those customers.
It also imposes other obligations on Kinetik Energy relating to rights of
non-contestable customers and procedures to be followed by Kinetik Energy when
customers become contestable.
The retail license also requires the license holder to comply with all
relevant laws and any guidelines issued by the ORG. In particular, the retailer
must comply with the Victorian Gas Customer Service Code, which prescribes a
minimum level of gas customer service. This code focuses on the direct
relationship between the customer and supplier. The distributors are subject to
conditions in the code with respect to the distribution assets and certain
contractual arrangements between the retailer and distributor.
QUALITY MANAGEMENT SYSTEM. Various acts, regulations and codes have an
impact on gas industry safety and performance. The gas distribution companies
are required to operate pursuant to a quality management system in the key areas
of technical standards, procedures and quality assurance. The documents forming
part of this system are developed with due regard to applicable acts,
regulations, codes of practice, Australian and international standards, and
manufacturer, supplier and expert recommendations, together with the gas
companies' experience in operating a gas distribution system.
37
<PAGE>
ELECTRIC INDUSTRY
ELECTRIC INDUSTRY PARTICIPANTS. Historically, the State Electricity
Commission of Victoria (SECV) was the State-owned entity responsible for most
generation activities, all of the high voltage transmission and approximately
85% of the distribution network. Eleven locally controlled entities known as
municipal electricity undertakings had responsibility for the remaining 15% of
the distribution network.
After a period of reform, the electricity industry in Victoria was
disaggregated and privatized beginning in 1995. It was separated into five
separate generation companies and five distribution/retail companies, including
Eastern Energy. The transmission system responsibilities were divided between
the privatized GPU PowerNet, which owns the high voltage transmission grid, and
the State-owned Victorian Power Exchange (VPX). VPX leased the transmission grid
from GPU PowerNet and, before the start of the National Electricity Market
discussed below, was responsible for system security and operation of the
Victorian wholesale electricity market. VPX has now merged with VENCorp, the
independent operator of the gas transmission system, and has a narrower role in
the Victorian electricity industry, being essentially responsible for
transmission system planning.
GENERATION. Most of the electricity consumed in Victoria is produced by
coal-fired power stations located in the Latrobe Valley in the southeast of
Victoria, where there are significant reserves of brown coal. Other power
required for use in Victoria is produced at two gas fired-power stations and at
hydro-electric plants and is imported over transmission lines from generators
located outside the State.
TRANSMISSION. The electricity produced by the generators is transported by
way of high voltage transmission lines. These transmission assets were owned
since privatization by GPU PowerNet and have been recently sold to Singapore
Power.
DISTRIBUTION. At various terminal stations, electricity is transformed from
higher voltages used in the transmission system to lower voltages. It is then
transported through the distribution systems for use at premises. The
distribution systems are owned by five privatized distribution companies:
Eastern Energy, Citipower, Powercor, AGL Electricity (formerly Solaris Power)
and United Energy. Each of these entities has been allocated a territory. United
Energy, AGL Electricity and Citipower are predominantly urban-based distribution
companies covering the Melbourne metropolitan area. Powercor and Eastern Energy
are predominantly rural distribution companies, with Powercor's territory
covering western Victoria and Eastern Energy's territory covering eastern
Melbourne and rural eastern Victoria.
RETAIL. Each of the distribution companies also holds a retail license and
may sell to franchise customers in its distribution territory and contestable
customers anywhere in Victoria. Electricity retailing activity is also conducted
by other persons who have been granted electricity retail licenses. As of
September 30, 2000, 17 additional entities have been issued retail licenses by
the ORG and are able to sell electricity to contestable customers anywhere in
the State.
RELATIONSHIPS BETWEEN INDUSTRY PARTICIPANTS. Generally, the Victorian
electricity industry works as follows. The Victorian generators sell their
electricity into the National Electricity Market operated by the National
Electricity Market Management Company (NEMMCO). See NATIONAL REGIMES FOR GAS AND
ELECTRIC INDUSTRIES - ELECTRIC INDUSTRY below. Electricity retailers purchase
electricity from the National Electricity Market. Retailers also pay for use of
the transmission and distribution systems by their customers. The retailers then
charge their customers for the supply and sale of electricity. These commercial
relationships are regulated by the regulatory framework described below.
CROSS-OWNERSHIP PROVISIONS. The Electricity Industry Act 1993 contains
electricity industry cross-ownership restrictions. Generally, a person
(including an individual, corporation or other entity) who has an interest of
over 20% in one licensed Victorian electricity distribution, transmission or
generation company (electricity company), cannot have a 20% or greater interest
in another electricity company or a 5% interest in more than two other
electricity companies. In addition, a person who has an interest of 5% or
greater in an electricity company cannot have interests of 5% or greater in two
other electricity companies.
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<PAGE>
However, commencing from January 1, 2001, the ORG may permit
cross-ownership among electric industry participants that would otherwise breach
these rules if it is satisfied that the national competition regulator , the
ACCC, has authorized the cross-ownership.
As in the gas industry, various tracing rules are provided for in the
Electric Industry Act which operate to trace the interest of a person in an
electricity company through interposed entities. This Act also contains rules
that deem a person to have an interest in an electricity company if that person,
either itself, or through the tracing rules, is entitled to voting shares in the
electricity company or shares in the electricity company conferring a right to a
dividend or other property, or if the person is able, either alone or with other
persons, to dominate or control the electricity company or its financial and
operating policies, management or other activities.
In addition, the cross-ownership restrictions prohibit an electricity
distribution company, or any person who has an interest of 20% in such a
company, from holding any entitlement to generating capacity of more than 200MW.
The following key government and regulatory bodies play a major role in the
electricity distribution and retail industries in Victoria:
o the Office of the Chief Electrical Inspector, the statutory authority
responsible for monitoring electricity safety standards;
o the ORG, the regulatory body primarily responsible for regulating
electricity industry licensing and distribution and retail pricing;
o VENCorp, the State-owned body responsible for transmission system
planning; and
o SECV, the State-owned entity, which retains a residual role in respect
of some elements of the industry.
REGULATORY FRAMEWORK. Entities operating in the electric industry in
Victoria operate under a series of legislative acts, regulations and orders
which form the regulatory framework. This regulatory framework is outlined
below.
ELECTRICITY INDUSTRY ACT 2000. The Electricity Industry Act 2000 (when it
is enacted), together with the Electricity Industry Act of 1933, to be renamed
the Electricity Industry (Residual Provisions) Act, will become the primary
legislation governing the reformed electricity industry in Victoria. The
Electricity Industry (Residual Provisions) Act will contain the provisions
relating to the disaggregation and privatization of the electricity industry.
The Electricity Industry Act 2000 will provide for the ongoing regulation of the
industry. It will outline the functions of the key regulatory bodies in the
industry and provide for the key regulatory instruments taking effect under the
Act, including the Victorian Electricity Supply Industry Tariff Order and the
generation, transmission, trading, distribution and retail licenses issued by
the ORG. It will also contain industry cross-ownership provisions and government
emergency powers. All of these provisions are currently contained in the
Electricity Industry Act 1993, which will be renamed when the ongoing regulatory
provisions are restated in the new Act, which is expected to be enacted before
the end of 2000.
OFFICE OF THE REGULATOR-GENERAL ACT (VIC) 1994. This Act establishes the
ORG, which has general regulatory authority over all regulated industries in
Victoria, including the electricity industry. The ORG may issue licenses
authorizing the generation, transmission, distribution, supply or sale of
electricity and the operation of the wholesale power market. The five
distribution companies formed upon the disaggregation of the SECV, including
Eastern Energy, have each received licenses from the ORG both to distribute and
sell electricity. Kinetik Energy has also received a license from the ORG to
sell electricity.
The ORG is also responsible for administration and enforcement of the
various industry codes applicable to the licenses, and is responsible for
administration of the Victorian Electricity Supply Industry Tariff Order as it
relates to electricity distributors and retailers.
39
<PAGE>
THE VICTORIAN ELECTRICITY SUPPLY INDUSTRY TARIFF ORDER. This Tariff Order
sets tariffs for, among other things, use of the electricity transmission
system; use of the electricity distribution systems; transmission connection
charges; and charges that retailers may charge to those customers consisting
generally of non-contestable franchise customers.
TARIFFS CHARGED TO FRANCHISE CUSTOMERS. As an electricity retailer, Eastern
Energy may charge its franchise customers no more than the maximum retail
tariffs set out in the Tariff Order, until those customers become contestable
and no longer subject to Tariff Order protection. These prices include all grid
charges and energy costs, and they may be adjusted only if the ORG approves a
pass through of indirect taxes attributable to the supply of electricity, such
as a goods and service tax or force majeure events. They are adjusted annually
according to a CPI-X formula.
PRICES CHARGED TO CONTESTABLE CUSTOMERS. Eastern Energy's retail energy
charges to contestable customers are not generally subject to price regulation.
However, elements that make up those charges are regulated. In particular,
charges for connection to and use of the transmission grid are regulated under
the Tariff Order. Charges for use of the distribution system are also regulated.
This means that Eastern Energy, in its role as a distributor, must charge for
use of its distribution network no more than the distribution tariffs set out in
the Tariff Order.
Upon full retail contestability, the regulatory framework does not
expressly provide that any customers will have the protection of the regulated
retail tariffs, and the regulatory framework was originally designed so that no
customer would receive such protection after full retail contestability was
introduced. However, the present Victorian government has made a policy decision
that no class of customer should pay higher tariffs as a result of full retail
contestability. In accordance with this decision, it has requested each of the
incumbent retailers to "volunteer" to establish new tariffs meeting this
criteria by October 31, 2000 to apply for a period of nine to twelve months from
January 1, 2001. The government is also in the process of enacting legislation
to enable it to regulate these prices if it does not approve the "voluntary"
tariffs submitted by the retailers. Eastern Energy has indicated to the
government that it does not support or encourage government regulation of retail
tariffs to contestable customers.
DISTRIBUTION TARIFFS. Distribution tariffs were originally calculated to
permit each distributor to recover costs and a rate of return thereon. Now,
apart from adjustments which may be approved by the ORG for changes in taxes,
these distribution tariffs are adjusted annually according to a CPI-X formula
until they are reset by the ORG. On September 21, 2000, the ORG released its
final decision in relation to the price review, setting tariffs to commence from
January 1, 2001. SEE ELECTRIC NETWORK PRICE REVIEW below. In resetting the
tariffs, the Tariff Order provides that the ORG was required to, among other
things:
o use CPI-X price capping and not rate of return regulation;
o set the new tariffs for a period of at least 5 years;
o provide each distributor with incentives to operate efficiently; and
o ensure a fair sharing of the benefits achieved through efficiency
gains between customers and distribution businesses.
The ORG must also consider the provisions regulating distribution prices
contained in the National Electricity Code. See NATIONAL REGIMES FOR GAS AND
ELECTRIC INDUSTRIES - ELECTRIC INDUSTRY below.
Charges that Eastern Energy may impose for connections to its distribution
system are not regulated by the Tariff Order, but Eastern Energy is required by
its distribution license to charge a "fair and reasonable" charge regulated by
the ORG.
40
<PAGE>
LICENSES. The Electricity Industry Act 2000 will require entities to obtain
a license from the ORG before they may engage in generation, transmission,
distribution, trading or retailing of electricity in Victoria. As an electricity
distributor and retailer, Eastern Energy has been issued both a distribution
license and a retail license under the Electricity Industry Act of 1993 (to be
renamed the Electricity Industry (Residual Provisions) Act). Kinetik Energy has
also been issued an electricity retail license.
DISTRIBUTION LICENSE. The distribution license contains rules relating
to the distributor's obligations to supply and connect certain persons to
its network; requires distributors to act as the "retailer of last resort"
if the retailer servicing a contestable customer in their distribution
territory becomes unable to provide that customer with electricity;
regulates certain charges of the distributor not regulated by the Tariff
Order; requires the distributor to co-operate with the ORG in the
development of standards and procedures; sets out information provision and
accounting separation requirements; and requires the distributor to comply
with all laws and relevant industry codes.
RETAIL LICENSE. The retail license issued to Eastern Energy enables
Eastern Energy to sell electricity to franchise customers in its service
territory and non-franchise customers anywhere in Victoria. It contains
rules relating to billing of customers; requires Eastern Energy to
co-operate with the ORG in relation to the development of standards and
procedures; sets out information provision and accounting separation
requirements; and requires Eastern Energy to comply with all laws and
relevant industry codes. A retail license holder can sell electricity to
any contestable Victorian retail customer.
CODES. In addition to complying with the National Electricity Code
(see NATIONAL REGIMES FOR GAS AND ELECTRIC INDUSTRIES - ELECTRIC INDUSTRY
below), electricity distributors and retailers are required to comply with
the following codes:
SYSTEM CODE. This code sets out requirements to ensure the secure
operation of the Victorian power system; requirements relating to the
operation of the transmission network and equipment connected to the
transmission network; and design and technical requirements and quality of
supply standards for connection points to the transmission network. It also
specifies performance requirements required of industry participants to
ensure that the technical performance of the Victorian Power System is
adequate. On January 1, 2001, responsibility for regulation of the
electricity transmission network will pass from the ORG to the ACCC.
Accordingly, the System Code will cease to have effect on that date. The
ORG is currently redrafting the System Code so that it no longer overlaps
with the National Electricity Code (see NATIONAL REGIMES FOR GAS AND
ELECTRIC INDUSTRIES below) and so that it simply contains transitional
provisions necessary for the transfer of jurisdiction of the transmission
network between the two regulators.
DISTRIBUTION CODE. This code regulates the distribution of electricity
by distributors; the connection of customers' electrical installations to
the distribution system; the connection of embedded generation units to the
distribution system and the transfer of electricity between distribution
systems.
SUPPLY AND SALE CODE. This code forms the customer contract between
non-contestable customers and the electricity supplier which supplies them.
It sets out the minimum conditions under which a supplier may supply and
sell electricity to such customers. It contains provisions relating to
information provision; guaranteed service levels; connection and
disconnection of supply; billing and complaints; privacy and
confidentiality; reliability of supply and access to the supply address.
The Supply and Sale Code will be amended to accommodate changes following
the commencement of full retail contestability.
RETAIL TARIFF METERING CODE. This code contains technical metering
provisions in relation to meters designed to measure and record the amount
of electricity supplied from the distribution system to customers. It
regulates standards and installation of new metering equipment; the
operation and maintenance of new and existing metering equipment and
establishes obligations in respect of metered data.
41
<PAGE>
ELECTRIC NETWORK PRICE REVIEW. Initial tariffs for use of the electricity
distribution network were first set in 1995 for the period ending December 31,
2000, at which time they will be reset by the ORG in accordance with principles
set out in the Tariff Order described above. Tariffs will be reset for a further
period of 5 years, commencing on January 1, 2001.
On September 21, 2000, following an extensive public consultation program,
the ORG published its final decision in the 2001 Electricity Distribution Price
Review. The decision utilizes a "building block" approach to determine the
tariffs. Under this approach, the required revenue of each distribution business
is determined based on a return on the regulated asset base, depreciation of the
regulated asset base, forecasted capital expenditures during the second
regulatory period and a carry over of efficiency gains from the first regulatory
period. The aggregate revenue so determined is then translated into tariffs on
the basis of demand forecasts. Once established as described above, the tariffs
are not retrospectively adjusted for either changes in demand (except to the
extent of forecasting errors) or for actual capital or operating expenditures,
so that the distribution business retains the benefit for the current regulatory
period of any capital and operating expenditure savings.
The decision, if implemented, would cause Eastern Energy's distribution
revenue for 2001 to be approximately A$27 million (US$16 million) lower than for
2000, principally because of a reduction in the cost of capital (which includes
the removal of a 1% increment in the cost of capital which has been available to
Eastern Energy as a largely rural-based distributor).
In its submissions to the price review, TXU Australia made proposals to
improve service standards by 16% over five years. The ORG has accepted these
submissions.
TXU Australia has expressed its disappointment with aspects of the final
decision by the ORG. TXU Australia does not believe that the final decision is
consistent with the interests of TXU Australia's customers. TXU Australia lodged
an appeal of the decision with the ORG Appeal Panel on October 2, 2000. On
October 16, 2000 the Appeal Panel upheld the ORG's original decision. TXU
Australia is now considering an appeal against this decision to the Victorian
Supreme Court. If any such appeal occurs, it is unlikely to be decided before
the new tariffs are due to commence on January 1, 2001. In anticipation of such
an appeal, the Victorian government is in the process of enacting legislation
which will enable it to set transitional distribution tariffs that will apply in
the event of such an appeal. These transitional tariffs will apply from January
1, 2001 until either the Supreme Court upholds the ORG determination and the new
tariffs go into effect, or if the Supreme Court upholds an appeal of TXU
Australia, the date on which the tariffs as re-determined by the ORG in
accordance with the Supreme Court's decision take effect.
OVERVIEW OF THE ELECTRIC INDUSTRY IN SOUTH AUSTRALIA, AUSTRALIA
GENERAL
The electric industry in the State of South Australia, Australia has
historically been a State-owned, vertically-integrated enterprise controlling
the generation, transmission, distribution and ultimate sale of electricity to
end-users. During the late 1990's, the State of South Australia began
restructuring the industry into generation, transmission and distribution/retail
companies, and began the privatization of those companies (by way of long-term
leases of the companies' assets) in 1999.
Following the national pronouncement towards a fully competitive electric
market, the South Australian Government has established a phase-in schedule for
electric and gas customers to become "contestable," or free to choose their own
electric retail provider. Generally, the larger industrial and commercial
customers are the first to become contestable with residential customers
becoming contestable by January 2003.
The following table sets forth the timetables for customer contestability:
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SOUTH AUSTRALIAN ELECTRICITY CONTESTABILITY TIMETABLE
-------------------------------------------------------------------------------
DATE CUSTOMER SIZE % OF MARKET VOLUME
-------------------------------------------------------------------------------
Currently contestable >0.16GWh pa 50%
-------------------------------------------------------------------------------
January 1, 2003 All customers 100%
-------------------------------------------------------------------------------
In December 1998, the National Electricity Market was established by
Queensland, Victoria, New South Wales, South Australia and the Australian
Capital Territory. It is expected that Tasmania will join the National
Electricity Market when an undersea cable is built between the Victorian
Electricity Grid and the Tasmanian Electricity Grid. The purpose of the National
Electricity Market is to establish a single interstate wholesale market for
electricity, characterized by non-discriminatory open access to transmission and
distribution assets without regard to State borders. See NATIONAL REGIMES FOR
GAS AND ELECTRIC INDUSTRIES - ELECTRIC INDUSTRY below for a description of the
National Electricity Market, and its interaction with the South Australian
legislative regime.
ELECTRIC INDUSTRY PARTICIPANTS. Previously, ETSA Corporation (and its
related entities), ElectraNet SA and SA Generation Corporation were the
State-owned entities responsible for almost all generation activities and all of
the transmission and distribution networks in South Australia.
After a period of reform, ETSA Corporation and SA Generation Corporation
were disaggregated, and the process of privatization commenced in late 1999.
These entities were separated into three separate generation companies, a
distribution company, a retail company and a gas trading company.
GENERATION. Generation in South Australia is primarily undertaken by three
generators which have been privatized by the South Australian government by way
of long-term lease. These comprise two gas-fired generators: the Torrens Island
power stations (which have been acquired by TXU South Australia) and Synergen
Pty Ltd (Synergen), and a coal-fired base-load generation plant, Flinders
Power Pty Ltd.
In addition, South Australia imports significant power through an
interconnect from Victoria, and further power is generated by a small
independent power plant. A further independent power plant (the Pelican Point
power station) is currently under construction, and there are number of
proposals for further interconnection between the South Australian electricity
grid and the New South Wales or Victorian grids, to allow for further power to
be imported from the eastern States.
TRANSMISSION. The electricity produced by the generators is transported by
way of high voltage transmission lines owned by ElectraNet SA which has also
recently been privatized by the South Australian Government.
DISTRIBUTION. At various terminal stations, electricity is transformed from
higher voltages used in the transmission system to lower voltages. It is then
transported for use at premises through the distribution system leased
throughout South Australia by ETSA Utilities (recently acquired from the South
Australian government by Cheung Kong Infrastructure Holdings/Hongkong Electric
International).
RETAIL. ETSA Power (recently acquired from the South Australian government
by AGL Electricity) holds a retail license and is the only entity able to sell
to franchise customers in South Australia. It may also sell electricity to
contestable customers. Electricity is also retailed to contestable customers in
South Australia by other persons who have been granted retail licenses by the
South Australian Independent Industry Regulator (SAIIR). As of September 30,
2000, 14 additional entities have been issued retail licenses by the SAIIR and
are able to sell electricity to contestable customers anywhere in the State.
RELATIONSHIPS BETWEEN INDUSTRY PARTICIPANTS. Generally, the South
Australian electricity industry works as follows. The South Australian
generators sell their electricity into the National Electricity Market operated
by NEMMCO. See NATIONAL REGIMES FOR GAS AND ELECTRIC INDUSTRIES - ELECTRIC
INDUSTRY below. Electricity retailers purchase electricity from the National
Electricity Market. Retailers also pay for use of the transmission and
distribution systems by their customers. The retailers then charge their
customers for the supply and sale of electricity. These commercial relationships
are regulated by the regulatory framework described below.
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CROSS-OWNERSHIP PROVISIONS. The Electricity Act 1996 contains electricity
industry cross-ownership restrictions. The cross-ownership rules in this
schedule expire on December 31, 2002. Generally, except between the holder of a
distribution license and a retail license, the holder of a license issued in
relation to the operation of one of the old State-owned electricity businesses,
or an associate of such a person, must not:
o hold a license issued in respect of another such business;
o be entitled to shares in, or be an associate of, the holder of a
license issued in respect of another such business; or
o acquire an interest in, or rights in respect of, certain assets of the
holder of a license issued in respect of another such business.
In addition:
o the licenseholder of the privately constructed and operated generator
at Pelican Point must not acquire a prohibited interest in the
operation of one of the old State-owned electricity businesses (except
for Synergen);
o the licenseholders in respect of the old State owned generators, and
the licenseholder of the Pelican Point power station, and their
associates, must not have an interest in an electricity transmission
network anywhere in Australia; and
o the licenseholders in respect of the old State-owned generators, and
the licenseholder of the Pelican Point power station, and their
associates, must not have an interest in the gas trading company or
the Moomba-Adelaide pipeline.
Various tracing rules are provided for in the Electricity Act 1996 which
operate to trace the interest of a person in an electricity company through
interposed entities.
KEY REGULATORY BODIES. The following key government and regulatory bodies
play a major role in the electricity generation industry in South Australia:
o the SAIIR, the regulatory body primarily responsible for regulating
electricity industry licensing and distribution and retail pricing;
o the Technical Regulator (located within the Office of Energy Policy),
who is responsible for monitoring and regulation of safety and
technical standards in the electricity industry;
o the Electricity Ombudsman, who is responsible for facilitating the
resolution of customer complaints in the electricity industry; and
o the Electricity Supply Industry Planning Council, which is responsible
for reviewing and providing information in relation to the performance
and reliability of the South Australian power system, the capacity of
the power system to meet expected future demand and possible future
augmentations and extensions to the South Australian transmission
network.
REGULATORY FRAMEWORK. Entities operating in the electric industry in South
Australia operate under a series of legislative acts, regulations and legal
documents which form the regulatory framework. This regulatory framework is
outlined below.
ELECTRICITY ACT 1996. The Electricity Act 1996 is the principal South
Australian legislative instrument that regulates the electricity industry. The
Act sets up the framework for the following aspects of the electricity industry:
o licensing of electricity entities by the SAIIR and granting
enforcement powers including step in rights;
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o creation of the system controller with powers to direct generators to
dispatch electricity, shut down or vary operations and shed or restore
customer loads;
o powers of price regulation granted to the Industry Regulator in
conjunction with the powers exercised under the National Electricity
Code; and
o safety and technical issues monitored by the Technical Regulator.
The Act also contains the cross ownership rules which are outlined above.
ELECTRICITY CORPORATIONS (RESTRUCTURING AND DISPOSAL) ACT 1999. The
Electricity Corporations (Restructuring and Disposal) Act 1999 contains
provisions which deal with matters related to the restructuring of electricity
industry and privatization of the industry (i.e. the entering into of leases of
certain electricity assets and the sale of other electricity assets).
SOUTH AUSTRALIAN INDEPENDENT INDUSTRY REGULATOR ACT 1999. The Independent
Industry Regulator Act 1999 establishes the SAIIR and grants certain powers and
functions upon the SAIIR. The Act grants powers in relation to price regulation,
industry codes and rules and the collection and use of information. The Act
grants powers to the SAIIR to make codes or rules relating to the conduct or
operations of a regulated industry or licensed entities. The SAIIR must consult
with the Treasurer of South Australia and participants in the regulated industry
as it considers appropriate when making such codes or rules.
ELECTRICITY PRICING ORDER. The Electricity Pricing Order is issued by the
Treasurer of South Australia under the Electricity Act 1996. It regulates
transmission and distribution network prices for a transitional period, pursuant
to derogations from the National Electricity Code (See NATIONAL REGIMES FOR GAS
AND ELECTRIC INDUSTRIES - ELECTRIC INDUSTRY below). It also regulates retail
tariffs for non-contestable customers, and small country customers.
LICENSES. Under the Electricity Act 1996, entities must obtain a license
before they can engage in generation of electricity, operation of a transmission
or distribution network, retailing of electricity or exercising system control
over a power system. The SAIIR is responsible for administering the licensing
regime.
GENERATION LICENSE. On May 2000, the business of Optima Energy was acquired
by TXU Australia Group. See BUSINESS OF TXU AUSTRALIA GROUP below. The
generation license is held by TXU South Australia. TXU Australia's generation
license permits TXU South Australia to generate electricity and includes (among
other things) requirements that:
o TXU South Australia grant access to its facilities and permit
transmission and distribution licensees to connect with its generation
plant in accordance with the National Electricity Code or, in the
event of dispute, on such terms as the SAIIR determines;
o disputes not covered by the National Electricity Code relating to
access must be resolved in accordance with a code to be developed by
the SAIIR;
o TXU South Australia must have a safety and technical management plan
annually approved by the SAIIR;
o TXU South Australia must submit information to the Electricity Supply
Industry Planning Council;
o TXU South Australia must comply with any directions given to it by the
system controller (ElectraNet SA);
o TXU South Australia must provide certain information to SAIIR upon
request;
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<PAGE>
o TXU South Australia must ensure that none of its directors are on the
boards of the other two previously State-owned generators;
o TXU South Australia must cause yearly compliance audits of its license
and code obligations to be conducted at its expense;
o TXU South Australia must participate in community service obligations
if required by the Treasurer of South Australia; and
o TXU South Australia must operate its plant in a manner compatible with
the transmission and distribution networks, and not prejudice public
safety or security of the power system.
CODES. As a market generator, TXU South Australia's primary technical and
market obligations are set out in the National Electricity Code (see NATIONAL
REGIMES FOR GAS AND ELECTRIC INDUSTRIES - ELECTRIC INDUSTRY below). However, as
a condition of its license TXU South Australia is required to comply with any
applicable obligations under State-based Codes comprising:
o the Distribution Code, which regulates the terms on which the
distributor connects customers to its distribution network and
supplies electricity to those customers;
o the Transmission Code, which sets out the obligations with which a
transmission entity must comply in relation to the operation and
maintenance of its transmission system, in addition to those
obligations set out in the National Electricity Code;
o the Retail Code, which regulates the terms on which a retailer sells
electricity to contestable customers who purchase at least 30MWh of
electricity per annum at a supply address, and non-contestable
customers who purchase at least 30MWh of electricity per annum at a
supply address who have entered into a contract on terms other than
the standard customer sale contract; and
o the Metering Code, which imposes obligations in relation to the
installation, testing and maintenance of meters and metering
installations on retailers, distributors and non-market generators.
NATIONAL REGIMES FOR GAS AND ELECTRIC INDUSTRIES
In addition to the State-based regimes for the regulation of gas and
electricity industries in Victoria and the electricity industry in South
Australia, these industries are also governed by national regimes which apply in
each jurisdiction through the operation of co-operative State-based legislation
in that State. These regimes set up the national access regime for access to gas
pipeline systems, and the National Electricity Market and access regime in the
electric industry. The terms of these regimes and their interaction with the
State-based regulations is set out below.
GAS INDUSTRY. On July 1, 1999, the national regulatory regime for
regulation of access to gas transmission and distribution systems was
implemented in Victoria. This regime is comprised of the Gas Pipelines Access
Law and the National Third Party Access Code for Natural Gas Pipeline Systems,
otherwise known as the National Access Code.
The Gas Pipelines Access Law sets up a regime for arbitration of access
disputes; deals with applications for classification of pipelines as
transmission or distribution pipelines; deals with the jurisdiction in which
cross-jurisdictional pipelines will be regulated; deals with amendments to the
National Access Code; sets out the procedures to be taken in respect of breaches
of the Gas Pipelines Access Law or the National Access Code, and for
administrative review of decisions of the regulators; and contains provisions
dealing with the regulators' powers to obtain information and restrictions on
the disclosure of confidential information.
The National Access Code regulates national gas pipeline access. It deals
with the mechanisms by which pipelines become subject to the Code; requires the
owners or operators of those pipelines to produce an "access arrangement"
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<PAGE>
accepted by the relevant regulator outlining services and tariffs applicable to
the pipeline; sets out the pricing principles on which those tariffs must be
based; sets out requirements for pipeline owners to "ring-fence," or separate,
their pipeline ownership business from their retail business and sets out the
mechanism for arbitration in the event of access disputes. The ORG is the
relevant regulator of the National Access Code in Victoria for distribution
pipelines.
Westar's pipelines transferred to it from GASCOR are subject to the
National Access Code. However, Westar has an existing access arrangement
approved by the ORG that applies until December 31, 2002, which is deemed to be
an access arrangement for the purposes of the National Access Code.
Westar's access arrangement provides that it will supply distribution
services in accordance with the Distribution Code described above. The access
arrangement further provides that Westar will charge for these services in
accordance with the tariffs for tariffed distribution services set out in the
Victorian Gas Industry Tariff Order described above. With the exception of
extensions that service more than 5,000 customers, Westar's access arrangement
will apply to any extensions or expansions of the system. Pricing arrangements
applicable to these extensions or expansions are set out in the access
arrangement.
Under the National Access Code, Westar is able to specify in an access
arrangement certain "fixed principles" that will apply to the pricing provisions
of its next access arrangement. The fixed principles that will apply to Westar's
next access arrangement, which will apply for five years from January 1, 2003,
are set out in the Victorian Gas Industry Tariff Order, and include a
requirement for the regulator to:
o use CPI-X and not rate of return regulation;
o ensure a fair sharing of efficiency gains between customers and the
distribution business;
o have regard to the cost of supplying the services which the
distributor supplies; and
o have regard to any relevant benchmarks in comparable private sector
industries.
ELECTRIC INDUSTRY. On December 13, 1998, the National Electricity Market
commenced operation in Australia. The National Electricity Market is a wholesale
market for the sale of electricity which is combined with an open access regime
for the use of physical electricity networks within the participating
jurisdictions of Queensland, New South Wales, Victoria, South Australia and the
Australian Capital Territory. It is expected that Tasmania will join the
National Market when an undersea cable is built between the Victorian
Electricity Grid and the Tasmanian Electricity Grid. It is unlikely that Western
Australia or the Northern Territory will participate in the National Electricity
Market, given the large physical distance separating them from the eastern
states.
The rules for participation in the National Electricity Market are set
forth in the National Electricity Code. In Victoria, the National Electricity
Code takes effect pursuant to the National Electricity Law, which is enacted as
a law of Victoria under the National Electricity (Victoria) Act 1997. As is the
case with the Gas Pipelines Access Law, the same law and code have been enacted
in each jurisdiction.
The national scheme has involved the establishment of an independent
operator, NEMMCO, and an independent body which administers the code itself, the
National Electricity Code Administrator (NECA). These bodies are companies owned
by the participating jurisdictions.
The National Electricity Market currently operates a wholesale electricity
pool into which all electricity produced by generators within Victoria, New
South Wales and South Australia is centrally pooled and scheduled to meet the
electricity demand of those States. NEMMCO matches the supply and demand
requirements among participants in the National Electricity Market. Generators
bid their electricity into the market, offering NEMMCO different prices for the
generation levels. In turn, market customers submit bids and quantities of
demand they wish to be scheduled. These are evaluated and met by NEMMCO on the
basis of minimizing the cost of meeting demand. Generators are paid the market
clearing price for the electricity they sell into the market. The clearing price
is the price at which supply and demand is matched as calculated by NEMMCO and
measured at half hour intervals each day. The clearing price is often referred
to as the "spot price."
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With limited exception, all electricity generated must be traded in an
electricity pool. Thus, all significant generators are pool participants. Each
electricity supplier is required to purchase electricity through a pool, unless
the electricity is purchased and consumed on the site of a generating station or
purchased from a generator too small to trade through a pool or through another
supplier who has purchased that electricity from a pool. A contestable customer
may also apply to NEMMCO to become a participant in a pool. New participants
will be admitted to a pool if they satisfy NEMMCO that they have sufficient
financial standing to meet their financial and other obligations under the rules
of such pool and that they will be able to maintain compliance with the National
Electricity Code.
Eastern Energy, in its capacity as an electricity retailer, is registered
as a market customer for the purposes of the market established under the
National Electricity Code, and purchases its power requirements from the
National Electricity Market. It manages its risk of exposure to high prices in
this market, however, by entering into hedging arrangements with market
generators.
TXU Australia is registered as a market generator for the purposes of the
market established under the National Electricity Code, and sells power into the
National Electricity Market and complies with the technical and market
requirements set out in the National Electricity Code. It manages its risk of
exposure to low prices in this market by entering into hedging arrangements with
market customers.
The National Electricity Code also contains various other rules relating to
industry technical requirements, access requirements of electricity transmission
and distribution systems and principles and methodology applicable to the
determination of transmission and distribution pricing arrangements. In
addition, this Code deals with power system security, and obligates NEMMCO to
maintain the national power system in a secure and reliable operating state.
Finally, this Code also contains technical rules relating to metering, generally
at the wholesale level.
Under the Code, each owner of an electricity transmission or distribution
system is required to lodge an access undertaking with the ACCC affirming that
the transmission and distribution company will comply with the National
Electricity Code, and with the jurisdictional regulatory requirements of the
State in which the network is located.
Accordingly, Eastern Energy, in its capacity as a distribution network
owner, has lodged an access undertaking with the ACCC to comply with the
National Electricity Code, as well as the provisions of the Victorian regulatory
regime. In this respect, the National Electricity Code contains rules to
determine which regulations take priority when jurisdictional regulatory
requirements overlap with the National Electricity Code. For example, the
distribution pricing arrangements for the next regulatory review set out in the
Victorian Electricity Supply Industry Tariff Order discussed above take
precedence over the pricing arrangements set out in the National Electricity
Code.
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BUSINESS OF TXU AUSTRALIA GROUP
GENERAL
TXU Australia Group purchases, distributes, markets and sells electricity
and gas, primarily in the State of Victoria, and generates electricity in the
State of South Australia, Australia. The Group's core businesses of Networks,
Retail, Energy Trading and Generation are conducted through four principal
operating companies:
o EASTERN ENERGY, which purchases, distributes and sells electricity to
approximately 512,000 customers, mainly in Victoria;
o WESTAR, which distributes natural gas to approximately 400,000
customers in central and west Victoria;
o KINETIK ENERGY, which sells natural gas to approximately 414,000
customers in Victoria; and
o TXU SOUTH AUSTRALIA, which generates electricity in South Australia.
Since December 1995, TXU Australia Group has been pursuing a strategy of
building a diverse energy portfolio encompassing distribution, retailing and
access to peak supplies of electricity and gas. TXU Australia Group believes
this portfolio will give it a competitive advantage in the market, particularly
through economies of scale, the ability to offer both electricity and gas for
sale and diversification of risk.
In December 1995, TXU Australia Group acquired Eastern Energy for A$2.1
billion (US$1.25 billion) in connection with the Government of Victoria's
disaggregation and privatization of the government-owned electricity industry.
In January 1997, the construction and maintenance activities of Eastern Energy
were transferred into a new subsidiary, Enetech Pty Ltd. (Enetech). In June
1997, Enetech purchased the construction business of Streamline from Melbourne
Water Corporation. In January 1998, the customer service activities of Eastern
Energy were transferred into a new subsidiary, Global Customer Solutions Pty Ltd
(Global Customer Solutions).
In November 1998, TXU Australia Group purchased the rights to construct and
operate an underground gas storage facility in western Victoria. A company in
TXU Australia Group, Western Underground Gas Storage Pty Ltd (Western
Underground Gas Storage), constructed this facility during 1999.
In February 1999, TXU Australia Group acquired Westar and Kinetik Energy
for A$1.6 billion (US$0.96 billion) in connection with the Government of
Victoria's disaggregation and privatization of the government-owned gas
industry.
In April 1999, Eastern Energy entered into a twenty year option agreement
with AES Ecogen. The agreement provides Eastern Energy with the ability to enter
into contracts with AES Ecogen that require the exchange of cash for the
difference between the amount specified in the agreement and the then current
spot price of electricity.
In January 2000, TXU Australia Group sold the construction and maintenance
activities of Enetech to Tenix Pty Ltd (Tenix), a major Australian technology
contractor for A$48.6 million (US$29.0 million), subject to the finalization of
any post-closing adjustments. At the same time TXU Australia Group entered into
a ten-year strategic contract with Tenix to provide a wide range of operations,
maintenance and construction services to the Group.
On May 4, 2000, TXU Australia Group was selected by the South Australian
government as the successful bidder for the business of the South Australian
electricity generator Optima Energy, which includes a 100-year lease of the
generating assets. The purchase price of A$295 million (US$176 million) was paid
on June 6, 2000. Optima Energy operated the gas-fired Torrens Island power
stations in South Australia, which have a total power generating capacity of
1,280 megawatts. The stations currently supply 28% of South Australia's
49
<PAGE>
electricity needs. The 100-year lease of the generating assets is held by TXU
South Australia, a subsidiary of TXU Australia, which also owns other related
assets. Eastern Energy has also entered into long-term electricity hedging
arrangements with TXU South Australia. TXU Australia Group funded its initial
investment of A$295 million in the business of Optima Energy by an equity
injection of A$181 (US$108 million), and the balance through debt. The debt
component has been provided under a loan (Facility F) with Citibank maturing
on December 29, 2000. Citibank has agreed in principle to extension of this
facility to September 30, 2001 and TXU Australia is negotiating the specific
terms of such extension. This debt ranks equally with the other senior debt
described under TXU AUSTRALIA GENERAL OVERVIEW - "CAPITALIZATION OF TXU
AUSTRALIA - SENIOR DEBT FUNDING." It is contemplated that this debt will be
repaid from proceeds of an issuance of medium term notes issued under the
Short-term/Medium-term Note Program. See TXU AUSTRALIA GENERAL OVERVIEW -
"CAPITALIZATION OF TXU AUSTRALIA - SENIOR DEBT FUNDING - SHORT-TERM/MEDIUM-TERM
NOTE PROGRAM" for more information.
See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION for additional information regarding these events.
BUSINESS SEGMENTS
Following the acquisition of the Westar and Kinetik Energy gas businesses
in February 1999, TXU Australia Group undertook a major integration process
which resulted in the Group being organized into three core businesses for
operating purposes. A fourth business segment was added following the
acquisition of the generation business of Optima Energy:
1. A NETWORKS BUSINESS SEGMENT, which
o distributes electricity to approximately 512,000 supply points
located in the eastern suburbs of Melbourne and in rural areas in
eastern Victoria; and
o distributes natural gas to approximately 400,000 supply points
located in the western suburbs of Melbourne and in rural towns in
western Victoria; and
o operates the underground gas storage facility.
2. A RETAIL BUSINESS SEGMENT, which
o sells electricity to approximately 512,000 customers located in
the eastern suburbs of Melbourne and in rural areas in eastern
Victoria; and
o sells natural gas to approximately 414,000 customers located in
the northern suburbs and central business district of Melbourne
and in rural towns in the west of the State of Victoria.
3. An ENERGY TRADING BUSINESS SEGMENT, which:
o manages electricity and gas supplies on behalf of the Retail
Business, including purchasing gas and electricity, trading
electricity and gas (both physical and derivatives) within
approved risk limits, managing electricity hedging agreements,
and managing TXU Australia Group's gas supplies from Western
Underground Gas Storage; and
o manages the output from the Torrens Island power stations.
4. A GENERATION BUSINESS SEGMENT, which:
o operates the Torrens Island power stations
TXU Australia Group also operates a non-core third party CUSTOMER SERVICE
BUSINESS providing call center services, through another Group company, Global
Customer Solutions. Until January 2000, TXU Australia Group also operated an
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infrastructure construction and maintenance business through Enetech, a Group
company. This business was sold in January 2000.
The following maps show Eastern Energy's electric distribution and initial
retail territories, Westar's gas distribution territory and Kinetik Energy's
initial gas retail territory.
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GRAPHIC DELETED
52
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TXU AUSTRALIA GROUP OPERATING STATISTICS
The following table provides unaudited summary statistical information regarding
the TXU Australia Group's operations. Gas results for the year ended December
31, 1999 relate only to the period from February 24, 1999, the date of
acquisition of Westar and Kinetik Energy. Electricity generation information for
the six months ended June 30, 2000 relates only to the period from May 4, 2000,
the date of acquisition of the business of Optima Energy.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
RETAIL BUSINESS
Electricity Sold (GWh)
Residential........................... 1,287 1,227 2,550 2,468 2,410
Industrial, Commercial and others..... 1,496 1,430 2,959 2,745 2,780
-------- -------- -------- -------- ---------
Total electricity retail sales........ 2,783 2,657 5,509 5,213 5,190
-------- -------- -------- -------- ---------
Gas Sold (PJ)
Residential........................... 12 8 18 - -
Industrial, Commercial and others..... 22 11 35 - -
-------- -------- -------- -------- ---------
Total gas retail
sales................................. 3 19 53 - -
-------- -------- -------- -------- ---------
Retail Revenue (millions of A$)
(unaudited)
Electricity (includes use of system
charges)
Residential........................... $ 164 $ 142 $ 294 $ 302 $ 295
Industrial, Commercial and others..... 131 121 261 270 283
Other................................. 2 - 29 14 3
-------- -------- -------- -------- ---------
Total electricity retail
revenue............................... $ 297 $ 263 $ 584 $ 586 $ 581
-------- -------- -------- -------- ---------
Gas Revenue
Residential........................... $ 61 $ 44 $ 104 $ - $ -
Industrial, Commercial and others..... 80 29 96 - -
Other................................. 1 - 2 - -
-------- -------- -------- -------- ---------
Total gas retail revenue................ 142 73 202 - -
-------- -------- -------- -------- ---------
Total retail revenues................... $ 439 $ 336 $ 786 $ 586 $ 581
======== ======== ======== ======== =========
Electricity Customers (thousands)....... 512 504 511 499 489
Gas Customers (thousands)............... 414 405 410 - -
</TABLE>
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<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NETWORKS BUSINESS
Electricity Distributed (GWh)............ 3,065 2,928 5,982 5,681 5,633
Gas Distributed (PJ)
Tariff V (customers < 10,000 GJ/year).. 11 10 24 - -
Tariff D (customers > 10,000 GJ/year).. 22 15 36 - -
-------- -------- -------- -------- ---------
Total gas distributed.................... 33 25 60 - -
-------- -------- -------- -------- ---------
Distribution Revenues (millions of A$)
(unaudited)
Electricity
Use of network......................... $ 153 $ 146 $ 298 $ 303 $ 287
Other.................................. 10 4 16 7 10
-------- -------- -------- -------- ---------
Total electricity distribution revenue... $ 163 $ 150 $ 314 $ 310 $ 297
-------- -------- -------- -------- ---------
Gas
Tariff V (customers < 10,000 GJ/year).. $ 43 $ 32 $ 85 $ - $ -
Tariff D (customers > 10,000 GJ/year).. 3 2 5 - -
Other.................................. 4 1 4 - -
-------- -------- -------- -------- ---------
Total gas distribution revenue........... $ 50 $ 35 $ 94 $ - $ -
-------- -------- -------- -------- ---------
Total distribution revenues.............. $ 213 $ 185 $ 408 $ 310 $ 297
======== ======== ======== ======== =========
ELECTRICITY GENERATION BUSINESS
Electricity Generated (GWh).............. 570 - - - -
Electricity Generation Revenues (millions of A$) (unaudited)....
Generation............................. $ 42 $ - $ - $ - $ -
Other.................................. - - - - -
-------- -------- -------- -------- ---------
Total electricity generation revenue $ 42 $ - $ - $ - $ -
======== ======== ======== ======== =========
</TABLE>
NETWORKS BUSINESS SEGMENT
ELECTRICITY NETWORK - EASTERN ENERGY. Eastern Energy is the holder of an
electricity distribution license, which provides the right to distribute
electricity within a defined geographical area in Victoria in accordance with a
set of conditions that attach to the license. The regulatory framework under
which the license is issued has been outlined above under OVERVIEW OF THE GAS
AND ELECTRIC INDUSTRIES IN VICTORIA, AUSTRALIA.
Virtually all customers within Eastern Energy's service territory are
connected to Eastern Energy's distribution network, whether electricity is
purchased from Eastern Energy or some other retail supplier. There is, however,
open access to the distribution network. Open access means that all retailers
licensed to sell electricity in Victoria have equal rights of access to the
distribution network. Eastern Energy has the right to charge network tariffs to
the retailers who access its network. These charges provide the primary revenue
of Eastern Energy's electricity network.
Eastern Energy's distribution area covers approximately 31,000 square miles
from the outer eastern metropolitan suburbs of Melbourne to the eastern coastal
areas of Victoria and north to the New South Wales border. The distribution
service territory encompasses three of the four fastest-growing suburban areas
in Melbourne, Australia's second-largest city. Almost 60 percent of Eastern
Energy's customers live in suburban Melbourne. See the maps on page 52.
Eastern Energy distributes electricity to approximately 500,000 customers
in a distribution territory with a population of approximately 1.2 million. The
region accounts for approximately 28% of Victoria's population and approximately
35% of its total territory. Eastern Energy's service territory has the fastest
population growth rate of the service territories of the five Victorian
distribution companies, and is expected to average an annual population growth
of approximately 1.5% for the next ten years. Eastern Energy's service territory
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has a predominantly residential and commercial customer base, but also includes
a diverse range of industrial customers, including logging paper mills, food
manufacturers, electricity generators, dairy producers and other light industry.
Eastern Energy's distribution network consists of approximately 24,000
miles of distribution lines. About 89% of Eastern Energy's lines and cables are
overhead and 70% of the poles are timber. The high voltage system mainly employs
steel crossarms and porcelain insulators. Eastern Energy considers its network
to be in good condition. This has been confirmed by a 1999 ORG audit and by a
review of asset conditions by an independent consultant.
Eastern Energy has rights under statute to enter upon public or private
land and construct or maintain works and take other action, subject to any
conditions in its license or any code issued by the ORG. Eastern Energy holds a
range of property interests, including freehold and leasehold interests,
licenses, easements and memoranda of understanding to grant an easement and
permit access to property if required.
Field operation of the electrical system is carried out by authorized
electrical operators under direction from the Eastern Energy control center. A
System Control and Data Acquisition (SCADA) system is being installed to allow
the control center to monitor energy supply, isolate faulted sections and
restore supply to the rest of the network.
Maintenance of performance was a primary objective of the industry reforms.
Eastern Energy's network has operated within the performance limits of the
regulatory regime. The network is particularly sensitive to related outages
during storms, due to the high number of customers living in heavily treed
areas, particularly in hilly areas surrounding Melbourne.
GAS NETWORK - WESTAR. Westar is the holder of a gas distribution license,
which grants a right to distribute gas within a defined geographical area in
accordance with a set of conditions that attach to the license. The ORG issued
its final approval of Westar's current access arrangement in December 1998. The
regulatory framework under which the license is issued has been outlined above
under OVERVIEW OF THE GAS AND ELECTRIC INDUSTRIES IN VICTORIA, AUSTRALIA. Westar
charges retailers (including Kinetik Energy) tariffs for providing distribution
services. Under the regulatory arrangements, the initial tariffs are subject to
increase or decrease based on a CPI-X formula based on the Consumer Price Index
and a multiplier that is set through December 2002. Westar also earns revenue
from other activities related to its distribution business, some of which are
regulated on a "fair and reasonable" basis.
Westar's gas distribution network includes approximately 4,800 miles of
pipelines over approximately 800 square miles in the western and northwestern
Melbourne metropolitan area, together with 19 rural localities in central and
western Victoria. As of December 31, 1999, Westar served approximately 400,000
customer connection points.
Westar's initial distribution territory covers part of both Kinetik Energy
and Ikon Energy's retail non-contestable agency areas. In addition, Westar also
transports gas for use by affiliates of Esso and BHPP at sites within its
distribution areas pursuant to the terms of a gas transportation deed between
GASCOR, Esso and BHPP. See the maps on page 52.
A SCADA system is used to monitor and/or control the operation of 82% of
the high pressure system. The SCADA system is operated from VENCorp's Fitzroy
control center.
Westar also currently operates a tempered liquefied petroleum gas plant at
Colac in western Victoria. Prior to the operation of this plant, there has been
no natural gas supply within the proximity of Colac. However, a natural gas
transmission pipeline from Geelong to Port Campbell has recently been
constructed which runs close to Colac. Under the asset sale agreement with the
Victorian Government, Westar must connect the Colac distribution system to the
natural gas pipeline and Kinetik Energy must supply customers in Colac with
natural gas by June 2001.
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Since Westar's formation, gas distribution system reliability and supply
for consumers have been in excess of industry standards. Minor supply
interruptions occur from time to time due to water ingress into low-pressure
pipelines or damage by third parties to a part of the distribution system.
Westar has easements and licenses which provide it with the legal right to
access land for installation, operation and maintenance of its distribution
pipelines, city gates and also for access routes to various Westar assets.
STRATEGIC ALLIANCE. In January 2000, at the same time that the
infrastructure construction and maintenance business of Enetech was sold to
Tenix, the Networks Business entered into a long-term strategic alliance with
Tenix. Tenix is one of Australia's leading technology contractors, with over A$1
billion (US$0.6 billion) in assets and over 4,000 employees in Australia. The
alliance agreement promotes the ability for technological and strategic
investment, and targets significant cost reduction in the provision of
operations, maintenance and capital works for the gas and electrical networks.
The agreement has a term of ten years and provides for reimbursement of both
direct and indirect costs together with a performance-based margin. The annual
value of services provided by Tenix under the alliance agreement is
approximately A$130 million (US$78 million). TXU Australia is able to terminate
the agreement on the following conditions: provision of twelve months' notice,
breach by Tenix of necessary licenses and authorization, force majeure lasting
longer than six months, insolvency of Tenix, or a material breach of the
agreement by Tenix.
WESTERN UNDERGROUND GAS STORAGE. In November 1998, TXU Australia purchased
the rights to construct and operate an underground gas storage facility near
Port Campbell in western Victoria. Construction was completed in August 1999.
The facility is expected to be fully operational by September 2000. It both
processes raw gas and stores processed gas. The Western Underground Gas Storage
facility is connected to the principal Victorian gas transmission system by a
recently constructed 95 mile pipeline. The pipeline is owned and operated by GPU
GasNet.
TXU Australia agreed to acquire three additional gas fields in the Port
Campbell area together with their remaining gas reserves. The acquisition
included the right and the obligation to build gas processing facilities to
process both TXU Australia's own gas and gas from other producers. Pursuant to
an Underground Storage, License and Sale Agreement with the State of Victoria,
Western Underground Gas Storage is required to keep its business separate from
the retail business of TXU Australia Group and must not offer discriminatory
terms in favor of related businesses. Western Underground Gas Storage's
customers are Kinetik Energy and other gas retailers for storage services and
gas producers for gas processing.
Western Underground Gas Storage provides TXU Australia Group with the
strategic advantage of having a ready access to an alternative supply of natural
gas at times of peak demand.
The Networks Business manages the underground storage and processing
facilities on behalf of Western Underground Gas Storage.
THE RETAIL BUSINESS SEGMENT
ELECTRICITY RETAIL. Eastern Energy has retailing licenses to sell
electricity to contestable customers in Victoria, New South Wales, Queensland,
South Australia and the Australian Capital Territory. Eastern Energy also holds
an exclusive franchise to sell electricity to retail customers with electricity
loads of less than 160 MWh/year within the same geographic area of Victoria as
its distribution license. This franchise is in effect until January 1, 2001,
when all customers will progressively be able to purchase from retailers of
their choice. See RISK FACTORS and OVERVIEW OF THE GAS AND ELECTRIC INDUSTRIES
IN VICTORIA, AUSTRALIA.
Kinetik Energy also has a retail license to sell electricity to contestable
customers in Victoria. Since the acquisition of the business by TXU Australia,
Kinetik Energy has not actively pursued new electricity sales.
COMPETITION IN ELECTRICITY RETAILING. In July 1996, customers in Victoria
with loads greater than 750 MWh/year became contestable. In July 1998, customers
with loads between 160 and 750 MWh/year became contestable. Together these two
customer classes accounted for approximately 49% of total Victorian volumes. In
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both cases, the introduction of contestability was characterized by the entry of
several new retailers, significantly lower prices, and a high level of switching
between retailers. Because of the low profitability of these customers, volume
retention has not been a priority to TXU Australia.
The most profitable segment of the retail electricity market in Victoria is
the final class of customers with loads below 160 MWh/year, which becomes
contestable in stages from January 2001. Based on information available from the
experience of mass market contestability, in particular in the United Kingdom
and in California, TXU Australia expects that the competition, and therefore the
downward pressure on profit margins, will be less intense for these smaller
customers. TXU Australia expects only a limited number of these customers will
seek to change their retailer.
However, if the new Victorian government implements its pre-election
proposal to retain retail tariff protection for domestic customers after
contestability (see RISK FACTORS and OVERVIEW OF THE GAS AND ELECTRIC INDUSTRIES
IN VICTORIA, AUSTRALIA), TXU Australia expects that the impact of competition
will be reduced in the domestic market.
GAS RETAIL. Kinetik Energy has a retail license which gives it the
exclusive right to supply gas to approximately 410,000 non-contestable customers
in its geographic agency area, as agent for GASCOR, until such time as those
customers become contestable. Its license also gives it the right to supply gas
to any customer in Victoria after contestability.
Kinetik Energy, as agent for GASCOR, serves a base of approximately 410,000
customers. Large industrial or commercial customers have individual sales
contracts. The contracted customers have the option of terminating their
contracts when they become contestable subject to paying all outstanding
charges. The portfolio of business customers currently served by Kinetik Energy
includes food manufacturing, chemicals, paper, health, hospitality and
recreation. Approximately 52% of Kinetik Energy's agency customers are connected
to Westar's distribution network, with the balance connected to Envestra's
distribution system.
COMPETITION IN GAS RETAILING. Customers consuming over 500,000 GJ/year
became contestable on October 1, 1999, those consuming between 100,000 and
500,000 GJ/year became contestable on March 1, 2000 and those consuming between
10,000 and 100,000 GJ/year became contestable on September 1, 2000. The
remaining gas consumers, including new connections, are supplied by GASCOR and
are non-contestable until the dates set out below.
CUSTOMER CONTESTABILITY TIMETABLE
--------------------------------------------------------------------------------
APPROXIMATE NUMBER OF CUSTOMERS
CUSTOMER LOAD
DATE (GJ/YEAR) VICTORIA KINETIK ENERGY
--------------------------------------------------------------------------------
Currently > 10,000 786 263
September 1, 2001 All others 1,337,000 395,000
--------------------------------------------------------------------------------
Contestable customers are able to choose their own retailer of gas. Upon
contestability, Kinetik Energy ceases to supply gas as agent of GASCOR, and
commences supplying contestable customers in its own right with gas purchased
from GASCOR and other sources.
In the first stage of contestability (customers consuming over 500,000
GJ/year who became contestable on October 1, 1999), TXU Australia has been very
successful both in retaining its existing customer base and in gaining customers
from other retailers at favorable margins. Prior to October 1, 1999, Kinetik
Energy had 10 first stage customers consuming approximately 13.2 PJ/year. By
March 1, 2000 it had 14 first stage customers consuming approximately 26.1
PJ/year. While competition for customers has been fierce, the downward pressure
on margins which occurred in the early stages of electricity contestability has
been nowhere near as intense in the gas market. It is too early to assess the
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results of the second and third stages of contestability which occurred on March
1, 2000 and September 1, 2000 respectively.
The most profitable segment of the retail gas market in Victoria is the
final class of customers with loads below 10,000 GJ/year, which become
contestable in September 2001. As with competition in the electric industry, TXU
Australia's expectation is that the competition will be less intense for these
smaller customers.
THE ENERGY TRADING BUSINESS SEGMENT
ELECTRICITY SUPPLY MANAGEMENT. In the eastern Australia electricity supply
industry, generators over 30 MW are required to offer all of their energy output
for sale through the wholesale market. As all electricity available for sale
comes from the national market, holders of retail electricity licenses are
required to participate in and comply with rules established by the wholesale
market operators if they want to purchase electricity. Eastern Energy is a
member of the National Electricity Market.
Eastern Energy and other distribution and retail companies in Victoria
purchase most of their electric energy needs from the National Electricity
Market. The National Electricity Market is discussed in more detail in OVERVIEW
OF THE GAS AND ELECTRIC INDUSTRIES IN VICTORIA, AUSTRALIA.
Because the spot price of electric energy can vary substantially from time
to time, Eastern Energy is exposed to the risk arising from the difference
between the fixed price at which they sell electricity to their contestable
customers and the variable price at which they purchase electricity from the
wholesale market. To manage this risk, Eastern Energy enters into hedging
contracts with electric energy generators and others to manage exposure to such
price fluctuations. See RISK FACTORS and MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The trading activities at TXU Australia Group are still being developed. In
May 1999, TXU Australia Group entered into a twenty year option agreement with
AES Ecogen which owns 966MW of gas fired generation facilities that are
typically used during peak periods of demand for electricity in Victoria. The
agreement provides TXU Australia Group with the ability to enter into contracts
with AES Ecogen, at TXU Australia Group's option, which would require an
exchange of cash for the difference between the amounts specified in the
contracts and the spot price of electricity.
TXU Australia Group also has an agreement to supply gas to AES Ecogen to
run the facilities for twenty years. TXU Australia Group made an initial option
premium payment of A$201 (US$121 million) million and is required to make
further future payments. The option is marked to market and had a fair value of
A$201 million at December 31, 1999.
The Energy Trading business also manages the output of the Torrens Island
power stations. See below under - "THE GENERATION BUSINESS SEGMENT."
ENERGY MANAGEMENT - GAS SUPPLY. Approximately 98% of Victoria's current gas
supply of 172 PJ per annum is sourced from the Bass Strait gas producers, Esso
Australia Resources Ltd and BHP Petroleum (Bass Strait) Pty Ltd, pursuant to
long term gas supply contracts with GASCOR. As a part of the gas industry
disaggregation and privatization, GASCOR has allocated to Kinetik Energy and the
other gas retailers, gas delivered under these contracts, with Kinetik Energy
entitled to a maximum of approximately 53PJ/year until 2009 at fixed prices.
Kinetik Energy initially is entitled to these gas volumes in its agency capacity
to GASCOR to supply gas to non-contestable customers. As customers become
contestable, Kinetik Energy is entitled to these volumes in its capacity as a
gas retailer to the contestable customers it serves. The gas is pumped onshore
and processed at Longford in Eastern Victoria.
Kinetik Energy also purchases gas from Boral Energy in western Victoria to
supply customers in that region. Historically, the western transmission system
was not connected to the principal transmission system supplied from Longford. A
new transmission pipeline from Geelong to Port Campbell has recently been
constructed.
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In September 1998, an explosion occurred at Esso's gas processing plant at
Longford, which caused almost total loss of supply to the principal Victorian
gas transmission system for almost two weeks. The only sources of supply were a
small flow over a newly constructed interconnect with New South Wales, plus a
storage tank of liquefied natural gas at Dandenong in Melbourne's outer suburbs.
Measures have since been taken to mitigate the risk of such an event
recurring including:
o the New South Wales interconnect has been upgraded;
o the previously isolated transmission system in Western Victoria has
been linked to the principal system via a new 95 mile pipeline from
Geelong to Port Campbell, thereby permitting gas to flow from the
western gas fields into the principal system;
o Western Underground Gas Storage has constructed an underground storage
facility at Port Campbell, which is linked via the same new pipeline;
o development of synthetic natural gas as an alternative energy supply;
and
o a new transmission pipeline from Longford to Sydney is under
construction, through which, if necessary, gas could flow back.
A gas spot market opened in Victoria in April 1999. Kinetik Energy must
specify the injections (volume and price) it is willing to make from its supply
sources, and must settle any imbalance between its injections and the demands of
its customers with counterparties in the spot market. Because of the dominant
volume of the Esso/BHPP supply source, market price volatility has been minimal
to date.
THE GENERATION BUSINESS SEGMENT
TXU South Australia is the lessee of the two Torrens Island power stations
(TIPS A and TIPS B; collectively, TIPS) in Adelaide, South Australia, which have
a combined capacity of 1,280MW consisting of eight steam turbines, as described
in the table below.
-------------------------------------------------
PLANT CAPACITY UNITS YEAR COMMISSIONED
(MW) (MW)
-------------------------------------------------
TIPS A 480 4x120 1967-1971
TIPS B 800 4x200 1975-1980
-------------------------------------------------
Both TIPS A and TIPS B units can generate electricity using either natural
gas or residual fuel oil. Gas is supplied through a long-term contract with
Terra Gas Trader, an entity which has also been sold by the South Australian
Government. The contract expires at the end of 2010, and commitment under the
contract diminishes over time. It also has an oil storage facility which stores
the oil used as the plants' secondary fuel source.
TIPS is the largest capacity gas-fired electricity generating plant in
Australia. The stations currently supply approximately 28% of South Australia's
electricity requirements.
Generating plants typically operate within a merit order which relates to
their unit costs of production, the lowest cost plants being classified as base
load plants and the highest cost plants as peaking plants. Between the two
extremes are intermediate plants. The generating plant that bids the highest
price that is accepted by NEMMCO for any half hourly pricing interval sets the
market price. Peaking plants will normally set the market price when their bids
are accepted. See also NATIONAL REGIMES FOR GAS AND ELECTRIC INDUSTRIES -
ELECTRIC INDUSTRY for a description of the price setting mechanism. TIPS acts in
an intermediate and peaking capacity.
TIPS A units were refurbished in 1997 and 1998 by the South Australian
Government, at a cost of approximately A$41 million (US$25 million), to better
position them to operate in the peaking segment of the National Electricity
Market. TIPS B units underwent a much smaller refurbishment program to further
improve the operational flexibility and reliability of those units.
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LITIGATION
POTENTIAL SUCCESSOR LIABILITY. Pursuant to Allocation Statements made under
the Electricity Industry Act 1993 (Vic.) and the Gas Industry Act 1994 (Vic.)
Eastern Energy, Westar, Kinetik Energy and Western Underground Gas Storage were
allocated liability for all claims arising in respect of certain causes of
action accrued against their predecessors as at September 29, 1994, in the case
of Eastern Energy, October 9, 1998 in the case of Western Underground Gas
Storage and February 24, 1999 in the case of Westar and Kinetik Energy.
TXU South Australia is also liable for claims arising in respect of certain
causes of action accrued against its predecessors as of May 4, 2000 in respect
of the assets acquired from Optima Energy in accordance with the terms on which
these assets were acquired.
LONGFORD CLAIM. Esso's gas processing plant at Longford exploded in
September 1998 causing prolonged interruption of gas supplies in Victoria.
Subsequently, a class action was commenced in the Federal Court of Australia
against Esso and Esso Australia Limited (Esso defendants) on behalf of a large
number of domestic and commercial consumers claiming damages for loss of supply.
The Esso defendants have joined the Victorian Government and related
entities to the action, including those which sold and distributed Esso gas
prior to these businesses being acquired by private operators. The Esso
defendants have also joined private operators as well (Esso Cross-Claim),
including Westar, Kinetik Energy and Western Underground Gas Storage, claiming
any such liability passed to them as part of the sale of the businesses from the
government.
As currently pleaded before the Federal Court of Australia, the claims
cover actions in negligence and in misleading and deceptive conduct.
On April 3, 2000, the State of Victoria and the state-owned entities who
were vendors of the business and assets to Westar and Kinetik Energy served a
cross-claim (State Cross-Claim) on Westar and Kinetik Energy. The State
Cross-Claim seeks orders against Westar and Kinetik Energy that they are liable
for any liability of the state owned vendors which may be found against those
entities in relation to the Esso Cross-Claim. To the extent the State
Cross-Claim raises issues which are already raised against Westar and Kinetik
Energy in the Esso Cross-Claim, it does not materially affect the potential
liability of Westar and Kinetik Energy in the litigation.
If Esso is found liable and is successful in its cross claims, the
potential liability of Westar, Kinetik Energy and Western Underground Gas
Storage could be significant.
Baker & McKenzie, Melbourne, Australia, counsel to TXU Australia Group, has
conducted a legal analysis of pleadings filed so far and the likely defenses
available. Based on their analysis, TXU Australia Group believes that the claims
against Westar, Kinetik Energy and Western Underground Gas Storage (and the
proposed State Cross-Claim) are without merit. However, given the complexity and
magnitude of the claims involved in this litigation, TXU Australia Group cannot
predict at this time the outcome or the impact on the financial condition,
results of operations or cash flows of TXU Australia Group of a negative
outcome. TXU Australia Group intends to vigorously pursue all of its defenses in
this litigation.
With the exception of the Longford claim, TXU Australia Group is not aware
of any actual or threatened actions, suits or claims against TXU Australia Group
likely to have a material adverse effect upon the business or financial
condition, results of operations or cash flows of TXU Australia Group.
EMPLOYEES
As of June 30, 2000, TXU Australia Group employed 1,373 persons. TXU
Australia Group considers its relations with its employees satisfactory.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The consolidated financial statements of TXU Australia Group have been
prepared in accordance with US GAAP and are expressed in Australian dollars
("A$"). Accordingly, the following discussion is expressed in Australian dollars
and should be read in conjunction with the consolidated financial statements and
the notes thereto, included elsewhere in this prospectus.
In January 1999, TXU Corp., through a series of subsidiaries, created TXU
Australia to acquire and hold, either directly or indirectly, all of its
Australian investments. Prior to this time, TXU Corp. principally conducted
business in Australia through TXU APL and its wholly-owned subsidiaries. In
connection with the acquisition of Westar and Kinetik Energy, TXU Australia
Group was restructured and TXU Australia became the ultimate holding entity in
Australia for TXU Australia Group. The consolidated financial statements of TXU
Australia Group give retroactive effect to these transactions, which have been
accounted for at historical cost in a manner similar to that of
pooling-of-interest accounting.
Until May 4, 2000, TXU Australia Group's principal operations were
conducted through Eastern Energy, Westar and Kinetik Energy. Through these
companies, the Group engages in the purchase, distribution, trading and
retailing of electricity and gas, mainly in the State of Victoria, Australia. In
addition, the Group's other operations are conducted through Western Underground
Gas Storage, Global Customer Solutions, and (until January 2000) Enetech. The
activities of these companies include gas storage for supplying gas into the gas
distribution network, call center management and infrastructure construction and
maintenance, respectively.
On May 4, 2000, TXU Australia Group through its subsidiary, TXU South
Australia, acquired certain assets and liabilities of Optima Energy, a
government-owned electricity generation entity, from the State Government of
South Australia.
ACQUISITIONS
In December 1997, TXU Australia Group acquired certain assets and
liabilities of the Victorian Power Exchange's metering business for A$7.7
million. In 1998, TXU Australia Group purchased Western Underground Gas Storage
Pty Ltd (WUGS), an underground gas storage facility for A$53 million. These
acquisitions were accounted for as purchase business combinations. 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 A$5.5 million and A$0.5 million for the 1997 and 1998
acquisitions, respectively, which is being amortized over 20 and 25 years,
respectively. The results of the acquired operations have been included in the
results of operations of TXU Australia Group from their respective dates of
acquisitions.
On February 24, 1999, TXU Australia Group acquired the gas retail
operations of Kinetik Energy and the gas distribution operations of Westar and
Westar (Assets) Pty Ltd from Gascor Holdings No. 2 Pty Ltd, a controlled entity
of the State Government of Victoria, Australia. The purchase price was A$1.6
billion, which has been financed principally through bank borrowings by TXU
Australia Group. 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 A$747 million, which is being
amortized over 40 years. The acquisition of Westar and Kinetik Energy was
treated for accounting purposes as a purchase business combination, and the
results of operations of Westar and Kinetik Energy have been included in the
results of operations of TXU Australia Group, since the acquisition date.
In connection with the acquisition of Westar and Kinetik Energy, TXU
Australia Group developed a plan to terminate 90 employees of the acquired
entities and recorded a liability for employee termination costs of A$4.6
million. At December 31, 1999, 45 employees had been terminated at a cost of A$2
million. The remaining employee termination costs of A$2.6 million were paid in
the first half of 2000.
On May 4, 2000, TXU South Australia, a subsidiary of TXU Australia Group,
acquired certain assets and liabilities of Optima Energy. The purchase includes
a 100-year lease of the power stations and leases for the land on which the
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power stations are located and a further area of land, adjacent to the land on
which the power stations are located. TXU Australia Group funded its purchase
price of A$295 million with a capital contribution of A$181 million, and the
balance through debt. The debt component (Facility F) was provided under a
bridge loan with Citibank maturing on December 29, 2000. The maturity date is
expected to be extended to September 30, 2001. This debt ranks equally with the
other senior debt described under "TXU AUSTRALIA - GENERAL OVERVIEW -
CAPITALIZATION OF TXU AUSTRALIA - SENIOR DEBT FUNDING."
The acquisition of the business of Optima Energy was accounted for as a
purchase business combination. The process of determining the fair value of
assets acquired and liabilities assumed from Optima Energy has not been
completed, however, the excess of the purchase consideration plus the incidental
expenses over a preliminary estimate of net fair value of the net assets
acquired resulted in goodwill of A$226 million, which is being amortized over 30
years. This amount is subject to revision as additional information about the
fair value of the assets acquired, liabilities assumed and contingencies
existing at the acquisition date becomes known. The results of the acquired
operations have been included in the results of operations of TXU Australia
Group from the acquisition date of May 4, 2000.
In connection with the acquisition of the business of Optima Energy, TXU
Australia Group is developing a plan to restructure the generation business.
Corporate departments and retail operations of the business will cease, and the
responsibilities are to be transferred to other parts of the Group. As a result,
13 employees will be terminated. The Group recorded a liability for employee
termination costs of A$2.5 million. Plans to restructure operation and
maintenance departments are currently being developed, and further costs may be
identified upon completion of the plans.
Prior to the acquisition of the business of Optima Energy in May 2000,
Optima Energy had entered into vesting contracts with third parties. As part of
the business acquisition, Optima Energy's rights and obligations under the
vesting contracts were transferred to TXU Australia Group. The vesting contracts
call for difference payments between the contract price and the pool price, and
do not involve an obligation to supply power. At the time of the acquisition,
the fair value of the liabilities associated with the contracts was A$117
million.
DISPOSALS
In July 1999, TXU Australia Group determined that it would sell Enetech,
its construction and maintenance subsidiary. In January 2000, TXU Australia
Group completed the sale of certain assets and liabilities of Enetech to Tenix
Pty Ltd (Tenix), a major Australian technology contractor. Under the terms of
the Purchase Agreement, TXU Australia Group received cash consideration of
A$48.6 million. TXU Australia Group entered into a ten-year contract with Tenix
to perform engineering and maintenance services for the Group's gas and
electricity networks throughout Victoria.
The results of Enetech for the six months ended June 30, 2000 and 1999,
respectively, have been reported separately as discontinued operations in the
Statement of Consolidated Operations. In the Consolidated Financial Statements
for the year ended December 31, 1999, the net gain on sale of the discontinued
operations was estimated to be A$10.7 million, after income taxes of A$8.5
million and deferred net losses for Enetech of A$5.8 million from the
measurement date (August 1, 1999) to December 31, 1999. The actual net gain on
sale amounted to A$14.9 million, after income taxes of A$10.7 million and
deferred net losses of A$5.8 million, and has been recognized in the six-month
period ended June 30, 2000. Losses from discontinued operations for the six
months ended June 30, 2000 and 1999 were A$4.2 million and A$7.3 million,
after income tax benefits of A$2.2 million and A$3.9 million, respectively.
At December 31, 1999, TXU Australia Group held a 26% interest in Eastcoast
Power Pty Ltd (Eastcoast Power), a company developing a 43 MW power station in
eastern Victoria, Australia. On April 17, 2000, TXU Australia Group sold its
interest in Eastcoast Power resulting in an A$8.7 million gain.
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RESULTS OF OPERATIONS
Comparisons between periods are affected by inclusion of the acquired
companies' operations from dates of acquisitions.
The operating results for Enetech are presented as discontinued operations.
The results of the discontinued operations for the six-months ended June 30,
2000, are discussed under the heading "DISPOSALS" above. The loss from
discontinued operations for 1999 includes the operating loss for the period from
January 1, 1999, to July 31, 1999. The operating loss for the period from August
1, 1999 to December 31, 1999, was deferred and offset against the gain from the
sale in the first quarter of 2000. The operating results for TXU Australia Group
for 1998 reflect Enetech as a discontinued operation.
SIX-MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX-MONTHS ENDED JUNE 30, 1999
OPERATING REVENUES
Operating revenues rose from A$384 million in the first half of 1999 to
A$582 million in the corresponding period in 2000, an increase of 52%. The
increase was attributable to the following main factors:
(i) Higher volumes of energy sold in the first half of 2000 compared to the
same period in 1999 accounted for an increase in electricity and gas revenues of
A$107 million from A$374 million to A$481 million. The increase in gas volume
from 19 PJ to 34 PJ reflected the activity for the full six months during 2000,
as compared to only four months during 1999. Furthermore, gas revenues have
increased due to the introduction of the first round of gas contestability in
late 1999. For contestable customers, TXU Australia Group ceases to supply gas
as an agent of GASCOR and commences supplying contestable customers in its own
right. As a result, for contestable customers, TXU Australia Group records
gross revenues in "operating revenues" and gas costs in "purchased energy and
distribution costs", whereas for franchise customers, GASCOR's gas costs are
deducted from GASCOR's revenues to derive the net agency fee received by TXU
Australia Group, which is recorded in "operating revenues". The increase in
gas revenue is also due to the increase in gas sales to AES Ecogen. The
increase in the volume of electricity sold from 2657 GWh to 2783 GWh was
primarily due to the weather being hotter in summer months and colder in
winter months in the first half of 2000 as compared to the same period in
1999, and an increase in the number of customers in 2000.
(ii) An increase in the Group's trading revenue of A$33 million reflected
the activity for the full six months during 2000, as compared to only two months
during 1999, as well as favourable mark to market valuation of the trading
contracts; and
(iii) The addition of the generation business revenue of A$42 million in
the first half of 2000.
OPERATING EXPENSES
Purchased energy and distribution costs increased between the two periods
from A$174 million to A$266 million or 53%. The $92 million increase was due to
an increase in electricity costs of A$15 million from A$139 million to A$154
million, and an increase in gas costs of A$77 million from A$35 million to A$112
million, between the two periods.
The electricity costs increased predominantly due to an increase in volumes
of electricity sold from 2657 GWh to 2783 GWh.
The gas costs increased mainly due to: (i) the additional gas purchases of
A$19 million to operate TXU South Australia's gas-fired generators; (ii) the
increase in gas supplied to AES Ecogen of A$29 million; (iii) the addition of
cost of gas sold by WUGS; (iv) the increase in distribution and transmission
charges paid to external parties for the full six months in 2000 compared to
only four months in 1999; and (v) the recording of the cost of gas purchased and
supplied to contestable customers as "purchased energy and distribution costs",
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following the introduction of first round of contestability in late 1999. For
franchise customers, sales are recorded as net agency margin and therefore no
gas purchases are recorded for these customers.
Operation and maintenance expenditures increased between the two periods
from A$78 million to A$104 million, an increase of A$26 million or 33%. The
increase was mainly attributable to the addition of two months' operating costs
following the acquisition of the business of Optima Energy in the first half of
2000, increase in service costs paid to TXU Corp., increase in project costs
relating to the preparation for the implementation of Goods and Services Tax and
full retail contestability, and increase in WUGS operating costs.
Depreciation and amortization expense (other than goodwill) increased
between the two periods from A$37 million to A$52 million, an increase of 41%.
The increase was primarily attributable to a full six-month depreciation charge
for Westar and Kinetik Energy for the six months ended June 2000, compared to
the four-month depreciation charge for the six months ended June 1999. The
two-month depreciation charge associated with the acquisition of the generation
business accounted for the balance of the variation.
Goodwill amortization expense increased between the two periods from A$15
million to A$19 million due to the initial amortization of goodwill associated
with the acquisition of the business of Optima Energy, and the amortization of
goodwill associated with Westar and Kinetik Energy for the full six months in
2000, compared with the inclusion of the goodwill amortization for those two
companies for only four months in 1999.
OTHER INCOME/(EXPENSE) - NET
Other income/(expense) - net changed from expense of A$1.5 million in the
first half of 1999 to income of A$6.5 million in the same period in 2000. The
variance between the two periods was due primarily to a gain on sale of
investments in the 2000 period.
INTEREST EXPENSE
Interest expense increased between the two periods from A$91 million to
A$122 million, due to the following factors: interest charged for six months in
2000 compared to interest charged for four months in 1999 on the debt used to
finance the acquisition of Westar and Kinetik Energy, interest charged for six
months in 2000 on the debt used to finance the purchase of a twenty-year option
from AES Ecogen, compared to interest charged for only two months in 1999,
higher amortization of debt issue costs, and a marginal increase in interest
rates on the Group's variable rate debt.
REPORTABLE OPERATING SEGMENTS
Until May 4, 2000, TXU Australia Group had three reportable operating
segments: Networks, Retail, and Energy Trading. Following the acquisition of the
business of Optima Energy on May 4, 2000, the Group has an additional segment:
Electricity Generation. The financial data of each of the segments is set out,
in brief, as follows:
NETWORKS - This segment recorded net income of A$4 million and A$7 million
in the first half of 1999 and 2000, respectively. The increase of A$3 million
occurred primarily because of the additional distribution revenues generated in
2000. The principal reason for the increase in trade and affiliated revenues
between the two periods, from A$185 million to A$213 million, was the addition
of gas distribution revenue for the full six months in 2000, compared to only
four months in 1999, and higher volume of energy sold in the first half of 2000.
RETAIL - Net income for the six-months ended June 30, 1999 and 2000 was A$3
million and A$15 million, respectively. The increase of A$12 million in the 2000
period occurred primarily because of additional retail revenues generated in
2000. The principal reason for the increase in trade and affiliated revenues
between the two periods, from A$336 million to A$439 million, was the addition
of gas retail revenue for the full six months in 2000, compared to only four
months in 1999, and higher volume of energy sold in the first half of 2000.
ENERGY TRADING - TXU Australia Group commenced this activity during May
1999, and recorded a net loss of A$0.4 million for the two months ended June 30,
1999, and a net income of A$3 million for the six months ended June 30, 2000.
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The improved result reflects the impact of a full implementation of the
segments' trading strategy for the six months ended June 2000.
ELECTRICITY GENERATION - TXU Australia Group commenced this activity during
May 2000, and the net income for the period ended June 30, 2000 was A$12
million.
For detailed financial data by segment, see NOTE 15 TO TXU AUSTRALIA
GROUP'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
JUNE 30, 2000.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
OPERATING REVENUES
Operating revenues rose from A$647 million in 1998 to A$888 million in
1999, an increase of 37%. The principal reason for the increase was the addition
of A$252 million of revenue of the Westar and Kinetik Energy gas retailing and
distribution businesses from February 24, 1999. Revenues, excluding Westar and
Kinetik Energy, decreased from A$647 million for 1998 to A$636 million in 1999,
primarily as a result of reduced prices in the contestable market.
OPERATING EXPENSES
Purchased energy and distribution costs increased between the two periods
from A$270 million in 1998 to A$415 million in 1999 or 54%. The $145 million
increase includes A$110 million of gas purchases and distribution costs
associated with Westar and Kinetik Energy, with the remainder of the increase
due primarily to higher purchased electricity and distribution costs as a result
of the increase in energy sold and higher electricity pool prices.
Operation and maintenance expenditures increased from A$137 million in 1998
to A$174 million in 1999. The increase of A$37 million was mainly attributable
to operation and maintenance costs associated with the Westar and Kinetik Energy
gas business and to costs associated with the integration of the gas business
with the existing electricity business. Depreciation and amortization expense
(other than goodwill) increased between the two periods from A$50 million to
A$86 million, an increase of 72%. The increase was primarily attributable to
additional depreciation expense of A$23 million associated with Westar and
Kinetik Energy and the depreciation of A$13 million relating to capital
additions. Goodwill amortization expense increased from A$16 million in 1998 to
A$32 million in 1999, due to the amortization of goodwill associated with the
acquisition of Westar and Kinetik Energy.
OTHER INCOME/(EXPENSE) - NET
Other income/(expense) - net changed from income of A$0.4 million in 1998
to expense of A$2.8 million in 1999. The variance between the two periods was
due primarily to a gain on sale of investments of A$2.9 million in 1998 with no
corresponding gain in 1999.
INTEREST INCOME
Interest income increased from A$0.4 million in 1998 to A$2 million in
1999, due to the interest earned on restricted cash that TXU Australia Group was
required to deposit with a third party in connection with the acquisition of
Westar and Kinetik Energy.
INTEREST EXPENSE
Interest expense increased from A$93 million in 1998 to A$206 million in
1999 due primarily to an increase in outstanding debt used to finance the
acquisition of Westar and Kinetik Energy and to finance the purchase of the
twenty-year option from AES Ecogen, and due to the amortization of debt issuance
costs associated with financing the acquisition of Westar and Kinetik Energy.
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INCOME TAX EXPENSE/(BENEFIT)
The effective income tax rate changed from 44% in 1998 to 77% in 1999. The
change reflected the effect of the loss from continuing operations in 1999, and
the effect of the enacted change in the Australian statutory tax rate on the
deferred tax assets and liabilities.
INCOME/(LOSS) FROM CONTINUING OPERATIONS
As a result of the factors discussed above, TXU Australia Group had a loss
from continuing operations of A$6 million for 1999 compared with income from
continuing operations of A$46 million for 1998. The primary cause of the loss
was the effect of TXU Australia Group's expansion program, where earnings were
insufficient to offset increases in depreciation and other amortization,
interest expense and goodwill amortization.
INCOME/(LOSS) FROM DISCONTINUED OPERATIONS
Income (loss) from discontinued operations of Enetech decreased from a loss
of A$1 million in 1998 to a loss of A$9 million in 1999. The increased loss in
1999 was primarily attributable to losses on construction contracts.
REPORTABLE OPERATING SEGMENTS
TXU Australia Group has three main reportable operating segments: Networks,
Retail and Energy Trading. The financial data of each of the segments is set
out, in brief, as follows:
NETWORKS - This segment recorded net income of A$38 million and A$26
million in 1998 and 1999, respectively. The reduction of A$12 million occurred
primarily because the additional gas distribution revenues generated in 1999
were insufficient to offset increases in depreciation, other amortization and
interest expense associated with the acquisition of the gas business. The
principal reason for the increase in trade and affiliated revenues from A$310
million in 1998 to A$408 million in 1999 was the addition of the revenues from
the gas distribution business. The increase in depreciation, other amortization
and interest expense in 1999 was also predominantly due to the acquisition of
the gas distribution business.
RETAIL - Net income for the years ended December 31, 1998 and 1999 was A$21
million and A$15 million, respectively. The reduction of A$6 million occurred
primarily because the additional gas retail revenues generated in 1999 were
insufficient to offset the increases in depreciation, other amortization and
interest expense associated with the acquisition of the gas business. The
principal reason for the increase in trade and affiliated revenues from A$586
million in 1998 to A$786 million in 1999 was the addition of the revenues from
the gas retail business.
ENERGY TRADING - TXU Australia Group commenced this activity during 1999,
and the net income for the year ended December 31, 1999 was A$5 million.
OTHER - A net loss of A$52 million was reported for the year ended December
31, 1999, compared to a net loss of A$13 million for the previous year. The
change between 1998 and 1999 was primarily attributable to costs associated with
various business development projects (e.g. Western Underground Gas Storage),
amortization of goodwill resulting from the acquisition of Westar and Kinetik
Energy and depreciation of capital additions in the Victorian Power Exchange
metering business.
For detailed financial data by segment, see NOTE 16 TO TXU AUSTRALIA
GROUP'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999.
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YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
OPERATING REVENUES
Operating revenues rose from A$621 million in 1997 to A$647 million in
1998, an increase of 4%. This increase was largely due to higher networks
business revenue, which rose 4% from A$297 million in 1997 to A$310 million in
1998, reflecting increased electricity consumption in TXU Australia Group's
distribution territory. In addition, TXU Australia Group received a net
settlement of A$8.5 million from the Victorian government to cover required
rebates to customers and to settle a sales tax reimbursement contract.
Electricity sales for the period rising marginally from 5,190 GWh in 1997 to
5,213 GWh in 1998, increased electricity retail revenues from A$581 million in
1997 to A$586 million in 1998. The retail sales revenue (excluding other
revenues) was slightly reduced, due primarily to declining prices, as further
classes of electricity customers were free to choose their electric suppliers.
Customers with electricity usage in excess of 160 MWh/year but less than 750
MWh/year were able to choose their suppliers from July 1, 1998. As of December
31, 1998, TXU Australia Group estimated that it lost approximately 500 GWh as a
result of those customers within TXU Australia Group's franchised area electing
to choose another energy retailer to supply their energy needs. This loss was
net of gains made during the same period by TXU Australia Group acquiring
customers from other retailers in Victoria and New South Wales.
OPERATING EXPENSES
Purchased energy and distribution costs decreased from A$294 million in
1997 to A$270 million in 1998, a reduction of 8%. This reduction was largely
attributable to a reduction in electricity purchases of A$17 million and a
reduction of the franchise fee of A$14 million charged by the Victorian
Government (after the first quarter of 1998, the Government phased out the
franchise fee). These reductions were offset by an increase in network charges
from other retailers of A$7 million. Operation and maintenance expenditures
increased from A$110 million in 1997 to A$137 million in 1998, the major
increase relating to external business development costs, Year 2000 costs,
salary increases and increased material costs due to increase in maintenance
work.
INTEREST EXPENSE
The reduction in interest expense from A$97 million in 1997 to A$93 million
in 1998 is attributable to debt repayments and decreases in interest rates in
1998.
INCOME TAX EXPENSE/(BENEFIT)
The effective income tax rate decreased from 54% in 1997 to 44% in 1998
primarily due to a reduction in non-tax deductible franchise fee payments.
INCOME FROM CONTINUING OPERATIONS
As a result of the various factors discussed above, TXU Australia Group
reported income from continuing operations of A$46 million in 1998 compared to
A$26 million in 1997. The increase was primarily attributable to the various
factors discussed above. The most significant factor was a reduction in non-tax
deductible franchise fee payments, which fell from A$18 million in 1997 to A$4
million in 1998.
INCOME/(LOSS) FROM DISCONTINUED OPERATIONS
Income/(loss) from discontinued operations decreased from income of A$1
million in 1997 to a loss of A$1 million in 1998. The change between the two
periods largely reflected the inclusion of a full year of operating expenses of
Streamline, the former maintenance division of Melbourne Water acquired by
Enetech, and increased management costs associated with the expansion of the
business.
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REPORTABLE OPERATING SEGMENTS
NETWORKS - Net income increased by A$9 million from A$29 million in 1997 to
A$38 million in 1998. Revenues increased by A$13 million, or 4%, due mainly to
increased electricity consumption in TXU Australia Group's distribution
territory. Interest expense decreased by A$5 million due to reduced debt and
lower effective interest rates. These amounts were offset by increased income
tax expense, rising from A$10 million in 1997 to A$17 million in 1998
attributable to increased revenues.
RETAIL - Net income increased by A$4 million from A$17 million in 1997 to
A$21 million in 1998 due to an increase in revenues by A$5 million and the net
settlement of A$8.5 million from the Victorian government to cover required
rebates to customers and to settle a sales tax reimbursement contract. However,
the total increase in revenues of A$13.5 million was offset by higher marketing
costs associated with the introduction of the contestability of customers with
electricity usage of more than 160 MWh/year but less than 750 MWh/year, and
other operating costs, totaling A$9.5 million. Therefore, the net effect is an
increase in net income of A$4 million in 1998 in comparison with 1997.
OTHER - This segment incurred a net loss of A$13 million for the year ended
December 31, 1998 compared to a net loss of A$20 million for the previous year.
The change was due to an increase in miscellaneous revenue, including new
business ventures of A$4.7 million, and the expansion of meter reading service
revenue of A$2 million.
For further financial data by segment, see NOTE 16 TO THE TXU AUSTRALIA
GROUP'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash generated by continuing operating activities before changes in
operating assets and liabilities for the six months ended June 30, 2000 and 1999
was A$60 million and A$44 million, respectively. Cash used in changes in
operating assets and liabilities of the continuing operations was (A$87 million)
and (A$228 million) for the six months ended 2000 and 1999, respectively. The
fluctuations between the two periods were due to the purchase of the AES Ecogen
option contract in 1999, the use of restricted cash in 1999 to fund
restructuring costs relating to the integration of Westar and Kinetik Energy,
and changes in working capital, offset partly by an upward revaluation of the
AES Ecogen contract in 2000.
In 1998 and 1997, TXU Australia Group generated cash from operations
sufficient to meet operating needs and service its debt requirements, while in
1999 its cash needs were supplemented by other means, such as borrowings. Net
cash generated by continuing operating activities before changes in operating
assets and liabilities for the years ended December 31, 1999, 1998 and 1997 was
A$108 million, A$149 million and A$123 million, respectively. Changes in net
income were the primary contributing factors in the fluctuations. Cash (used in)
provided by changes in operating assets and liabilities of the continuing
operations was (A$172 million), (A$13 million) and A$26 million for the years
ended 1999, 1998 and 1997, respectively. The variances arose primarily due to
the purchase of a twenty-year option from AES Ecogen in 1999, changes in working
capital requirements and interest accrued. Net cash used in discontinued
operations for 1999, 1998 and 1997 was A$56 million, A$9 million, and A$18
million, respectively. The variance was primarily due to a large increase in
construction work-in-progress in 1999 over the other years.
The days sales outstanding (the average number of days taken to collect
receivables) increased from 80 to 99 days at December 31, 1998 and 1999,
respectively, due primarily to an increase in receivables from external
construction projects. The construction receivables were not included with the
sale of Enetech; however, the underlying revenues are included in the net loss
from discontinued operations. The increase in days sales outstanding from 60 to
80 days at December 31, 1997 and 1998, respectively, is the result of the
commencement of competition for customers with annual energy usage of 160 - 750
MWh. This transition also resulted in an increased amount of unbilled volume.
Cash flows used in investing activities for the six-month ended June 2000
and 1999 were A$288 million and A$1.7 billion. The fluctuation was primarily due
to the cash requirement for the acquisition of Westar and Kinetik Energy in 1999
of A$1.6 billion, although the fluctuation was marginally offset by the cash
requirement for the acquisition of the business of Optima Energy in 2000.
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Cash flows used in investing activities for the year ended December 31,
1999 totaled A$1.9 billion, including A$1.6 billion for the acquisition of
Westar and Kinetik Energy, compared with A$154 million, including A$53 million
for business acquisitions, for the year ended December 31, 1998. Cash flows used
for investing activities for the same period in 1997 was A$67 million.
Capital expenditure decreased from A$145 million for the six months in 1999
to A$61 million for the same period in 2000, due primarily to the substantial
completion of the construction of the Western Underground Gas Storage facility.
Capital expenditures for the year ended December 31, 1999 were A$260
million, compared with A$104 million and A$62 million for the comparable periods
in 1998 and 1997, respectively. The increase from 1998 to 1999 was primarily due
to capital projects related to Westar and Kinetik Energy (A$24 million) and the
construction of the Western Underground Gas Storage facility (A$128 million).
Cash provided by financing activities from continuing operations for the
six months ended June 30, 2000 and 1999 was A$235 million and A$1.9 billion,
respectively. The large increase in borrowings in 1999 was required to fund the
Westar and Kinetik Energy's acquisition. The fluctuation between the two
periods, caused predominantly by these increased borrowings, was offset slightly
by an increase in capital contributions of A$181 million and a net increase in
borrowings in 2000. The additional funds were used to finance the acquisition of
the business of Optima Energy.
During 1999, cash provided by financing activities of TXU Australia Group
amounted to A$2 billion due primarily to a large increase in borrowings in 1999
to fund the acquisition of Westar and Kinetik Energy. The details of the
additional borrowings are discussed below.
In February 1999, TXU Australia obtained a A$1.1 billion syndicated
acquisition facility from a group of banking institutions, and TXU Australia and
Eastern Energy obtained a A$413 million subordinated acquisition facility to
fund the acquisition of Westar and Kinetik Energy. The Deed of Common Terms
contains provisions that, in effect, restrict payments of principal and interest
on the subordinated acquisition facility unless certain conditions, including
interest coverage ratios, are satisfied.
In April 1999, TXU Australia obtained a loan facility in the amount of
A$200 million. This facility was repaid through an issue of medium-term notes.
See "TXU AUSTRALIA - GENERAL OVERVIEW - CAPITALIZATION OF TXU AUSTRALIA - SENIOR
DEBT FUNDING." The amount originally borrowed, A$200 million, was used to
purchase a twenty-year option from AES Ecogen. See "BUSINESS OF THE TXU
AUSTRALIA GROUP - ENERGY TRADING BUSINESS SEGMENT - ELECTRICITY SUPPLY
MANAGEMENT."
In 1999, TXU Australia Group borrowed an additional A$123 million under its
commercial paper program and an additional A$68 million and A$142 million under
its lines of credit and its Australian dollar-denominated revolving credit
facility, respectively. Funds borrowed were primarily used for construction
activity related to the underground gas storage facility, acquisition costs
associated with Westar and Kinetik Energy and for general corporate purposes.
During 1998, net cash provided by financing activities of TXU Australia
Group was A$25 million. TXU Australia Group received proceeds of approximately
A$51 million from the settlement of cross currency swaps associated with its US
dollar-denominated debt and borrowed A$25 million under a syndicated facility
agreement. These funds were primarily used to fund the acquisition of the
Western Underground Gas Storage facility and for general corporate purposes.
During 1998, Eastern Energy repaid approximately A$51 million on its outstanding
lines of credit.
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During 1997, cash used in financing activities by TXU Australia Group was
A$65 million. Borrowings of A$177 million were raised through Eastern Energy's
commercial paper program. These funds, along with cash from operations, were
used to repay Eastern Energy's syndicated facility agreement of A$242 million.
On February 24, 2000, TXU Australia Group restructured its senior bank
debt. All bank debt previously borrowed by Eastern Energy has been replaced with
bank debt borrowed by TXU Australia. The terms of all bank debt previously
borrowed by TXU Australia have been renegotiated, so that all bank debt,
aggregating approximately A$2 billion, now ranks equally as debt of TXU
Australia.
In June 2000, TXU Australia Group received a capital contribution of A$181
million from the partners of TXU Australia Holdings (Partnership) Limited
Partnership and borrowed A$120 million to finance the acquisition of the
business of Optima Energy. The A$120 million loan facility expires on December
29, 2000.
In June 2000, TXU Australia Group amended and restated the subordinated
acquisition facility with the effect that Eastern Energy repaid its portion of
the debt and TXU Australia borrowed the same amount. TXU Australia now owes the
full amount of A$413 million under that facility.
As of June 30, 2000, Eastern Energy had US$350 million of senior notes
outstanding. These senior notes were issued by Eastern Energy in 1996 in the
United States pursuant to Rule 144A promulgated under the Securities Act of
1933, as amended. The US$350 million fixed interest rate liability was swapped
into a floating rate Australian dollar liability of A$483 million via fixed to
floating US$ interest rate swaps and US$ to A$ cross-currency swaps. In July
2000, TXU Australia made an offer to the holders of both tranches of Eastern
senior notes to exchange their senior notes for senior notes issued by TXU
Australia. Following completion of the exchange offer in September 2000, new TXU
Australia senior notes outstanding are as follows:
o TXU Australia 6.75% senior notes due December 2006 - A$132.8 million
(US$92.25 million ); and
o TXU Australia 7.25% senior notes due December 2016 - A$74.1 million
(US$60.0 million ).
Eastern Energy's senior notes outstanding on completion of the exchange
offer include:
o Eastern Energy 6.75% senior notes due December 2006 - A$227.1 million
(US$157.75 million ); and
o Eastern Energy 7.25% senior notes due December 2016 - A$49.4 million
(US$40.0 million ).
The US$60 million 7.25% senior notes and US$92.25 million 6.75% senior
notes of Eastern Energy exchanged in the exchange offer continue to be
outstanding and are held by TXU Australia Group.
The US dollar denominated senior notes have been converted to Australian
dollars using the exchange rates applicable to the US dollar to Australian
dollar cross-currency swaps.
TXU Australia is in the process of arranging to transfer the appropriate
proportion of the fixed to floating US$ interest rate swaps and the US$ to A$
cross-currency swaps from Eastern Energy to TXU Australia. TXU Australia notes
issued under the exchange offer rank equally with the Senior Debt and would be
senior to the JUMPS.
In March 2000, TXU Australia established a A$750 million combined
short-term/medium-term note program. Short-term notes issued under this program
fully replaced Eastern Energy's commercial paper program by May 24, 2000. These
notes are unsecured obligations of TXU Australia and rank equally with all other
senior debt of TXU Australia. In August 2000, TXU Australia increased the size
of the Short-Term/Medium-Term Note Program to $1.5 billion. As of June 30, 2000,
A$335 million of short-term notes were outstanding under the
Short-Term/Medium-Term Note Program, and TXU Australia had A$380 million of
short-term note liquidity support facilities, all of which were undrawn. In
September 2000, TXU Australia issued two series of medium-term notes in the
Australian market:
o A$200 million 7% fixed rate notes maturing in September 2005, and
o A$275 million floating rate notes maturing in September 2007.
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Both series are guaranteed by MBIA Insurance Corporation, and the proceeds
from the issue of the series were used to retire Facility D and Facility E. TXU
Australia plans to issue on October 30, 2000, A$30 million of floating rate
medium term notes maturing in October 2003. These notes will not be guaranteed
by MBIA and will be rated "BBB+" by Standard and Poor's and "Baa2" by Moody's.
The proceeds of the issuance will be used for general corporate purposes. See
"TXU AUSTRALIA GENERAL OVERVIEW -- SHORT-TERM/MEDIUM-TERM NOTE PROGRAM."
CONTINGENT LIABILITIES
As of June 30, 2000, the Group had entered into employment service
agreements (ESAs) of varying termination dates with employees. Under the ESAs,
if the Group terminates an ESA prior to its expiration, other than for illness
or acts of dishonesty, it would be required to pay compensation to the employee
affected. As of June 30, 2000, the Group would be required to pay approximately
A$13.2 million in the event it terminates the employees covered by all of the
ESA's.
Pursuant to Allocation Statements made under the Electricity Industry Act
1993 (Vic.) and the Gas Industry Act 1994 (Vic.), Eastern Energy, Westar,
Kinetik Energy and Western Underground Gas Storage were allocated liability for
all claims arising in respect of certain causes of action accrued against their
predecessors as of September 29, 1994 in the case of Eastern Energy, October 9,
1998 in the case of Western Underground Gas Storage, and February 24, 1999 in
the case of Westar and Kinetik Energy.
TXU Australia Group is liable for claims arising in respect of certain
causes of action against TXU South Australia's predecessors as at May 4, 2000,
in respect of the assets acquired from Optima Energy, in accordance with the
terms on which these assets were acquired. TXU Australia Group cannot predict
the impact on the financial condition, results of operations or cash flows of
TXU Australia Group.
The Group is party to various types of contracts for the purchase of gas.
These include "take-or-pay" obligations under which the buyer agrees to pay for
a minimum quantity of gas in a year. As of June 30, 2000, TXU Australia Group
had commitments under long-term gas purchase contracts of an estimated $1.4
billion, through 2009. On the basis of the Group's current expectations of
demand from its customers as compared with its take-or-pay obligations under
such purchase contracts, management does not consider it likely that any
material payments will become due from the Group for gas not taken.
TXU Australia Group through the Westar and Kinetik Energy and Optima Energy
acquisitions was allocated certain properties that are contaminated. A provision
of A$12 million is recorded in the balance sheet for land reclamation in
relation to Westar and Kinetik Energy's contaminated properties. A provision of
A$7 million is also recorded for site restoration in relation to the acquisition
of the business of Optima Energy. The provisions are based on the estimate of
the land reclamation and site restoration costs following limited site reviews
and testings. These costs may increase if the extent of contamination is worse
than testing indicated at the time of the limited reviews. Under the Victorian
Environment Protection Act 1970 and the South Australian environmental
legislation, the Victorian and South Australian Environment Protection
Authorities have the power to order TXU Australia Group to incur such costs to
remedy the contamination of land.
FUTURE CAPITAL REQUIREMENTS
TXU Australia Group plans to replace the A$413 million subordinated
acquisition facility with the JUMPS.
TXU Australia Group 's capital expenditures are estimated at A$112.1
million for 2000. At December 31, 1999, TXU Australia Group had commitments of
A$3.5 million related to these capital expenditures. Approximately 73% of the
estimated capital expenditures will be spent on the electricity and gas
networks, 23% on information technology, and 4% on plant and equipment.
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TXU Australia Group believes it will have adequate access to capital to
meet the above capital requirements for 2000.
EFFECT OF INFLATION
Because of the relatively low level of inflation experienced in Australia,
inflation did not have a material impact on results of operations for the
periods presented.
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 Australia Group beginning January 1, 2001. SFAS No. 133
establishes accounting and reporting standards for derivative financial
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 Australia
Group is currently evaluating the impact the adoption of the Standard will have
on its statement of financial position and results of operations.
YEAR 2000 ISSUES
BACKGROUND - TXU Australia Group initiated a Year 2000 (Y2K) Program in
1997 with the compilation of a Y2K inventory of supported information technology
assets and systems. A Y2K remediation plan for items in the inventory assessed
as having Y2K risk and a methodology for addressing the Y2K risks of all other
assets and systems was carried out. After the assets of Westar and Kinetik
Energy were purchased in February 1999, the Y2K programs of these businesses
were incorporated into TXU Australia Group's Y2K Program in April 1999.
Assessments of potential impact due to Y2K were completed by July 1999.
Remediation and testing work on these systems was completed by December 31,
1999.
RESULTS - During the year 2000 roll over, none of TXU Australia Group's
customers experienced service interruptions due to computer hardware, software
or embedded chip failures. A few minor problems occurred with internal systems,
but these were considered to be no more than normal system issues.
COSTS - The total estimated cost of TXU Australia Group's Y2K program was
A$2.5 million, of which A$2.3 million had been spent by December 31, 1999, with
the remaining A$0.2 million expected to be spent in 2000. There can be no
assurance that these estimates will not change as a result of the discovery of
unexpected additional remediation work.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
TXU Australia Group enters into derivative instruments, including options,
swaps, futures and other contractual commitments for both trading and
non-trading purposes. TXU Australia Group enters into derivative instruments for
non-trading purposes in order to manage market risks related to changes in
interest rates, foreign currency exchange rates and commodity prices. TXU
Australia Group also enters into derivative instruments and other contractual
commitments for trading purposes.
INTEREST RATE RISK - The table below provides information concerning TXU
Australia Group's financial instruments as of December 31, 1999 that are
sensitive to changes in interest rates, which include debt obligations (by
principal amount), interest rate swaps and forward rate agreements. For debt
obligations, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. TXU Australia Group 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 or payable at specified intervals which
generally coincide with the dates on which interest is payable on the underlying
debt. When differences exist between the swap settlement dates and the dates on
which interest is payable on the underlying debt, the basis risk is managed by
means of forward rate agreements and basis swaps. For interest rate swaps and
forward rate agreements, the table presents notional amounts and weighted
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average interest rates by expected (contractual) maturity dates. Weighted
average variable rates are based on rates in effect at the reporting date.
EXPECTED MATURITY DATE
----------------------
(A$ IN MILLIONS, EXCEPT FOR PERCENTAGES)
<TABLE>
<CAPTION>
1999 1998
THERE- 1999 FAIR 1998 FAIR
2000 2001 2002 2003 2004 AFTER TOTAL VALUE TOTAL VALUE
---- ---- ---- ---- ---- ----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt
(including current maturities)
Fixed Rate (all US$)................ - - - - - A$ 483 A$ 483 A$ 492 A$ 483 A$605
Average interest rate................. - - - - - 6.89% 6.89% - 6.89% -
Variable Rate (all A$)................ A$1,280 A$ 625 A$ 825 - - - A$2,730 A$2,730 A$ 685 A$685
Average interest rate................. 6.34% 5.53% 6.28% - - - 6.14% - 5.31% -
Cross Currency Swaps
(including current
maturities) (US$ to A$)
Variable Rate ....................... - - - - - A$ 483 A$ 483 A$ 46 A$ 483 A$ 86
Average interest rate............... - - - - - 6.18% 6.18% - 5.26% -
Interest Rate Swaps
(notional amounts) (all A$)
Variable to Fixed .................. A$ 655 A$ 140 A$ 651 - - A$ 859 A$2,305 A$ 23 A$ 940 (A$100)
Average pay rate.................... 6.10% 6.77% 6.94% - - 5.97% 6.33% - 7.13% -
Average receive rate................ 5.71% 5.16% 5.05% - - 5.08% 5.26% - 5.13% -
Fixed to Variable (all US$)........... - - - - - A$ 483 A$ 483 (A$ 24) A$ 483 A$ 42
Average pay rate..................... - - - - - 6.55% 6.55% - 5.70% -
Average receive rate................. - - - - - 6.89% 6.89% - 6.89% -
Basis Swaps and Forward
Contracts (notional amounts)
(all A$) A$ 432 A$ 432 A$ 432 A$ 432 - - A$ 432 A$ 0.2 A$ 432 A$ 2
Average pay rate.................... 6.08% 5.86% 5.86% 5.86% - - 5.92% - 5.98% -
Average receive rate................ 6.12% 5.86% 5.86% 5.86% - - 5.93% - 6.01% -
Forward Rate Agreements(all
A$) (notional amounts)
Variable to Fixed................... A$ 100 - - - - - A$ 100 (A$ 0.1) A$ 95 -
Average pay rate.................... 5.70% - - - - - 5.70% - 4.99% -
Average receive rate................ 5.83% - - - - - 5.83% - 4.89% -
</TABLE>
Except for the changes in debt balances as disclosed in Notes 6 and 7 to
the Condensed Consolidated Financial Statements "Short Term Debt" and "Long Term
Debt", the information as of June 30, 2000, has not significantly changed from
that presented above.
FOREIGN CURRENCY RISK - TXU Australia Group enters into currency swaps to
manage foreign currency exposures, primarily with the US dollar.
At December 31, 1999, Eastern Energy had cross-currency swaps for its US
dollar-denominated debt. The notional amount outstanding on cross-currency swaps
was A$483 million. These cross-currency swaps mature in December 2006 and
December 2016 for A$360 million and A$123 million, respectively. The maturity of
these swaps coincides with the maturity of the US dollar denominated debt. (The
information as at June 30, 2000, has not significantly changed from that
presented as at December 31, 1999).
ENERGY PRICE RISK - NON-TRADING ACTIVITIES - Electricity prices are
established through a power pool, which is controlled by a statutory,
independent corporation. Substantially all power must be sold into and purchased
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<PAGE>
from the pool. In order to manage the exposure to fluctuations in electricity
pool prices, TXU Australia Group enters into both short- and long-term
derivative instruments whereby the pool price is fixed for an agreed-upon
quantity and duration by reference to an agreed-upon strike price.
TXU Australia Group has entered into wholesale market contracts to hedge
most of its forecasted franchise load through the end of 2000. At December 31,
1999, these contracts covered a notional volume of approximately 3.5 million MWh
(as at June 30, 2000, this amount decreased to 1.8 million MWh). The Group has
also entered into wholesale market contracts to cover a portion of its
contestable load for the period from January 2000 through December 2001. At
December 31, 1999, these contracts covered a notional load of approximately 0.8
million MWh (0.4 million MWh, as at June 30, 2000).
The hypothetical loss in fair value of TXU Australia Group's contracts in
existence at December 31, 1999 and 1998 entered into for non-trading purposes
arising from a 10% adverse movement in future electricity prices is estimated at
A$12 million and A$19 million, respectively. As at June 30, 2000, this amount
decreased to A$5 million. The loss is calculated by modeling the contracts
against an internal forecast of pool prices.
TRADING ACTIVITIES - The trading activities of TXU Australia Group
commenced in May 1999 when TXU Australia Group entered into a twenty-year option
agreement with AES Ecogen which owns 966MW of gas fired generation facilities
that are typically used during peak periods of demand for electricity in
Victoria, Australia. The agreement provides TXU Australia Group with the ability
to enter into contracts with AES Ecogen, at TXU Australia's option, which would
require an exchange of cash for the difference between the amounts specified in
the contracts and the spot price of electricity. TXU Australia Group also has an
agreement to supply gas to AES Ecogen to run the facilities for twenty years.
TXU Australia Group made an initial option premium payment of A$201 million and
is required to make further future monthly payments over the term of the
agreement. The option is marked to market and had a fair value of A$201 million
at December 31, 1999 and A$219 million at June 30, 2000.
TXU Australia Group manages the market risk on a portfolio basis within
limitations imposed by the Board of Directors and in accordance with its overall
risk management policies. Market risks are monitored daily, utilizing
appropriate mark-to-market methodologies, which value the portfolio of contracts
and hypothetical effect on this value from changes in market conditions. TXU
Australia Group uses techniques and methodologies that simulate forward price
curves in the energy market to estimate the size and probability of changes in
market value resulting from price movements.
In its capacity as a trader, TXU Australia Group offers price risk
management services to customers through a variety of financial and other
instruments, including swaps, options, caps and swaptions. TXU Australia Group's
sale and purchase commitments for trading purposes amounting to 2.7 million MWh
and 3.1 million MWh, respectively, with terms extending up to 2002, are included
in the electricity portfolio as of December 31, 1999. The trading activities are
measured at fair value, and unrealized gains and losses from changes in the fair
value are included within Operating Revenues on a net basis. The fair value of
the contracts is recorded in other assets or liabilities, as appropriate. The
fair value of the contracts was A$3.4 million at December 31, 1999 (A$15 million
as of June 30, 2000), which was recorded in Other Assets.
The hypothetical loss in fair value of TXU Australia Group's trading
contracts and other energy purchase contracts in existence at December 31, 1999
entered into for trading purposes arising from a 10% adverse movement in future
electricity prices is estimated at A$31 million.
REGULATION AND RATES
TXU Australia Group is subject to regulation by the ORG. The ORG has the
power to issue licenses for the supply, distribution and sale of electricity
within Victoria and regulates tariffs for the use of the distribution system.
The ACCC is responsible for regulating transmission system tariffs. The
distribution tariffs applying to Eastern Energy are effective until December 31,
2000.
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<PAGE>
On September 21, 2000 following an extensive public consultation program,
the ORG published its final decision in the 2001 Electricity Distribution Price
Review. The decision, if implemented, would cause Eastern Energy's distribution
revenue for 2001 to be approximately A$27 million lower than for 2000. TXU
Australia has expressed its disappointment with aspects of the final decision by
the ORG. TXU Australia does not believe that the final decision is consistent
with the interests of TXU Australia's customers. TXU Australia Group lodged an
appeal of the decision with the ORG Appeal Panel on October 2, 2000. On October
16, 2000, the Appeal Panel upheld the ORG's original decision. TXU Australia is
now considering appealing this decision to the Victorian Supreme Court. If any
such appeal occurs, it is unlikely to be decided before the new tariffs are due
to commence on January 1, 2001. In anticipation of such an appeal, Victorian
government is in the process of enacting legislation, which will enable it to
set transitional distribution tariffs that will apply in the event of such an
appeal. These transitional tariffs will apply from January 1, 2001 until either
the Supreme Court upholds the ORG determination and the new tariffs go into
effect, or if the Supreme Court upholds an appeal of TXU Australia Group, the
date on which the tariffs as redetermined by the ORG in accordance with the
Supreme Court's decision take effect.
Maximum retail prices for remaining franchise electricity customers, those
with usage below 160MWh/year, are fixed by the Tariff Order until December 31,
2000. Retail prices for non-franchise customers are subject to competitive
forces and are not regulated. All electricity retail prices are scheduled to be
deregulated beginning January 1, 2001.
The distribution tariffs applying to Westar are effective until December
31, 2002, at which time a price review process will occur prior to new tariffs
being approved by the ORG for the next five-year period. After the next period,
prices will be set for periods nominated by Westar and approved by the ORG. TXU
Australia Group is not able to predict the outcome of this review or the impact
on its financial position or results of operations.
DEREGULATION OF ELECTRIC AND GAS INDUSTRIES
ELECTRICITY RETAIL - In July 1996, customers in Victoria with loads greater
than 750 MWh/year became contestable. In July 1998, customers with loads between
160 and 750 MWh/year became contestable. Together these two customer classes
accounted for approximately 49% of total Victorian volumes. In both cases, the
introduction of contestability was accompanied by the entry of several new
retailers into the market, significantly lower prices, and a high level of
switching between retailers. Because of the low profitability of serving these
customers, volume retention has not been a priority to TXU Australia Group. The
most profitable segment of the retail electricity market in Victoria is the
final class of customers with loads below 160 MWh/year, which will become
contestable in stages during 2001. Based on information available from the
experience of mass-market competition in other industries and other countries,
TXU Australia Group believes that the competition, and therefore the downward
pressure on profit margins, will be less intense for these smaller customers.
GAS RETAIL - Customers consuming over 500,000 GJ/year became contestable on
October 1, 1999, those consuming between 100,000 and 500,000 GJ/year on March 1,
2000 and those consuming between 10,000 and 100,000 GJ/year became contestable
on September 1, 2000. The remaining gas consumers, including new connections,
are supplied by GASCOR and are non-contestable until the dates set out below.
CUSTOMER CONTESTABILITY TIMETABLE
--------------------------------------------------------------------------------
APPROXIMATE NUMBER OF CUSTOMERS
CUSTOMER LOAD
DATE (GJ/YEAR) VICTORIA KINETIK ENERGY
--------------------------------------------------------------------------------
Currently > 10,000 786 263
September 1, 2001 All others 1,337,000 395,000
--------------------------------------------------------------------------------
Contestable customers are able to choose their own retailer of gas. As
customers become contestable, Kinetik Energy ceases to supply gas as agent of
GASCOR, and commences supplying contestable customers in its own right with gas
purchased from GASCOR and other sources.
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<PAGE>
In the first stage of contestability (customers consuming over 500,000
GJ/year who became contestable on October 1, 1999), TXU Australia Group has been
very successful both in retaining its existing customer base and in gaining
customers from other retailers at favorable margins. Prior to October 1, 1999
Kinetik Energy had 10 first stage customers consuming approximately 13.2
PJ/year. By March 1, 2000 it had 14 first stage customers consuming
approximately 26.1 PJ/year. While competition for customers has been fierce, the
downward pressure on margins which occurred in the early stages of electricity
contestability has been nowhere near as intense in the gas market. It is too
early to assess the results of the second and third stages of contestability
which occurred on March 1, 2000 and September 1, 2000, respectively.
The most profitable segment of the retail gas market in Victoria is the
final class of customers with loads below 5,000 GJ/year, which become
contestable in September 2001. As with competition in the electric industry, TXU
Australia Group's belief is that the competition will be less intense for these
smaller customers.
TXU South Australia is registered as a market generator for the purposes of
the market established under the National Electricity Code, and sells power into
the National Electricity Market and complies with the technical and market
requirements set out in the National Electricity Code. Generators are paid the
market clearing price for the electricity they sell into the market. The
clearing price is the price at which supply and demand is matched and measured
at half-hour intervals each day. The clearing price is often referred to as the
"spot price." With limited exception, all electricity generated must be traded
in an electricity pool.
FUTURE RESULTS OF OPERATIONS - The forthcoming full deregulation of the
electricity and gas industries in Victoria may result in a change in the Group's
existing customer base, and in the current level of retail profit margin. This
will, in turn, affect the future results of the Group's operations.
RECENT AUSTRALIAN TAX REFORMS
Australia's business tax system is currently undergoing major reform. It is
anticipated that, on the whole, the tax reforms will be beneficial to TXU
Australia Group. The most significant area of reform from the standpoint of TXU
Australia Group is the reduction of the company tax rate from 36% to 34% for the
year ending December 31, 2000 and to 30% for the year ending December 31, 2001
and thereafter.
On December 10, 1999, legislation was enacted giving effect to a number of
these reforms, including the above tax rate reduction. Accordingly, TXU
Australia Group's deferred tax asset and liability balances at December 31, 1999
reflected the new tax rates.
GOODS AND SERVICES TAX (GST)
Legislation has been enacted for a GST to apply in Australia from July 1,
2000. The GST will be imposed at the rate of 10% on most transactions involving
the supply of goods and services, subject to certain exemptions.
The GST is not intended to be a cost to business, but rather a tax to be
met by the final consumers of goods and services. Ordinarily, businesses will be
entitled to claim a tax credit for the GST charged to them on all goods,
services and other transactions purchased or acquired in the course of their
business activities.
TXU Australia Group's primary products and services supplied will be
subject to the GST. TXU Australia Group will be required to collect the GST on
behalf of the Australian Taxation Office. In most cases TXU Australia Group will
be entitled to claim a credit for "input tax," being the GST paid on inputs
required for the taxable goods and services it supplies. TXU Australia Group is
currently evaluating the impact of the GST on its operations.
Various existing taxes have been abolished as part of the introduction of
the GST. In particular, the wholesale sales tax was abolished on July 1, 2000.
TXU Australia Group is currently assessing the combined impact of the abolition
of wholesale sales tax and the introduction of the GST on the pricing of its
products and services. In general, TXU Australia Group has been permitted to
increase its prices by 10% less any savings arising from the abolition of
existing taxes. Any pricing decisions made must comply with existing regulatory
requirements and the guidelines issued by the ACCC.
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TXU Australia Group has put in place systems and procedures to implement
the GST and to ensure compliance with the legislation governing the tax. The
total implementation cost, including systems modification and other costs, was
estimated to be approximately A$5 million. Of this amount, A$0.2 million was
expensed in the year ended December 31, 1999, with the remainder expected to be
expensed during the year ending December 31, 2000.
LONGFORD LITIGATION
Esso's gas processing plant at Longford exploded in September 1998 causing
prolonged interruption of gas supplies in Victoria. Subsequently, a class action
suit was commenced in the Federal Court of Australia against Esso on behalf of a
large number of domestic and commercial customers claiming damages for loss of
supply.
Esso has joined the Victorian Government and related entities to the
action, including those which sold and distributed Esso gas prior to these
business being acquired by private operators. Esso has also joined private
operators as well (Esso Cross-Claim), including Westar, Kinetik Energy and
Western Underground Gas Storage, claiming any such liability passed to them as
part of the sale of the businesses from the government.
As currently pleaded before the Federal Court of Australia, the claims
cover actions in negligence and in misleading and deceptive conduct.
On April 3, 2000, the State of Victoria and the state owned entities who
were vendors of the business and assets to Westar and Kinetik Energy served a
Cross-Claim (State Cross-Claim) on Westar and Kinetik Energy. The State
Cross-Claim seeks orders against Westar and Kinetik Energy that they are liable
for any liability of the state-owned vendors, which may be found against those
entities in relation to the Esso Cross-Claim. To the extent the State
Cross-Claim raises issues which are already raised against Westar and Kinetik
Energy in the Esso Cross-Claim, it does not materially affect the potential
liability of Westar and Kinetik Energy in the litigation.
If Esso is found liable and is successful in its cross claims, the
potential liability of Westar, Kinetik Energy and Western Underground Gas
Storage could be significant.
Baker & McKenzie, Melbourne, Australia, counsel to TXU Australia Group, has
conducted a legal analysis of pleadings filed so far and the likely defenses
available. Based on their analysis, TXU Australia Group believes that the claims
against Westar, Kinetik Energy and Western Underground Gas Storage (and the
proposed State Cross-Claim) are without merit. However, given the complexity and
magnitude of the claims involved in this litigation, TXU Australia Group cannot
predict the ultimate outcome and its impact on the financial condition, results
of operations or cash flows of TXU Australia Group at this time. TXU Australia
Group intends to vigorously pursue all of its defenses in this litigation.
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SECURITY OWNERSHIP
The partnership deed of TXU Australia provides that its general partner,
AGP, is solely responsible for the management and direction of TXU Australia. In
addition, essentially all of TXU Australia's operations are managed by the
officers of TXU APL.
TXU Australia and its general partner, AGP, and TXU APL are indirectly
wholly-owned by TXU Corp. The following tables show the number of shares of
common stock of TXU Corp. owned by the directors of AGP and TXU APL, as of July
7, 2000.
NUMBER OF SHARES
--------------------------------------------------
NAME % OF
---- BENEFICIALLY PHANTOM OUTSTANDING
OWNED STOCK PLANS* TOTAL SHARES
------------ ------------ -------- -----------
Erle Nye.................. 191,937 80,836 272,773 0.001
H. Jarrell Gibbs.......... 47,107 36,426 83,533 **
Steven M. Philley......... 3,556 7,605 11,161 **
Paul O'Malley............. 3,057 0 3,057 **
Dr. John Onto............. 0 0 0 0
Geoffrey McIntyre......... 0 0 0 0
Graham Inns............... 0 0 0 0
Brian Dickie.............. 23,334 24,307 47,641 **
Directors of AGP and TXU 268,991 149,174 418,165 0.001
APL as a group (8 persons)
** Less than 0.001 percent.
*Share units held in individual accounts in phantom stock plans of TXU
Corp. 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.
The named individuals have sole voting and investment power for the shares
of common stock reported as beneficially owned.
MANAGEMENT OF TXU AUSTRALIA
DIRECTORS OF AGP
The partnership deed provides that AGP is solely responsible for the
management and direction of TXU Australia. Limited partners do not take part in
the management of TXU Australia's business.
The following table lists certain information with respect to the directors
of AGP as of September 30, 2000:
NAME AGE POSITION
---- --- --------
Steven M. Philley 42 Chairman and Director, appointed
September 20, 2000
Paul O'Malley 36 Director, appointed April 29, 1999
Steven M. Philley was appointed Chairman and a director of AGP on September
20, 2000. His previous position was Vice President of Energy Supply for TXU
Corp. Mr. Philley joined TXU Corp in 1994, prior to which he spent over 18 years
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in the electricity and gas sector in the United States with Valero Energy
Corporation, Coastal Corporation and Gulf Energy Development Corporation.
Paul O'Malley has served as a director of AGP since April 29, 1999 and the
Chief Financial Officer of TXU APL since April 15, 1999. Mr. O'Malley was
director of corporate finance at Deloitte Touche Tohmatsu from June 1997 to
March 1999. Prior to June 1997, Mr. O'Malley was a consultant with Deloitte
Touche Tohmatsu. On October 1, 1999, Paul O'Malley appointed J.G. (Tom) Atkin as
an alternate director to act when Mr. O'Malley is unable to attend meetings or
otherwise act as director. Mr. Atkin has been Treasurer of TXU APL since June
1999. From April 1997 to June 1999, he was Chief Financial Officer of Westar and
Kinetik Energy and prior to that was Treasurer of Alcoa of Australia Limited.
Mr. Atkin owns no shares in TXU Corp.
There are no family relationships between any of the above-named directors.
AGP has no executive officers other than its secretary, Anthony William Kelly
(appointed January 27, 1999), an employee of TXU APL (see description below).
DIRECTORS OF TXU APL AND HOLDINGS
The business of TXU Australia is directed through the key holding company,
TXU APL. All the stock of this company is owned by Holdings. In turn, AGP, on
behalf of the partnership, owns all of the stock of Holdings.
The directors of Holdings are the same as those for AGP. Mr Philley was
appointed a director on September 20, 2000 and Mr. O'Malley was appointed on
April 29, 1999. Mr. Atkin was appointed alternate director for Mr. O'Malley on
October 1, 1999.
The table below lists certain information concerning the directors of TXU
APL.
NAME AGE POSITION
---- --- --------
Erle Nye........... 63 Chairman and Director, appointed
January 15, 1996
H. Jarrell Gibbs... 62 Director, appointed October 31, 1995
Steven M. Philley.. 42 Managing Director, appointed September 20,
2000
Dr. John Onto...... 60 Director, appointed April 19, 1996
Geoffrey McIntyre.. 64 Director, appointed April 19, 1996
Graham Inns........ 63 Director, appointed April 19, 1996
Brian Dickie....... 45 Director, appointed July 29, 1999
Erle Nye has been a director of TXU APL since January 15, 1996. 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
Limited (formerly known as TXU Eastern Holdings Limited). 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 APL since October 13,
1995. He has also been Vice Chairman of TXU Corp. and a director and Vice
Chairman of the Board of TXU Gas Company since August 5, 1997. 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 Group plc
and of TXU Europe Limited.
Steven M. Philley was appointed Managing Director of TXU APL on September
20, 2000. His previous position was Vice President of Energy Supply for TXU
Corp. Mr. Philley joined TXU Corp in 1994, prior to which he spent over 18 years
in the electricity and gas sector in the United States with Valero Energy
Corporation, Coastal Corporation and Gulf Energy Development Corporation.
Dr. John Onto has served as director of TXU APL since April 19, 1996. He is
currently an Associate Professor of International Business at the Melbourne
Business School, University of Melbourne. Prior to his current position he spent
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eight years on the management faculty of Georgetown University Business School
where he was also Associate Dean for Graduate Business Programs.
Geoffrey McIntyre has served as a director of TXU APL since April 19, 1996.
Mr. McIntyre has held many positions in international banking and is currently
the Honorary Trade representative for Singapore in Australia. He is also a
consultant to the Church and Grace law firm.
Brian Dickie has served as a director of TXU APL since July 29, 1999. He is
Executive Vice President of TXU Corp. and President of the Emerging Business
Group. Prior to joining TXU Corp., Mr. Dickie was President and Chief Operating
Officer of Booz-Allen & Hamilton in New York.
Graham Inns has served as a director of TXU APL since April 19, 1996. Mr.
Inns is an Alderman of the Adelaide City Council and Deputy Lord Mayor of the
City of Adelaide and is a partner at J.K. McLachlan & Company Consulting
Services.
There are no family relationships between any of the above-named directors.
Neither Holdings nor TXU APL has any statutory appointed officers or directors
other than its directors and the secretary.
DIRECTOR COMPENSATION
The directors of AGP, Holdings and TXU APL, listed above, have received,
and will continue to receive, compensation in respect of services performed by
those persons as directors of these companies from their primary employer which
is either TXU Corp. or another subsidiary of TXU Corp. Those 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
such companies.
EXECUTIVE MANAGEMENT OF TXU AUSTRALIA
Although TXU Australia has no executive officers, the AGP board of
directors has effectively delegated the management of essentially all of TXU
Australia's day-to-day operations to the officers of TXU APL. The following
table lists certain information with respect to the executive management of TXU
APL as of September 30, 2000:
NAME AGE POSITION
---- --- --------
Steven M. Philley 42 Chief Executive Officer
Paul O'Malley.... 36 Chief Financial Officer
Daryll Smith 56 Chief Operating Officer
Peter Magarry.... 51 General Manager Networks
Leonard Gill..... 43 General Manager Energy Trading
Caryle Demarte... 52 General Manager Retail
Ian Rischmueller 48 General Manager Generation
Steven M. Philley was appointed Chief Executive Officer of TXU APL on
September 20, 2000. His previous position was Vice President of Energy Supply
for TXU Corp. Mr. Philley joined TXU Corp in 1994, prior to which he spent over
18 years in the electricity and gas sector in the United States with Valero
Energy Corporation, Coastal Corporation and Gulf Energy Development Corporation.
Paul O'Malley has served as a director of AGP since April 29, 1999 and the
Chief Financial Officer of TXU APL since April 15, 1999. Mr. O'Malley was
director of corporate finance at Deloitte Touche Tohmatsu from June 1997 to
March 1999. Prior to June 1997, Mr. O'Malley was a consultant with Deloitte
Touche Tohmatsu.
Daryll Smith has been Chief Operating Officer of TXU Australia since July
31, 2000. The Networks, Retail and Generation businesses report to Mr. Smith.
Immediately prior to joining TXU Australia, Mr. Smith was President of the Asia
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Pacific region for Telstra Corporation. He has extensive experience in the
Australian telecommunications industry.
Peter Magarry is General Manager of TXU Networks. In this role, Mr. Magarry
is responsible for the functions associated with operating the combined
Electricity and Gas networks of Eastern Energy and Westar in Victoria. Mr.
Magarry has spent 35 years in the utilities industry in Australia with extensive
experience in the management of electricity networks in regional and city based
utilities in Queensland and Victoria.
Leonard Gill is General Manager, Wholesale Energy Trading. Prior to joining
TXU Australia in May 1999, Mr. Gill held the position of General Manager,
Marketing and Strategy for Ecogen, a Victorian based electricity generator.
Caryle Demarte is General Manager of the Retail business segment of TXU
Australia. Prior to joining TXU Australia in February 1999, Ms. Demarte held the
position of General Manager, Kinetik Energy from its inception in 1997. Ms.
Demarte has held senior positions in the Government-owned Gas & Fuel
Corporation. Ms. Demarte is a Board Member of the Australian Gas Association,
the Energy Industry Ombudsman Victoria and of VENCorp.
Ian Rischmueller is General Manager of the Generation business segment of
TXU Australia. Prior to joining TXU Australia in June 2000, Mr. Rischmueller was
Chief Executive Officer of Optima Energy from August 1998. He has had over 25
years' experience in the South Australian electricity industry.
There are no family relationships between any of the above-named executive
managers.
COMPENSATION OF EXECUTIVE OFFICERS
The officers of TXU APL, listed above, have received, and will continue to
receive, compensation in respect of services performed by those persons as
officers of their primary employer, which is TXU Corp., TXU APL or another
subsidiary of TXU Corp. Those officers receive no cash or non-cash compensation
for the services they perform for TXU Australia beyond that which they would
otherwise receive from their primary employer.
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DESCRIPTION OF THE JUMPS
The JUMPS will be issued under an indenture dated as of , 2000 between
TXU Australia and The Bank of New York, as trustee.
Global certificates for the JUMPS will be held by DTC. Beneficial interests
in the JUMPS will trade through DTC. Specific terms of the JUMPS will be
described in an officer's certificate delivered to the trustee. Material terms
of the JUMPS and the indenture are summarized below. You should read the
indenture, the United States Trust Indenture Act of 1939, as amended, and the
officer's certificate for a more complete description. You should also read the
Deed of Common Terms dated February 24, 1999, as amended on February 24, 2000,
among TXU Australia, National Bank Australia Bank Limited and others which
contains limitations on certain rights of holders of the JUMPS. Copies of the
indenture and the officer's certificate are available upon request to the
trustee. Whenever particular provisions or defined terms in the indenture are
referred to under this DESCRIPTION OF THE JUMPS, 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.
The JUMPS will be issued as debt securities. The indenture permits the
issuance of an unlimited principal amount of debt securities in series, the
first of which series is the JUMPS. The JUMPS will be unsecured, subordinated
obligations of TXU Australia. The indenture does not limit the number of series
or amount of debt securities that may be issued under the indenture or limit the
aggregate amount of indebtedness that TXU Australia or Group companies may issue
under other bonds, notes, debentures or similar instruments.
The covenants contained in the indenture will not afford beneficial owners
or holders of JUMPS protection in the event of a highly-leveraged transaction or
change of control involving TXU Australia.
DISTRIBUTIONS AND MATURITY
The JUMPS will mature on , 20 .
Distributions on the JUMPS will:
o Be payable in US dollars at the rate of per annum;
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 (Indenture, Section 310);
o Be payable quarterly in arrears on , , and of each year,
beginning , unless deferred as described below under - "OPTION
TO DEFER DISTRIBUTIONS;"
o Originally accrue from and including the date of initial issuance, to
and excluding the first distribution date;
o Generally accrue from and including the last distribution date to
which distributions have been paid to and excluding the next
distribution date or the redemption date, whichever comes first; and
o Be payable on overdue distributions to the extent permitted by law at
the same rate as distributions are payable on principal.
If any payment date is not a business day, payment will be made on the next
business day, except that if the next business day would be in the next calendar
year, the payment will be made on the business day immediately preceding the
payment date. In either case, the payment will be made with the same force and
effect as if made on the payment date, without any further distributions or
other payments resulting 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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Distributions on each JUMPS will be paid on a distribution date to the
holder in whose name that JUMPS is registered at the close of business on the
related record date, except that distributions payable upon redemption will be
paid on the redemption date to the holder to whom the principal is paid. The
regular record date for payment of distributions on JUMPS in global form will be
the business day in The City of New York immediately preceding the date of such
distribution. See "--CERTIFICATED JUMPS" for the regular record date for payment
of distributions on JUMPS in certificated form. If any distribution has not been
paid when due on any JUMPS, the defaulted distributions may be payable to the
registered owner as of the close of business on a date selected by the trustee.
A distribution will not be considered payable by TXU Australia on any
distribution date falling within a deferral period unless TXU Australia elects
to make a full or partial payment of accrued distributions on the JUMPS on that
distribution payment date. (Indenture, Section 307)
Payments of principal will be paid on a redemption date in US dollars to
the registered owners of the JUMPS only upon surrender of the JUMPS to the
trustee.
The Bank of New York is the paying agent for the JUMPS in The City of New
York. Payments on the JUMPS will be made at the office of The Bank of New York
maintained for that purpose in The City of New York which, may be changed, to an
office or agency of TXU Australia or a successor trustee in The City of New
York. However, at the option of TXU Australia, payments on the JUMPS may be
made:
o By checks mailed by the trustee or a paying agent to the holders at
their registered addresses; or
o By wire transfers to accounts maintained in the USA by the holders of
more than US$1 million principal amount of JUMPS as specified in the
register for the JUMPS.
OPTION TO DEFER DISTRIBUTIONS
So long as no Event of Default under the indenture has occurred and is
continuing, TXU Australia will have the right, at any time and from time to
time, to defer distributions on the JUMPS for up to 20 consecutive quarters. TXU
Australia will pay additional distributions on any deferred distribution at the
same rate as the JUMPS, compounded quarterly, to the date of payment, to the
extent legally permitted. When the deferral period has ended, TXU Australia will
pay all accrued and unpaid distributions on the next distribution payment date.
Before any deferral period ends, TXU Australia may further defer distributions.
However, a deferral period, together with any previous and further deferral
periods, may not exceed 20 consecutive quarters and may not extend beyond the
maturity date of the JUMPS. During a deferral period, TXU Australia will have
the right to pay partial distributions on any distribution payment date. After a
deferral period terminates and all amounts due are paid, TXU Australia may
select a new deferral period, subject to the previously mentioned requirements.
If TXU Australia defers payment on the JUMPS, no payment (interest,
distributions, redemption, repurchase or otherwise) may be declared or paid by
TXU Australia on or with respect to its partnership interests or any other
securities, guarantees or other obligations of TXU Australia ranking junior to
or equal with the JUMPS. Based upon TXU Australia's current financial condition,
TXU Australia believes that the deferral of any distributions on the JUMPS is
currently unlikely, and it has no current intention to defer any distributions.
TXU Australia will notify the holder or holders of the JUMPS and the
trustee of its election or extension of a deferral period at least one business
day before the earlier of:
o the record date for the distribution date on which the deferral period
is to begin or the record date for the distribution date on which the
deferral period that is being extended would otherwise terminate; or
o the date that TXU Australia is required to give notice to the NYSE or
other exchange on which the JUMPS are listed of the record date or of
the date those distributions are payable.
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REDEMPTION
TXU Australia may redeem all or any part of the JUMPS at any time and from
time to time on or after , 2005 at a redemption price equal to the principal
amount of the JUMPS to be redeemed plus accrued and unpaid distributions and
Additional Amounts, if any, to the redemption date.
If TXU Australia elects to redeem less than all the JUMPS, the particular
JUMPS to be redeemed will be selected by lot or by such other method of random
selection as the security registrar deems fair and appropriate and the
book-entry interests in the JUMPS will be redeemed in accordance with the
depositary's standard procedures. See "--BOOK-ENTRY ONLY ISSUANCE - THE
DEPOSITORY TRUST COMPANY."
If the JUMPS are in global form, TXU Australia will give notice to the
holder of the JUMPS to be redeemed 30 days to 60 days before the redemption
date. See "--CERTIFICATED JUMPS" for redemption notice provisions for JUMPS in
certificated form. (Indenture, Section 404)
Any notice of redemption may state that redemption is conditional on
receipt by the trustee or paying agent or agents, on or before 11:00 a.m., New
York City time, on the redemption date, of money sufficient to pay the principal
of and accrued distributions, if any, on the JUMPS and that if the money has not
been so received, TXU Australia will not be required to redeem the JUMPS.
TXU Australia may not redeem less than all outstanding JUMPS unless all
accrued and unpaid distributions have been paid on all JUMPS for all quarterly
distribution periods terminating on or prior to the redemption date.
If TXU Australia gives a notice of redemption of any JUMPS held by the
depositary and has irrevocably deposited with the trustee or a paying agent or
agents sufficient cash to pay those JUMPS on or before the redemption date,
then, by 12:00 noon, New York City time, on the redemption date, the trustee or
the paying agent or agents will deposit with the depositary sufficient funds to
pay the redemption price for those JUMPS. TXU Australia will also give the
depositary instructions and authority to pay the redemption price through its
procedures to its participants for the benefit of the applicable beneficial
owners of the JUMPS.
If TXU Australia gives a notice of redemption of any JUMPS and has
irrevocably deposited with the trustee or a paying agent or agents sufficient
cash to pay those JUMPS on or before the redemption date, then on the redemption
date distributions will cease to accrue on those JUMPS and all rights of the
holders of those JUMPS will cease, except for the right to receive the
redemption price on those JUMPS, without any distributions or other payments
after the redemption date. If any redemption date is not a business day in New
York City, then payment of the amounts payable on the redemption date will be
made to the holders on the next succeeding day that is a business day, without
any interest or other payment in respect of any delay. However, if that business
day falls in the next calendar year, the payment will be made to the holders on
the immediately preceding business day.
TXU Australia may, at any time and from time to time, purchase any
outstanding JUMPS by tender, in the open market or by private agreement,
provided that it complies with United States federal securities laws and any
other applicable laws.
TAX EVENT REDEMPTION
TXU Australia may redeem all of the outstanding JUMPS at any time within 90
days following the occurrence of a Tax Event. A Tax Event Redemption may be any
of the events described in (A), (B) or (C) below.
(A) A Tax Event occurs if the general partner of TXU Australia has
requested, received and delivered to the trustee an opinion from a reputable
legal counsel or other tax adviser in the US, Australia or the UK, as
appropriate, experienced in these matters that there has been one or more of the
following three events:
(1) an amendment to, or change (or announced prospective change) in, the
laws or treaties (or related regulations) of any of those
jurisdictions or any political subdivision or taxing authority of any
of those jurisdictions; or
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(2) a judicial decision or an official administrative pronouncement,
ruling, regulatory procedure, notice or announcement, including a
notice or announcement of intent to issue or adopt any administrative
pronouncement, ruling, regulatory procedure or regulation (each, an
Administrative Action); or
(3) an amendment to, or change in, the official position or interpretation
of an Administrative Action or judicial decision or any interpretation
or pronouncement that provides for a position with respect to an
Administrative Action or judicial decision that differs from the
previously generally accepted position, in each case, by any
legislative body, court, governmental authority or regulatory body,
regardless of when or how the amendment or change is introduced or
made known.
In order to be a Tax Event as described above:
(1) the amendment or change must be effective, or the Administrative Action
must be taken, or the judicial decision must be issued, on or after the date of
issuance of the JUMPS; and
(2) as a result of the amendment, change, administrative action or judicial
decision, there must be more than an insubstantial risk that distributions on
the JUMPS will not be, or are not, fully deductible for UK taxation purposes.
(B) A Tax Event also occurs if the general partner of TXU Australia has
requested, received and delivered to the trustee an opinion from a reputable
legal counsel or other tax adviser in the US, Australia or the UK, as
appropriate, experienced in these matters that there has been a tax action. A
tax action means any of the three following events:
(1) an amendment, change, Administrative Action, judicial decision, or
administrative pronouncement, ruling, regulation, procedure, notice or
announcement as described in (A) above; or
(2) a clarification of the laws or treaties (or related regulations) of
any of those jurisdictions or any political subdivision or taxing
authority of any of those jurisdictions; or
(3) a clarification of the official position or interpretation of an
Administrative Action or judicial decision or any interpretation or
pronouncement that provides for a position with respect to an
Administrative Action or judicial decision that differs from the
previously generally accepted position, in each case, by any
legislative body, court, governmental authority or regulatory body,
regardless of when or how the clarification is introduced or made
known.
In order to be an Tax Event as described above:
(1) the tax action must be effective on or after the date of issuance of
the JUMPS; and
(2) as a result of the occurrence of the tax action, there must be more
than an insubstantial risk that:
o distributions on the JUMPS will not be, or are not, deductible for
Australian income tax purposes; or
o distributions on the JUMPS will not be, or are not, fully deductible
for US federal income tax purposes; or
o tax losses of, or other amounts in respect of, TXU Australia which,
but for such tax action, would be eligible for surrender by way of
group relief for UK corporation tax purposes against the taxable
profits of any company which at the date of the issue of the JUMPS is
a member of the same group of companies as TXU Australia LP (No 1)
Limited or TXU Australia LP (No 2) Limited for the purposes of group
relief, as a result of the tax action, will not be, or are not, so
eligible.
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(C) Finally, a Tax Event occurs if the general partner of TXU Australia has
certified to the trustee that, as a result of a tax action, Additional Amounts,
as described under "ADDITIONAL AMOUNTS" below, are, or will be payable with
respect to any payments made on the JUMPS, and has further certified to the
trustee that it cannot avoid the requirement to pay such Additional Amounts by
using reasonable efforts.
SUBORDINATION PROVISIONS
The JUMPS will rank equal in right of payment with all other obligations
issued under the indenture and any of TXU Australia's securities which are
specifically unsecured, "junior" and "subordinate" by their terms, but will
otherwise rank subordinated and junior in right of payment to all other debt
instruments of TXU Australia, including Senior Indebtedness.
The subordination provisions require any holder of JUMPS or the Trustee to
turn over to the senior debt trustee under the Financing Documents any moneys
received or recovered through the exercise of remedies under the indenture or
otherwise, at all times during the occurrence and continuance of a default under
the Financing Documents, until the Senior Indebtedness is paid in full. So long
as there is Senior Indebtedness outstanding and to the extent permitted by the
Trust Indenture Act and other applicable law, each Holder of the JUMPS, by its
acceptance thereof, and the Trustee (on behalf of all Holders) agrees that all
amounts owing under the JUMPS are subordinated to the Senior Indebtedness. They
further agree that as long as there is Senior Indebtedness outstanding and to
the extent permitted by the Trust Indenture Act and other applicable law:
(a) if an event of default relating to the winding-up, dissolution,
bankruptcy or insolvency of TXU Australia or its general partner as described in
the fourth through the fifteenth bullet-points of the -"EVENTS OF DEFAULT"
section (any such event, a Bankruptcy Event) occurs, then the JUMPS shall
become due and payable immediately and the Holders and the Trustee shall act in
conformity with the provisions of any Senior Indebtedness then outstanding,
including, but not limited to, appointing any trustee or other person acting on
behalf of the Senior Indebtedness as the Holder's attorney-in-fact to file,
process, or otherwise deal with any claims to be filed in any proceeding in
connection with such Bankruptcy Event, all in accordance with the terms of the
Senior Indebtedness. However, the Holder may otherwise file, prosecute and
defend a proof of claim or similar filing in connection with such proceeding if,
and only if, (i) the trustee or other person acting on behalf of the Senior
Indebtedness in connection with such proceeding has failed to file such proof of
claim on behalf of the Holder, and (ii) a final deadline for filing such proof
of claim will occur within the next 10 business days;
(b) except as permitted by the terms of any Senior Indebtedness then
outstanding or with the prior written consent of the trustee or other person
acting on behalf of any Senior Indebtedness outstanding or, following the
occurrence of an event of default under the Senior Indebtedness, as directed by
the trustee or other person acting on behalf of the Senior Indebtedness, not to
vote for the winding up of TXU Australia, apply to any court to wind up TXU
Australia, or requisition a meeting to consider (i) a resolution for winding up
of TXU Australia, (ii) a scheme of arrangement for TXU Australia, or (iii) a
resolution for the appointment of an administrator to TXU Australia;
(c) not to set off the debt represented by any JUMPS against any
indebtedness owing to TXU Australia;
(d) not to accept the benefit of any guarantee in respect of the JUMPS
except as allowed by the terms of the Senior Indebtedness then outstanding;
(e) agree not to suffer to exist or take any security interest to secure
payment of the JUMPS except as allowed by the terms of the Senior Indebtedness
then outstanding; and
(f) not to amend or vary the JUMPS or the indenture if such variation or
amendment would result in the JUMPS ceasing to be subordinated to the Senior
Indebtedness.
In the event that in a proceeding in connection with a Bankruptcy Event,
any amount due and owing on the JUMPS is set off against amounts owing to TXU
Australia by a Holder of JUMPS, then that Holder agrees to indemnify the holders
of Senior Indebtedness, to the extent of such set off, against any amount the
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holders of Senior Indebtedness are unable to recover on the Senior Indebtedness
in that proceeding directly as a result of such set off.
In furtherance of the foregoing, the Trustee and the Holders of the JUMPS
appoint the trustee under the Senior Indebtedness as their attorney-in-fact to
do anything the Trustee or the Holder may lawfully do to exercise a right of
proof of claim following a Bankruptcy Event. This includes, without limitation,
executing drawdown notices, repayment notices, executing deeds and instituting,
conducting and defending legal proceedings and receiving any dividend arising
out of such right. However, no such attorney-in-fact may waive or compromise TXU
Australia's obligations with respect to the JUMPS or any amounts due thereon.
The trustee under the Senior Indebtedness, acting as such attorney-in-fact, may
delegate its powers to any person for any period and may revoke a delegation and
may exercise or concur in exercising its powers even if the attorney-in-fact has
a conflict of duty in exercising its powers or has a direct or personal interest
in the means or result of that exercise of powers. Except as otherwise
contemplated above, the Trustee or the Holders of the JUMPS may not exercise any
such right of proof of claim in any such proceeding in connection with such
Bankruptcy Event independently of the power-of-attorney granted. (Indenture
Section 1501).
Upon any voluntary or involuntary distribution of assets of TXU Australia
to its creditors in any bankruptcy, insolvency, receivership or other similar
proceedings, all principal of, and premium, if any, and interest due or to
become due on, all Senior Indebtedness must be paid in full before the holders
of the JUMPS are entitled to receive or retain any payment. To the extent that
any distributions in these proceedings applicable to the JUMPS are paid to
holders of Senior Indebtedness, the holders of the JUMPS will be subrogated to
the rights of the holders of Senior Indebtedness to receive further
distributions applicable to Senior Indebtedness after the Senior Indebtedness is
paid in full. (Indenture 1504)
The term "Senior Indebtedness" is defined in the indenture to mean all
obligations of, or guaranteed or assumed by, TXU Australia for borrowed money,
including both senior and subordinated indebtedness for borrowed money, or for
the payment of money relating to any lease which is capitalized on the
consolidated balance sheet of TXU Australia Group in accordance with generally
accepted accounting principles applicable to TXU Australia as in effect from
time to time, or indebtedness evidenced by bonds, debentures, notes or other
similar instruments, whether existing as of the date of the indenture or
subsequently incurred by TXU Australia. However, indebtedness issued under the
indenture and other equally ranking indebtedness of TXU Australia are excluded
from the definition of Senior Indebtedness. (Indenture 101)
An event of default with respect to any Senior Indebtedness may not
necessarily constitute an Event of Default with respect to the JUMPS.
The indenture does not limit the aggregate amount of Senior Indebtedness
that TXU Australia may issue. As of December 31, 1999, outstanding Senior
Indebtedness of TXU Australia and its subsidiaries aggregated approximately
A$2,800 million (US$ 1,697 million).
EFFECTIVE PRIORITY OF SUBSIDIARY OBLIGATIONS
TXU Australia is a holding partnership that derives substantially all of
its income from the Group companies. Substantially all of TXU Australia's
consolidated assets are held by the Group companies. Accordingly, the ability of
TXU Australia to service its debt is largely dependent on the earnings of the
Group companies and the payment of those earnings to TXU Australia in the form
of dividends, loans, or advances, and through repayment of loans or advances
from TXU Australia to those Group companies. The Group companies have no
obligation to pay any amounts due on the JUMPS.
ADDITIONAL AMOUNTS
All payments made on the JUMPS will be made without withholding or
deduction for any taxes or other governmental charges imposed by a jurisdiction
in which TXU Australia is 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), TXU Australia
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will pay to each holder of JUMPS any additional amounts as shall be necessary so
that the net amount received by each holder of JUMPS after the withholding or
deduction equals the amount that the holder would have received absent that
withholding or deduction (Additional Amounts), except that no Additional Amounts
will be payable:
o on account of any tax, duty, assessment or other governmental charge
that would not have been imposed but for the existence of any present
or former connection between the holder and a Taxing Jurisdiction or
between a fiduciary, settlor, beneficiary, member, shareholder or
affiliate of, or possessor of a power over, such holder and a Taxing
Jurisdiction, including, without limitation, such holder, fiduciary,
settlor, beneficiary, member, shareholder, affiliate or possessor
being or having been a citizen, national or resident or being or
having been present or engaging or having engaged in trade or business
or having or having had a permanent establishment in such Taxing
Jurisdiction;
o on account of any estate, inheritance, gift, sales, transfer,
franchise, wealth, personal property or similar tax, duty, assessment
or other governmental charge;
o on account of any tax, duty, assessment or other governmental charge
that is payable otherwise than by withholding or deduction; and
o on account of any tax, duty, assessment or other governmental charge
that is imposed or withheld by reason of the failure by the holder or
the beneficial owner of a JUMPS (a) to provide information concerning
the nationality, residence or identity of such holder or such
beneficial owner or (b) to make any declaration or other similar claim
or satisfy any information or reporting requirement, which, in the
case of (a) or (b), is required or imposed by a statute, treaty, rule,
regulation or administrative practice of the taxing jurisdiction as a
precondition to exemption from all or part of such tax, duty,
assessment or other governmental charge;
No Additional Amounts will be payable with respect to any JUMPS if the
beneficial owner would not have been entitled to that payment if that beneficial
owner had been a holder. See "-- CERTIFICATED JUMPS" for additional limitations
on payment of Additional Amounts for JUMPS held in certificated form.
BOOK-ENTRY ONLY ISSUANCE - THE DEPOSITORY TRUST COMPANY
The JUMPS will be book-entry securities. Upon issuance, all book-entry
securities will be represented by one or more fully registered global JUMPS,
without coupons. Each global JUMPS will be deposited with, or on behalf of, DTC,
a securities depositary, and will be registered in the name of DTC or a nominee
of DTC. DTC will thus be the only registered holder of the JUMPS and will be
considered the sole owner of the JUMPS for purposes of the indenture. A
beneficial holder of book-entry JUMPS will be entitled to receive JUMPS in
certificated form only in the circumstances described in "- CERTIFICATED JUMPS."
Purchasers of JUMPS may only hold interests in the global JUMPS through DTC
if they are participants in the DTC system. Purchasers may also hold interests
through a securities intermediary - banks, brokerage houses and other
institutions that maintain securities accounts for customers - that has an
account with DTC or its nominee or another securities intermediary. DTC will
maintain accounts showing the JUMPS holdings of its participants, and these
participants will in turn maintain accounts showing the JUMPS holdings of their
customers. Some of these customers may themselves be securities intermediaries
holding JUMPS for their customers. Thus, each beneficial owner of a book-entry
JUMPS will hold that JUMPS indirectly through a hierarchy of intermediaries,
with DTC at the "top" and the beneficial owner's own securities intermediary at
the "bottom".
The JUMPS of each beneficial owner of a book-entry security will be
evidenced solely by entries on the books of the beneficial owner's securities
intermediary. The actual purchaser of the JUMPS will generally not be entitled
to have the JUMPS represented by the global JUMPS registered in its name and
will not be considered the owner under the indenture. In most cases, a
beneficial owner will also not be able to obtain a paper certificate evidencing
the holder's ownership of JUMPS. The book-entry system for holding JUMPS
eliminates the need for physical movement of certificates and is the system
through which most publicly traded common stock is held in the United States.
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However, the laws of some jurisdictions require some purchasers of securities to
take physical delivery of their securities in definitive form. These laws may
impair the ability to transfer book-entry securities.
In this prospectus, for book-entry JUMPS, references to actions taken by
JUMPS holders will mean actions taken by DTC upon instructions from its
participants, and references to payments and notices of redemption to JUMPS
holders will mean payments and notices of redemption to DTC as the registered
holder of the JUMPS for distribution to participants in accordance with DTC's
procedures.
DTC is a New York clearing corporation and a clearing agency registered
under Section 17A of the Securities Exchange Act of 1934. 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 applicable to DTC and its participants are on file with the SEC.
All transfers of beneficial interests in the global JUMPS 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. Payments on the global
JUMPS will be made by TXU Australia through the trustee or other paying agent to
DTC. DTC will immediately credit participants' accounts with those payments in
amounts proportionate to their interests in the JUMPS as shown on the records of
DTC. Payments by participants to owners of beneficial interests will be made
according to standing customer instructions and customary practices. DTC will
have no responsibility for payments by its participants. If any global JUMPS are
redeemed, the trustee or paying agent will deliver the amount received by it to
DTC. In the event of a partial redemption, selection of interests in the JUMPS
to be redeemed will be made by DTC proportionally or on any other basis that DTC
deems fair and appropriate.
TXU Australia understands that DTC, under its current practices, would
authorize its participants owning interests in the JUMPS 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.
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.
TXU Australia, the trustee and the agents will not have any responsibility
or liability for any aspect of the records relating to, or payments made on
account of, or authorizations to the owners of, beneficial ownership interests
in the book-entry securities or for maintaining, supervising or reviewing any
records relating to the beneficial ownership interests.
DTC may discontinue providing its services as securities depositary with
respect to the JUMPS at any time by giving reasonable notice to TXU Australia.
Under such circumstances, in the event that a successor securities depositary is
not obtained within 90 days, JUMPS certificates are required to be printed and
delivered. Additionally, TXU Australia may decide to discontinue use of the
system of book-entry transfers through DTC or any successor depositary with
respect to the JUMPS. In that event, certificates for the JUMPS will be printed
and delivered based on instructions and information received from DTC.
CERTIFICATED JUMPS
A beneficial owner of book-entry JUMPS may exchange them for JUMPS in
certificated form only if:
o DTC is unwilling or unable to continue as depositary for the global
JUMPS and TXU Australia is unable to find a qualified replacement for
DTC within 90 days;
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o DTC at any time ceases to be a clearing agency registered under the
Securities Exchange Act of 1934; or
o TXU Australia in its sole discretion decides to allow the book-entry
JUMPS to be exchangeable for certificated JUMPS in registered form.
In that case, global JUMPS will be exchangeable in whole for certificated
JUMPS in registered form, with the same terms and of an equal aggregate
principal amount, in denominations of US$25 and whole multiples of US$25.
Certificated JUMPS will be registered in the name or names of the person or
persons specified by DTC in a written instruction to the registrar of the JUMPS.
DTC may base its written instruction upon directions it receives from its
participants.
RECORD DATES. The record date for payment of distributions on JUMPS in
certificated form will be the fifteenth day of the calendar month before the
relevant distribution payment date, whether or not it is a business day in The
City of New York.
REDEMPTION NOTICES. TXU Australia will mail notice to each holder of JUMPS
in certificated form to be redeemed 30 days to 60 days before such redemption
date.
ADDITIONAL AMOUNTS. No Additional Amounts will be payable:
o to or for a holder of JUMPS in certificated form who presents a JUMPS
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 a JUMPS on the last
day of the 30 day period; or
o to or for a holder of JUMPS in certificated form who presents a JUMPS,
when presentation is required, at any place other than (a) the
corporate trust office of the trustee in The City of New York or (b) a
paying agent location for the JUMPS designated by TXU Australia for
that purpose.
FORM, EXCHANGE, AND TRANSFER
The JUMPS will be issuable only in fully registered form without coupons
and in denominations of US$25 and any integral multiple of US$25.
At the option of the holder, JUMPS will be exchangeable for other JUMPS of
the same series of any authorized denomination and with the same terms and
aggregate principal amount.
Certificated JUMPS, duly endorsed or accompanied by a duly executed
instrument of transfer, may be presented for exchange or for registration of
transfer at the office of the security registrar or at the office of any
transfer agent designated by TXU Australia for such purpose. TXU Australia may
designate itself the security registrar. No service charge will be made for any
registration of transfer or exchange of JUMPS, but TXU Australia may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith. Such transfer or exchange will be effected upon
the security registrar or such transfer agent, as the case may be, being
satisfied with the documents of title and identity of the person making the
request. TXU Australia may at any time designate additional transfer agents or
rescind the designation of any transfer agent or approve a change in the office
through which any transfer agent acts, except that TXU Australia will be
required to maintain a transfer agent in each place of payment for the JUMPS.
TXU Australia will not be required to execute or to provide for the
registration of transfer of, or the exchange of:
o any JUMPS during a period 15 days before giving notice of redemption;
or
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o any JUMPS selected for redemption in whole or in part, except the
unredeemed portion of any JUMPS being redeemed in part. (Indenture,
Section 305)
PAYING AGENTS
The Bank of New York will act as paying agent for the JUMPS. Principal of
and distributions and any Additional Amounts on the JUMPS will be payable at the
office of this paying agent or paying agents that TXU Australia may designate
for this purpose from time to time. TXU Australia may at any time designate
additional paying agents or rescind the designation of any paying agent or
approve a change in the office through which any paying agent acts, except that
TXU Australia will be required to maintain a paying agent in each place of
payment for the debt securities of a particular series.
TXU Business Services Company will act as registrar and transfer agent for
the JUMPS.
All moneys paid by TXU Australia to a paying agent for the payment of the
principal of or distributions or any Additional Amounts on the JUMPS which
remain unclaimed at the end of two years after the principal, distribution or
Additional Amount has become due and payable will be repaid to TXU Australia or
to the appropriate governmental agency for unclaimed funds, and the holder of
the affected JUMPS may look only to TXU Australia or the appropriate
governmental agency for payment.
CONSOLIDATION, MERGER, AND SALE OF ASSETS
Under the terms of the indenture, TXU Australia or its general partner may
not consolidate with or merge into any other entity or convey, transfer or lease
its properties and assets substantially as an entirety to any person or entity,
unless
o the entity formed by such consolidation or into which TXU Australia or
its general partner, as the case may be, is merged or the person or
entity which acquires by conveyance or transfer, or which leases, the
property and assets of TXU Australia or its general partner, as the
case may be, substantially as an entirety shall expressly assume TXU
Australia's obligations on the JUMPS and under the indenture, or its
general partner's obligations under the partnership deed, as the case
may be,
o immediately after giving effect to the transaction, no Event of
Default, and no event which, after notice or lapse of time or both,
would become an Event of Default, shall have occurred and be
continuing, and
o TXU Australia shall have delivered to the trustee an officer's
certificate of its general partner and an opinion of counsel as
provided in the indenture. (Indenture, Section 1101)
The indenture does not prevent or restrict:
o TXU Australia or its general partner from entering into a merger in
which that entity is the surviving entity; and
o any consolidation or merger of any Group company other than TXU
Australia's general partner or the conveyance or other transfer, or
lease, of any part of the assets of TXU Australia Group other than the
assets of TXU Australia itself or its general partner, or any
conveyance, transfer or lease, which does not constitute the entirety,
or substantially the entirety, of the direct assets of TXU Australia,
which are primarily the common shares of Holdings, or its general
partner. (Section 1103).
In the event that any successor entity is organized under the laws of a
jurisdiction other than a Taxing Jurisdiction and withholding or deduction is
required by law for or on account of any present or future taxes, duties,
assessments or governmental charges of any nature, the successor entity will pay
to the relevant holders of JUMPS Additional Amounts. The Additional Amounts will
be payable under the same circumstances and subject to the same limitations as
would be payable as set forth under "--ADDITIONAL AMOUNTS" above, but
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substituting for the applicable Taxing Jurisdiction in each place the name of
the jurisdiction where the successor entity is organized, is managed, has a
place of business or is controlled.
EVENTS OF DEFAULT
"Event of Default", when used in the indenture with respect to the debt
securities of any series including the JUMPS, means any of the following has
occurred:
o Failure to pay any distributions on the debt securities of that series
within 30 days after they are due; however, any valid deferral of
distributions is not considered a failure to pay distributions for
this purpose;
o Failure to pay principal or premium, if any, on the debt securities of
that series when due;
o Failure to perform, or breach of, any other covenant or warranty of
TXU Australia in the indenture for 60 days after written notice to TXU
Australia by the trustee, or to TXU Australia and the trustee by the
holders of at least 33% in principal amount of the debt securities of
that series outstanding under the indenture as provided in the
indenture;
o 90 days after the occurrence of an Insolvency Event (as defined in the
Partnership Deed) of a limited partner of TXU Australia, unless,
within 90 days of such Insolvency Event, TXU Australia's general
partner has given notice to the other partners of TXU Australia of its
continuation and TXU Australia, at all times from and after such
Insolvency Event, is in fact continued as a limited partnership under
the laws of the state of Victoria, Australia;
o An order is made by a court of competent jurisdiction that TXU
Australia or the general partner of TXU Australia be wound up or
dissolved, or an order is made appointing a liquidator or provisional
liquidator in respect of TXU Australia or the general partner of TXU
Australia, or a liquidator or provisional liquidator is appointed in
respect of TXU Australia or the general partner of TXU Australia
(whether or not by order) and that order is not vacated or such
liquidator is not removed within 90 days;
o TXU Australia resolves to wind itself up, or otherwise dissolve
itself, or gives notice of its intention to do so;
o The general partner of TXU Australia resolves to wind itself up or to
wind up TXU Australia, or otherwise dissolve itself or TXU Australia,
or gives notice of its intention to do so;
o TXU Australia or its general partner enters into, or resolves to enter
into, a scheme of arrangement, partnership deed or composition with,
or assignment for the benefit of, all or any class of TXU Australia's
or TXU Australia's general partner's creditors or proposes a
reorganization, moratorium or other administration, in each case under
any applicable bankruptcy, insolvency or other similar law, involving
any of them;
o TXU Australia or its general partner (as the case may be) is granted
protection from its creditors under any applicable legislation and
such step is not reversed within 90 days or TXU Australia or its
general partner takes any step to obtain protection, including,
without limitation, summoning a creditors' meeting to consider a
proposal for voluntary arrangement;
o A receiver, receiver and manager or similar officer is appointed in
respect of all or any substantial part of the property of TXU
Australia and that officer is not removed within 90 days if that
officer was not voluntarily appointed by TXU Australia;
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o An administrator or controller (as those terms are defined in the
Corporations Law of the State of Victoria, Australia) is appointed to
the general partner of TXU Australia or in respect of all or any
substantial part of its property, as the case may be, and that officer
is not removed within 90 days;
o TXU Australia, or its general partner, is or states that it is unable
to pay its debts as and when they fall due or is adjudicated by a
court of competent jurisdiction to be insolvent;
o The general partner of TXU Australia is insolvent or is deemed by any
applicable law to be insolvent;
o The general partner of TXU Australia, or its board of directors,
resolves to appoint an administrator to the general partner;
o Anything analogous or having a substantially similar effect to any of
the events specified in the preceding ten bullet points above happens
under the laws of any applicable jurisdiction but only if (a) TXU
Australia or its general partner is no longer formed or incorporated
under the laws of the State of Victoria, Australia and (b) any such
event is not cured within any applicable cure period specified in such
paragraph;
o Failure to pay any Additional Amounts on that series within 30 days
after they are due; or
o Any other event of default specified with regard to debt securities of
that series; (Indenture, Section 801)
The merger, consolidation or dissolution of TXU Australia or the
conveyance, lease or transfer of substantially all of its properties or assets
as permitted under the terms of Article 11 of the indenture is not considered an
Event of Default for the purposes of any of paragraphs four through eleven
above.
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 JUMPS or bankruptcy,
dissolution or insolvency of TXU Australia or AGP. 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 any series of debt securities occurs
and is continuing, then either the trustee or the holders of not less than 33%
in principal amount of the outstanding debt securities of that series may
declare the principal amount of all of the debt securities of that series to be
due and payable immediately. However, if an Event of Default occurs and is
continuing with respect to more than one series, only the trustee or the holders
of not less than 33% in aggregate principal amount of the outstanding debt
securities of all those series, considered collectively as one class may declare
acceleration and not the holders of any one of those series.
A declaration of acceleration will be considered rescinded and annulled and
the events giving rise to declaration of acceleration will be considered waived
if prior to the entry of a judgment or decree for payment of money due, TXU
Australia has paid or deposited with the trustee a sum sufficient to pay:
o all distributions due on all debt securities of any series,
o the principal of and premium, if any, on any debt securities of the
series which have become due otherwise than by declaration of
acceleration, and interest on such amounts as applicable,
o to the extent permitted by law, interest and distributions upon
overdue interest and distributions and
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o all amounts due to the trustee under the indenture. (Indenture,
Section 802)
There is no automatic acceleration, even in the event of bankruptcy,
dissolution or insolvency of TXU Australia.
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 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 the outstanding debt securities of any
series 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 trust
or power conferred on 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 with respect to the indenture, or for the appointment of a
receiver or a trustee, or for any other remedy thereunder, unless:
o the holder has previously given to the trustee written notice of a
continuing Event of Default;
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 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 respect of which an Event of Default has occurred and is continuing
have not given the trustee direction inconsistent with the written
request within that 60 day period.
o the institution of any such proceeding, appointment of any such
receiver or trustee or pursuit of any such remedy is not prohibited
under the DCT, as described below. (Indenture, Section 807)
TXU Australia will provide to the trustee an annual statement by an
appropriate officer of its general partner 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 of any series, TXU
Australia 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 to TXU Australia
of the covenants of TXU Australia in the indenture and in the debt
securities issued under the indenture;
o to add one or more covenants of TXU Australia or to surrender any
right or power of TXU Australia under the indenture;
o to add any additional Events of Default;
o to change or eliminate any provision of 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
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(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
as permitted by the indenture;
o to provide for the issuance of bearer securities and related coupons,
if any;
o to evidence and provide for the acceptance of appointment of a
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
distributions, if any, will be payable, debt securities may be
surrendered for registration of transfer or exchange and notices to
TXU Australia may be served; or
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 TXU Australia
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 TXU Australia with some restrictive provisions of the indenture
with respect to those series or tranches. (Indenture, Section 607) The holders
of a majority in aggregate of principal amount of the outstanding debt
securities of any series may waive any past default under the indenture, except
a default in the payment of principal, premium, interest, distributions or
Additional Amounts or a default in 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 the Act. TXU Australia and the
trustee may, without the consent of any holders, enter into one or more
supplemental indentures to evidence or effect 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 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 affected will be required. No amendment or modification may:
o change the stated maturity, if any, of the principal of, or any
installment of principal of or interest or distribution on, any debt
security, or reduce the principal amount of any debt security or the
rate or amount of interest, installment of interest or distribution on
any debt security or change the method of calculating the rate, 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
security of any series, whose consent is required for any supplemental
indenture, 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 specific covenants and waivers of
past defaults with respect to the debt securities of any series,
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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 be deemed to
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 TXU Australia or any
affiliate or anyone else required to make payment on the debt securities shall
be disregarded and considered not to be outstanding in determining whether the
required holders have given a request, demand, authorization, direction, notice,
waiver or consent under the indenture.
TXU Australia may fix in advance a record date to determine the holders
entitled to give any request, demand, authorization, direction, notice, consent,
election, waiver or other act of the holders, but TXU Australia will have no
obligation to do so. If a record date is fixed for that purpose, the request,
demand, authorization, direction, notice, consent, election, waiver or other act
of the holders may be given before or after the record date, but only the
holders of record at the close of business on that record date will be
considered to be holders for the purposes of determining whether holders of the
requisite percentage of the outstanding debt securities have authorized or
agreed or consented to that 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 security 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 or
TXU Australia taken in reliance on those requests or directions, whether or not
notation of that action is made upon the debt security. (Indenture, Section 104)
DEFEASANCE
TXU Australia will be discharged from its obligations under the indenture
and on the JUMPS or any other series of debt securities issued under the
indenture when it deposits with the trustee cash or government securities
sufficient to pay the principal, interest or distributions, any premium and any
other sums when due before the stated maturity date, if any, or a redemption
date for that series of debt securities, provided that TXU Australia will remain
obligated to make any additional deposits that may be necessary to pay those
amounts or will deliver to the trustee an opinion of counsel to the effect that
the discharge will not be a taxable disposition of the JUMPS under US tax laws.
(Indenture, Section 701)
RESIGNATION OF TRUSTEE
A trustee may resign at any time by giving written notice to TXU Australia
or may be removed at any time by act of the holders of a majority in principal
amount of all series of debt securities upon notice of that act having been
delivered to the trustee and TXU Australia. No resignation or removal of a
trustee and no appointment of a successor trustee will become 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 TXU Australia delivers to the
trustee a resolution of its general partner's Board of Directors appointing a
successor trustee and that successor has accepted that 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 JUMPS will be given by mail to the addresses of the
holders as they may appear in the security register. (Indenture, Section 106)
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TITLE
TXU Australia, the trustee, and any agent of TXU Australia or the trustee,
will treat the person or entity in whose name JUMPS are registered as the
absolute owner of those JUMPS (whether or not the JUMPS 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 and the JUMPS will be governed by, and construed in
accordance with, the law of the State of New York. (Indenture, Section 112)
REGARDING THE TRUSTEE
The trustee under the indenture is The Bank of New York. In addition to
acting as trustee, The Bank of New York also maintains various banking and trust
relationships with TXU Australia and some of its affiliates.
MATERIAL INCOME TAX CONSIDERATIONS
MATERIAL AUSTRALIAN INCOME TAX CONSIDERATIONS
The following summary describes material Australian income tax consequences
of the acquisition, ownership and disposition of the JUMPS and represents the
opinion of Baker & McKenzie, Melbourne, Australia, counsel to TXU Australia.
INTEREST WITHHOLDING TAX
Australia imposes a withholding tax of 10% on interest and amounts deemed
to be interest derived by and paid to a non-resident of Australia, unless the
interest or other amount is paid by a company that is a resident of Australia on
debentures that at the time of issuance satisfied the requirements of the public
offer test in section 128F of the Income Tax Assessment Act 1936 of Australia
(the Tax Act). For purposes of the Tax Act, the JUMPS are debentures.
The issue of a debenture, prima facie, satisfies the public offer test if
the issue of the debenture resulted from the debenture being offered for issue
as a result of being accepted for listing on a stock exchange outside Australia
where the company has previously entered into an agreement with a dealer,
manager or underwriter in relation to the placement of debentures, requiring the
company to seek such a listing. Additionally, the issue of a global bond to a
clearing house such as DTC and the offering of interests in the global bond may
also satisfy the public offer test.
For Australian tax purposes, TXU Australia is treated as a company. The
arrangements relating to the issue of the JUMPS are such that at the time of
their issue they satisfy the requirements of the public offer test, so that as
long as TXU Australia remains a tax resident of Australia, the interest paid on
the JUMPS will be exempt from Australian withholding tax (except if the holder
of the JUMPS is a known "associate" of TXU Australia at the time interest is
paid or there are reasonable grounds for suspecting that the holder is an
"associate").
A non-resident who is carrying on business in Australia and who holds the
JUMPS through a permanent establishment (as defined in the Tax Act) in Australia
will be taxable on any interest derived that has an Australian source. Tax is
assessed at the applicable rate (currently 36% for corporations) on that
interest after allowing for appropriate deductions. The fact that the issue of
the JUMPS satisfied the public offer test will not alter this outcome.
If TXU Australia should at any time be compelled by law to deduct or
withhold an amount in respect of any withholding taxes, it shall, subject to
certain exceptions, pay such additional amounts as may be necessary in order to
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ensure that the net amounts received by the holders of the JUMPS after deduction
or withholding will equal the respective amounts which would have been
receivable had no deduction or withholding been required. SEE DESCRIPTION OF THE
JUMPS - "ADDITIONAL AMOUNTS."
DISPOSAL OR REDEMPTION
A holder of the JUMPS, who is a non-resident of Australia and who during
the taxable year has not engaged in trade or business at or through a permanent
establishment in Australia, will not be subject to Australian income tax on
gains realized during that year on sale or redemption of the JUMPS, provided
such gains do not have an Australian source. A gain arising on the sale of JUMPS
by a non-Australian resident holder to another non-Australian resident where the
JUMPS are sold outside Australia and all negotiations are conducted, and
documentation executed, outside Australia would not be regarded as having an
Australian source.
OTHER TAX MATTERS
No JUMPS will be subject to death, estate or succession duties imposed by
Australia, or by any political subdivision or authority therein having power to
tax, if held at the time of death.
No ad valorem stamp, issue, registration or similar taxes are payable in
Australia on the issue of any JUMPS or the transfer of any JUMPS, except in
certain circumstances where the transfer occurs in Australia otherwise than for
full market value.
No goods and services tax is payable in respect of either the issue of the
JUMPS or the payment of the principal or any interest.
Repayments of the principal should be free of Australian tax.
MATERIAL US INCOME TAX CONSIDERATIONS
The following summary describes the material US federal income tax
consequences of the acquisition, ownership and disposition of the JUMPS and
represents the opinion of Thelen Reid & Priest LLP, counsel to TXU Australia.
Except where noted, this summary deals only with JUMPS held as capital assets
within the meaning of section 1221 of the US Internal Revenue Code of 1986, as
amended (the Code), and does not deal with special situations, such as those of
dealers in securities or currencies, financial institutions, tax-exempt
organizations, life insurance companies, individual retirement and tax-deferred
accounts, persons holding the JUMPS 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 purchase
the JUMPS other than pursuant to their initial issuance and distribution and at
their original issue price. Furthermore, the discussion below is based upon the
Code, existing and proposed Treasury regulations promulgated thereunder, and
applicable administrative rulings and judicial decisions now in effect, 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 herein, a "US holder" means a beneficial owner of a JUMPS that is
(i) an individual citizen or resident of the US, (ii) a corporation, partnership
or other entity created or organized in or under the laws of the US or any
political subdivision thereof, (iii) an estate the income of which is subject to
US federal income taxation regardless of its source or (iv) a trust if (a) a
court within the US is able to exercise primary supervision over the
administration of the trust and (b) one or more US persons have the authority to
control all substantial decisions of the trust.
Prospective holders of the JUMPS are advised to consult with their tax
advisors as to the US federal income tax consequences of the acquisition,
ownership and disposition of the JUMPS in light of their particular
circumstances, as well as the effect of any state, local or other tax laws.
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DISTRIBUTIONS
The JUMPS will be treated as debt for US federal income tax purposes.
Except as set forth below, distributions on the JUMPS will be taxable to a US
holder as ordinary income at the time they are paid or accrued in accordance
with the US holder's own method of accounting.
No amount included in the income of corporate US holders with respect to
the JUMPS will be eligible for the dividends-received deduction.
Based on the above discussion of the Australian withholding tax, it appears
that no Australian withholding tax will be imposed upon distributions made on
the JUMPS. Should withholding tax be imposed in the future or if a US holder can
credit foreign taxes paid from other sources, the amount of the credit will be
limited by the foreign tax credit limitation. In determining the amount of the
foreign tax credit limitation, income accrued on the JUMPS will 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.
ORIGINAL ISSUE DISCOUNT
The terms of the JUMPS permit TXU Australia to defer distributions on the
JUMPS at any time and from time to time for up to 20 consecutive quarters. TXU
Australia believes that the likelihood of a deferral of distributions on the
JUMPS is remote and that all distributions should therefore constitute payments
of "qualified stated interest" as defined in applicable US federal Treasury
regulations. Accordingly, the right to defer distributions on the JUMPS should
not cause the JUMPS to be treated as issued with an original issue discount
(OID).
If, however, TXU Australia exercises the option to defer distributions,
then, solely for purposes of determining the yield and maturity of the JUMPS,
the JUMPS will be treated as having been retired and reissued on the date the
option is exercised. In that case, the JUMPS will be treated as reissued with
OID at that time and all subsequent distributions on the JUMPS will be treated
as OID for as long as the JUMPS remain outstanding. As a result, all US holders
will be required to accrue interest income as OID even if they use the cash
method of accounting, and actual distributions will not be included in taxable
income. Consequently, a US holder will be required to include OID in income on
an economic accrual basis, notwithstanding the fact that TXU Australia does not
make any distributions on the JUMPS during a deferral period.
It should be noted that the Treasury regulations described above have not
yet been addressed in any rulings or other interpretations by the Internal
Revenue Service (IRS) and it is possible that the IRS could take a contrary
position. If the likelihood of a deferral of distributions on the JUMPS were not
treated as remote, then the JUMPS would be treated as issued with OID in an
amount equal to the sum of all distributions payable over the term of the JUMPS,
plus the excess, if any, of the principal amount of the JUMPS over their issue
price, and a US holder would be required to include the OID in income over the
term of the JUMPS on an economic accrual basis, regardless of the holder's
regular method of accounting for tax purposes. In that case, the amount and
timing of inclusion of the interest income that a US holder was required to
include in income in a particular taxable year could differ from the amount and
timing of inclusion of the distributions that the US holder received in that
year. US holders should consult their tax advisors regarding the tax
consequences to them, in light of their particular situations, of treating the
JUMPS as issued with OID.
SALE, EXCHANGE OR REDEMPTION OF THE JUMPS
Upon the sale, exchange, redemption or other taxable disposition of the
JUMPS, a US holder will recognize gain or loss equal to the difference between
(i) the amount of cash and the fair market value of any other property received
(excluding any accrued and unpaid distributions not previously included in
income) and (ii) the US holder's adjusted tax basis in the JUMPS. A US holder's
adjusted tax basis in the JUMPS generally will be its initial purchase price,
increased by OID previously included in the US holder's gross income, and
decreased by subsequent distributions received on the JUMPS. Such 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 JUMPS have been held for more than
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one year. Under current law, the deductibility of capital losses is subject to
limitations. The net capital gains of individuals generally are taxed at lower
rates than ordinary income, depending on the tax bracket of the individual.
Any gain or loss realized by a US holder on the sale, exchange or
redemption of the JUMPS 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 JUMPS will be reported to US
holders on IRS Form 1099, which should be mailed by January 31 following each
calendar year in which the income arises.
Payment of the proceeds from the disposition of the JUMPS 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 JUMPS may be
subject to a "backup withholding" tax of 31% if the US holder fails to comply
with certain identification requirements, 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 such US holder's US federal income tax liability, provided that
certain required information is furnished to the IRS.
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UNDERWRITING
Under the terms and subject to the conditions of the underwriting agreement
dated , 2000, each underwriter named below, for whom Salomon Smith Barney
Inc. and are acting as representatives, has severally agreed to purchase
from TXU Australia, and TXU Australia has agreed to sell to such underwriter,
the principal amount of JUMPS set forth opposite the name of such underwriter
below.
PRINCIPAL AMOUNT
NAME OF JUMPS
---- ----------------
Salomon Smith Barney Inc.....................
Total.................................... US$300,000,00
The underwriters are obligated to take and pay for all of the JUMPS offered
hereby if any JUMPS are purchased. In the event of default by any underwriter,
the underwriting agreement provides that if none of the non-defaulting
underwriters purchase (or procure others to purchase) the amount of JUMPS that
the defaulting underwriter had agreed to purchase, purchase commitments of the
non-defaulting underwriters may be increased or the underwriting agreement may
be terminated.
The underwriting agreement provides that TXU Australia will indemnify the
several underwriters against liabilities, including liabilities under the
Securities Act of 1933, as amended.
TXU Australia's expenses associated with the offer and sale of the JUMPS
are estimated to be US$2 million.
The underwriters propose to offer the JUMPS, in part, directly to the
public at the initial public offering price set forth on the cover page of this
prospectus, and to certain dealers at that price less a concession of % of the
principal amount of the JUMPS. The underwriters may allow, and such dealers may
reallow, a concession not to exceed % of the principal amount of the JUMPS.
After the JUMPS are released for sale to the public, the offering price and
other selling terms may from time to time be varied by the representatives of
the underwriters.
Application will be made to list the JUMPS on the New York Stock Exchange
(NYSE). If approved, trading of the JUMPS on the NYSE is expected to commence
within a 30-day period after the initial delivery of the JUMPS. Prior to this
offering, there has been no public market for the JUMPS. In order to meet one of
the requirements for listing the JUMPS on the NYSE, the underwriters will
undertake to sell lots of 100 or more JUMPS to a minimum of 400 beneficial
holders.
TXU Australia has agreed, during the period of 30 days from the date of the
underwriting agreement, not to sell, offer to sell, grant any option for the
sale of, or otherwise dispose of any JUMPS, any security convertible into or
exchangeable into or exercisable for JUMPS or any debt or equity securities
substantially similar to the JUMPS, without the prior written consent of the
representatives.
In order to facilitate the offering of the JUMPS, the underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price of
the JUMPS. Specifically, the underwriters may overallot in connection with the
offering, creating a short position in the JUMPS for their own account. In
addition, to cover overallotments or to stabilize the price of the JUMPS, the
underwriters may bid for, and purchase, the JUMPS in the open market. Finally,
the underwriting syndicate may reclaim selling concessions allowed to an
underwriter or a dealer for distributing the JUMPS to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the JUMPS above independent market
levels. The underwriters are not required to engage in these activities, and if
such activities are commenced, the underwriters may end any of these activities
at any time.
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Salomon Smith Barney, Inc. and its affiliates have in the past provided,
and may in the future provide, investment and/or commercial banking services to
TXU Australia and its affiliates in the ordinary course of business.
EXPERTS
The consolidated financial statements of TXU Australia Group as of December
31, 1999 and 1998 and for each of the three years in the period ended December
31, 1999 included in this prospectus have been audited by Deloitte Touche
Tohmatsu, independent auditors, as stated in their report appearing herein. Such
financial statements are included herein in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Gascor Holdings No. 2 Pty Ltd
(Gascor) as of June 30, 1998 and for the year then ended included in this
prospectus have been audited by Deloitte Touche Tohmatsu, independent auditors,
as stated in their report appearing herein (which report expresses a qualified
opinion and includes an explanatory paragraph relating to the July 1, 1997
valuation of the property, plant and equipment of Gascor). Such financial
statements are included herein in reliance upon the report of such firm 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 -- "MATERIAL AUSTRALIAN TAX
CONSIDERATIONS" have been reviewed by Baker & McKenzie, Melbourne, Australia,
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 -- "MATERIAL 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 JUMPS is being passed upon for TXU Australia by Worsham
Forsythe Wooldridge LLP, Dallas, Texas, by Thelen Reid & Priest LLP, New York,
New York and by Baker & McKenzie, Melbourne, Australia and for the underwriters
by Winthrop, Stimson, Putnam & Roberts, New York, New York. However, all matters
pertaining to the formation of TXU Australia and all other matters of Australian
and Victorian law relating to TXU Australia will be passed upon only by Baker &
McKenzie. At June 30, 2000, members of the firm of Worsham Forsythe
Wooldridge LLP owned approximately 47,000 shares of the common stock of TXU
Corp.
WHERE YOU CAN FIND MORE INFORMATION
TXU Australia will be required to file annual, quarterly and other reports
with the SEC under the Securities Exchange Act of 1934. 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.
Copies of the indenture will be available at the offices of the paying
agent for the JUMPS.
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PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses payable by TXU Australia in
connection with the issuance and distribution of the JUMPS, excluding
underwriting discounts and commissions. All costs are to be borne by the
registrant.
US$
----
Filing fee - Securities and Exchange Commission 79,200
Fees of Trustee 30,000*
Legal Fees 950,000*
Accountant's Fees 660,000*
Rating Agencies Fees 100,000*
Printing, including Registration, 100,000*
prospectuses, exhibits, etc
Miscellaneous 80,000*
-------------
Total US$2,000,000*
* =============
*Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under section 199A(1) of the Corporations Law of Victoria, a company and
its related bodies corporate are prohibited from exempting a person from a
liability to the company incurred as an officer of the company. However, under
section 199A(2), a company and its related body corporate will be permitted to
indemnify an officer of a company for a liability incurred, other than for legal
costs, except in circumstances where liability:
o is owed to the company or its related body corporate;
o is a pecuniary penalty ordered under the Corporations Law; or
o arises out of conduct which is not in good faith.
If a provision of a company's constitution seeks to indemnify the company's
officers in breach of the prohibition in section 199A of the Corporations Law,
that provision is void.. Under section 199A(3), a company will be allowed to
indemnify its officers against legal costs except in circumstances where:
o the proceedings relate to a liability which the company cannot
indemnify against and liability is established;
o the officer is found guilty in criminal proceedings;
o the Australian Securities and Investments Commission or a liquidator
brought the proceedings for a court order and the grounds for making
the order are established; or
o the officer undertakes the proceedings for relief under the
Corporations Law and relief is not granted.
Since indemnification depends on the final outcome of proceedings,
indemnification money should not be paid until the outcome is known. Under
section 212 of the Corporations Law of Victoria, the company is permitted to
give the officer a loan for legal costs. If the outcome means the officer was
not entitled to an indemnity, the officer must repay the loan.
<PAGE>
Under section 199B of the Corporations Law, a company and its related
bodies corporate are prohibited from paying a premium for a policy for a present
or former officer which insures such a person against a liability (other than
for legal costs) arising out of conduct involving a wilful breach of duty in
relation to the company, or breach of the duty to make proper use of position
and information.
Clause 35 of the constitution of Holdings provides as follows:
"35.1 The Company indemnifies every person who is or has been an
officer (as defined in section 241(4) of the Corporations Law)
of the Company or of a wholly-owned subsidiary of the Company
(the "Officer") against the following:
(a) any liability for costs and expenses incurred by the Officer
in his or her capacity as an officer of the Company or
of a wholly-owned subsidiary of the Company, in
defending any proceedings, whether civil or criminal,
in which judgment is given in the Officer's favour, or
in which the Officer is acquitted, or in connection
with an application in relation to any such proceedings
in which relief under the Law is granted to the Officer
by a Court; and
(b) any liability incurred by the Officer in his or her capacity
as an officer of the Company or of a wholly-owned
subsidiary of the Company, to a person other than the
Company or a Related Body Corporate, unless the
liability arises out of conduct by the Officer
involving a lack of good faith.
35.2 Insurance
Subject to the Corporations Law, the Company may pay premiums for an
insurance policy in favour of any Officer for any type of
liability."
Although section 241(4) of the Corporations Law, which contained a
definition of "officer" and which was referred to in clause 35 of the
constitution of Holdings, has been repealed, an equivalent definition appears in
section 9 of the Corporations Law and would be applicable in this context.
An insurance policy provides cover to a prudent limit for directors and
officers against liability they may incur in performing their duties, except
where conduct involves:
o willful breach of duty to the company, or
o improper use of company information or property, or
o improper use of their position as directors or officers of the
company.
Clause 169 of the constitution of TXU APL provides as follows:
"Every director, manager or officer of the Company or any person employed
by the Company as auditor shall be indemnified out of the property of the
Company against all liability incurred by him in his capacity as director,
manager, officer or auditor 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 law in which
relief is given to him by a Court."
ITEM 15. SALES OF UNREGISTERED SECURITIES.
TXU Australia was formed on January 27, 1999. On that date, AGP, its
general partner acquired an 0.5% ownership interest in TXU Australia in return
for its capital contribution of A$1. TXU Australia (LP) No. 1 Limited and TXU
Australia (LP) No. 2 Limited each acquired a 49.75% ownership interest in TXU
II-2
<PAGE>
Australia in return for a capital contribution of $A50 and an undertaking to
contribute A$462.5 million to TXU Australia as part of the completion of the
Westar and Kinetik Energy acquisition
As of June 30, 2000, Eastern Energy had US$350 million of senior notes
outstanding, comprising US$250 million of 6.75% senior notes due December 2006,
and US$100 million of 7.25% senior notes due December 2016. These notes were
issued by Eastern Energy in 1996 in the United States pursuant to Rule 144A
promulgated under the Securities Act of 1933, as amended.
In July 2000, TXU Australia made an offer to the holders of both tranches
of the Eastern Energy senior notes to exchange their senior notes for senior
notes issued by TXU Australia. A cash component of 1% of the principal amount
was payable on the senior notes due 2006 accepted for exchange, and 2% of the
principal amount on the senior notes due 2016 so accepted. Following completion
of the exchange offer in September 2000, new TXU Australia senior notes
outstanding are as follows:
o TXU Australia 6.75% senior notes due December 2006 - US$92.25 million;
and
o TXU Australia 7.25% senior notes due December 2016 - US$60.0 million.
Eastern Energy's senior notes outstanding on completion of the exchange
offer include:
o Eastern Energy 6.75% senior notes due December 2006 - US$157.75
million; and
o Eastern Energy 7.25% senior notes due December 2016 - US$40.0 million.
The US$60 million 7.25% senior notes and US$92.25 million 6.75% senior
notes of Eastern Energy exchanged in the exchange offer continue to be
outstanding and are held by TXU Australia Group.
The exchange offer was exempt from registration pursuant to Rule 144A
promulgated under the Securities Act of 1933, as amended. The TXU Australia
senior notes were issued under and are entitled to all of the rights and
benefits of, and subject to the limitations under, a new indenture dated as of
August 15, 2000 between TXU Australia and The Bank of New York. The TXU
Australia senior notes issued under the exchange offer rank equally with the
Senior Debt and would be senior to the JUMPS.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
PREVIOUSLY FILED
----------------
WITH FILE AS
EXHIBIT NUMBER EXHIBIT DESCRIPTION
--------- ------ ------- -------------
1 * Form of Underwriting Agreement.
3(a) * Limited Partnership Deed, dated January 27, 1999,
between TXU Australia Holdings (AGP) Pty Limited,
TXU Australia (LP) No.1 Limited and TXU Australia
(LP) No.2 Limited.
3(b) * Deed of Amendment to the Partnership Deed, dated
February 23, 1999, between TXU Australia Holdings
(AGP) Pty Limited, TXU Australia (LP) No.1 Limited
and TXU Australia (LP) No.2 Limited.
3(c) ** Second Deed of Amendment to the Partnership Deed,
dated May 16, 2000, between TXU Australia Holdings
(AGP) Pty Limited, TXU Australia (LP) No.1 Limited
and TXU Australia (LP) No.2 Limited.
3(d) ** Third Deed of Amendment to the Partnership Deed,
dated May 31, 2000, between TXU Australia Holdings
(AGP) Pty Limited, TXU Australia (LP) No.1 Limited
and TXU Australia (LP) No.2 Limited
4(a) * Form of Indenture between TXU Australia and
Trustee.
4(b) * Form of Officer's Certificate of TXU Australia,
establishing the terms of the JUMPS.
4(c) * Deed of Common Terms, dated February 24, 1999,
among TXU Australia, certain of its affiliates and
the Senior Lenders.
4(d) * Indenture, dated as of December 1, 1996, between
Eastern Energy and The Bank of New York as
Trustee.
4(e) Indenture (for Unsecured Debt Securities), dated
August 15, 2000, between TXU Australia and The
Bank of New York as Trustee.
4(f) Credit Wrapped MTN Deed Poll, dated September 11,
2000, by TXU Australia and TXU Holdings in favor
of MTN Holders.
4(g) Non-Credit Wrapped MTN Deed Poll, dated September
11, 2000, by TXU Australia and TXU Holdings in
favor of MTN Holders.
4(h) MTN Deed of Guarantee and Indemnity, dated
September 11, 2000, by TXU Australia and TXU
Holdings in favor of MTN Holders.
4(i) Credit Wrapped AUD Medium Term Notes Reimbursement
Agreement, dated September 11, 2000, between TXU
Australia, TXU Australia (Holdings) AGP, TXU (No.
8) Pty, TXU Australia Holdings and MBIA Insurance
Company.
4(j) Subordinated Facility Agreement, dated February
24, 1999, between TXU Australia, Eastern Energy
and Citibank, N.A.
II-4
<PAGE>
4(k) Amended and Restated Subordinated Facility
Agreement, dated June 30, 2000, between TXU
Australia, Citibank, N.A. and Citisecurities
Limited.
4(l) Amendment and Restatement Agreement relating to
Subordinated Facility Agreement, dated June 30,
2000, between TXU Australia, TXU Electricity, TXU
Corp., Citibank, B.A. Australia, Westpac Banking
Corporation and Citisecurities Limited.
4(m) Deed Poll, dated June 30, 2000, by TXU Australia
in favor of Financiers, Arranger and
Administrative Agent.
5(a) Opinion of Worsham Forsythe Wooldridge LLP.
5(b) Opinion of Thelen Reid & Priest LLP.
5(c) Opinion of Baker & McKenzie, Melbourne, Australia.
8(a) Tax opinion of Thelen Reid & Priest (included in
the opinion filed as Exhibit 5(b))
8(b) Tax opinion of Baker & McKenzie, Melbourne,
Australia (included in the opinion filed on
Exhibit 5(c)
10(a) ** Master Agreement, dated December 23, 1998, between
Gascor, Energy 21 Pty Ltd, Ikon Energy Pty Ltd,
Kinetik Energy Pty Ltd and Gas Release Co. Pty
Ltd.
10(b) ** Agency Agreement, dated August 14, 1998, between
Gascor and Kinetik Energy Pty Ltd.
10(c) ** Sub-Sales Agreement, dated August 14, 1998,
between Gascor and Kinetik Energy Pty Ltd.
10(d) Network Services Alliance Agreement, between TXU
Australia, Tenix, Eastern Energy, Westar, Akaman
Pty Ltd. and TXU Networks Pty Ltd.
12 Computation of ratio of earnings to fixed charges.
21 * TXU Australia Group companies.
23(a) Consent of Deloitte Touche Tohmatsu, independent
auditors.
23(b) Consents of Worsham Forsythe Wooldridge LLP,
Thelen Reid & Priest LLP and Baker & McKenzie
(included in the Opinions filed as Exhibits 5(a),
5(b), 5(c) and 8, hereto).
24 ** Powers of Attorney.
25 * Statement of Eligibility of Trustee.
27 Financial Data Schedule.
* Previously filed with the original Registration Statement (No. 333-36484)
on May 5, 2000.
** Previously filed with the Amendment No. 1 to the original Registration
Statement (No. 333-36484) on October 2, 2000.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS.
a. The undersigned registrant hereby undertakes:
(1) That, insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions
described under Item 14 above, or otherwise, the registrant has 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 registrant of expenses incurred or paid by a director officer or
controlling person of the registrant 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 registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(2) For purpose of determining liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it was
declared effective.
(3) That, for purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus 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.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 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 OCTOBER 27, 2000.
TXU AUSTRALIA HOLDINGS (PARTNERSHIP)
LIMITED PARTNERSHIP
BY: TXU AUSTRALIA HOLDINGS (AGP) PTY LTD,
ITS GENERAL PARTNER
BY /S/ ROBERT J. REGER, JR.
----------------------------------------
NAME: ROBERT J. REGER, JR.
TITLE: ATTORNEY-IN-FACT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
---------- ----- ----
STEVEN M. PHILLEY* PRINCIPAL EXECUTIVE OFFICER
-------------------------------- AND DIRECTOR
STEVEN M. PHILLEY
PAUL O'MALLEY* PRINCIPAL FINANCIAL OFFICER, OCTOBER 27, 2000
-------------------------------- PRINCIPAL ACCOUNTING
PAUL O'MALLEY OFFICER AND DIRECTOR
*BY: /S/ ROBERT J. REGER, JR. ATTORNEY-IN-FACT
--------------------------------
ROBERT J. REGER, JR.
II-7
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
FINANCIAL STATEMENTS
PAGE NO.
ANNUAL
Report of Independent Auditors......................................... F-3
Financial Statements:
Statements of Consolidated Operations for the years ended
December 31, 1999, 1998 and 1997................................... F-4
Consolidated Balance Sheets as of December 31, 1999 and 1998......... F-5
Statements of Consolidated Cash Flows for the years ended
December 31, 1999, 1998 and 1997................................... F-7
Statements of Consolidated Owners' Equity for the years ended
December 31, 1999, 1998 and 1997................................... F-9
Notes to Consolidated Financial Statements........................... F-10
INTERIM
Financial Statements:
Condensed Statements of Consolidated Operations for the six-month
periods ended June 30, 2000 and 1999............................... F-35
Condensed Consolidated Balance Sheet as of June 30, 2000 and 1999.... F-36
Condensed Statements of Consolidated Cash Flows for the six-month
periods ended June 30, 2000 and 1999............................... F-38
Condensed Statements of Consolidated Owners' Equity for the six-month
periods ended June 30, 2000 and 1999............................... F-40
Notes to Condensed Consolidated Financial Statements................. F-41
FINANCIAL STATEMENT SCHEDULES
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 of the notes thereto
F-1
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
FINANCIAL STATEMENTS
PAGE NO.
ANNUAL
Report of Independent Auditors......................................... F-52
Financial Statements:
Statement of Consolidated Operations for the year ended
June 30, 1998...................................................... F-53
Consolidated Balance Sheet as of June 30, 1998....................... F-54
Statement of Consolidated Cash Flows for the year ended June 30, 1998 F-56
Statement of Consolidated Shareholder's Equity for the year ended
June 30, 1998...................................................... F-57
Notes to Consolidated Financial Statements........................... F-58
INTERIM
Financial Statements:
Condensed Statements of Consolidated Operations for the six-month
periods ended December 31, 1998, and 1997.......................... F-72
Condensed Consolidated Balance Sheet as of December 31, 1998, and
June 30, 1998...................................................... F-73
Condensed Statements of Consolidated Cash Flows for the six-month
periods ended December 31, 1998 and 1997........................... F-75
Condensed Statements of Consolidated Shareholder's Equity for the
six-month periods ended December 31, 1998 and 1997................. F-76
Notes to Condensed Consolidated Financial Statements................. F-77
F-2
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
REPORT OF INDEPENDENT AUDITORS
To: TXU Australia Holdings (Partnership) Limited Partnership:
We have audited the accompanying consolidated balance sheets of TXU Australia
Holdings (Partnership) Limited Partnership as of December 31, 1999 and 1998, and
the related statements of consolidated operations, owners' equity and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of TXU Australia Holdings
(Partnership) Limited Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TXU Australia
Holdings (Partnership) Limited Partnership as of December 31, 1999 and 1998 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE TOUCHE TOHMATSU
Melbourne, Australia
April 28, 2000
F-3
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------- ---------- ----------
1999 1998 1997
---------- ---------- ----------
THOUSANDS OF AUSTRALIAN DOLLARS
<S> <C> <C> <C>
OPERATING REVENUES............................. $ 887,670 $ 646,777 $ 621,173
---------- ---------- ----------
OPERATING EXPENSES
Purchased energy and distribution costs...... 414,968 269,822 293,881
Operation and maintenance.................... 174,252 136,590 109,704
Depreciation and other amortization.......... 85,628 50,483 47,794
Goodwill amortization........................ 31,620 15,791 15,646
---------- ---------- ----------
Total operating expenses................... 706,468 472,686 467,025
OPERATING INCOME............................... 181,202 174,091 154,148
OTHER INCOME/(EXPENSE) - NET................... (2,789) 466 216
---------- ---------- ----------
INCOME BEFORE INTEREST AND INCOME TAXES........ 178,413 174,557 154,364
---------- ---------- ----------
INTEREST INCOME................................ 2,080 449 223
INTEREST EXPENSE............................... (206,151) (93,198) (97,460)
INCOME/(LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES.......................... (25,658) 81,808 57,127
INCOME TAX EXPENSE/(BENEFIT)................... (19,807) 35,627 31,051
---------- ---------- ----------
INCOME/(LOSS) FROM CONTINUING OPERATIONS....... (5,851) 46,181 26,076
INCOME/(LOSS) FROM DISCONTINUED OPERATIONS -
NET OF TAX (NOTE 4).......................... (8,540) (1,121) 1,149
---------- ---------- ----------
NET INCOME /(LOSS)............................. $ (14,391) $ 45,060 $ 27,225
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------ ------------
1999 1998
------------ ------------
THOUSANDS OF AUSTRALIAN DOLLARS
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Electricity network.................................... $ 1,620,391 $ 1,549,674
Gas network............................................ 987,050 -
Gas processing and storage facility 133,406 -
Computer equipment and software........................ 69,089 20,556
Vehicles and machinery................................. 14,014 10,599
Land 30,718 30,785
Other.................................................. 13,579 12,892
------------ ------------
Total................................................ 2,868,247 1,624,506
Less accumulated depreciation.......................... 229,535 146,650
------------ ------------
Net of accumulated depreciation...................... 2,638,712 1,477,856
Construction work in progress.......................... 58,328 73,936
------------ ------------
Net property, plant and equipment.................... 2,697,040 1,551,792
------------ ------------
INVESTMENTS
Goodwill (net of accumulated amortization:
1999 - $80,656 1998 - $49,036)...................... 1,297,102 581,996
Investments in unconsolidated affiliates............... 3,488 1,690
------------ ------------
Total investments.................................... 1,300,590 583,686
------------ ------------
CURRENT ASSETS
Cash and cash equivalents.............................. 70,505 1,252
Accounts receivable - net.............................. 240,182 141,601
Inventories - at average cost:
Materials and supplies............................... 8,405 6,980
Gas stored underground............................... 18,643 19,820
Net assets of discontinued operations (Note 4)......... 21,656 13,080
Other.................................................. 11,774 3,655
------------ ------------
Total current assets................................. 371,165 186,388
------------ ------------
OTHER NONCURRENT ASSETS
Unamortized debt issuance costs........................ 24,719 8,088
Energy risk management asset........................... 200,837 -
Other.................................................. 5,835 4,861
------------ ------------
Total other noncurrent assets........................ 231,391 12,949
------------ ------------
TOTAL ASSETS $ 4,600,186 $ 2,334,815
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
DECEMBER 31,
------------ ------------
1999 1998
------------ ------------
THOUSANDS OF AUSTRALIAN DOLLARS
CAPITALIZATION
Owners' equity............................ $ 947,607 $ 925,998
Long-term debt............................ 1,933,394 966,394
------------ ------------
Total capitalization.................... 2,881,001 1,892,392
------------ ------------
CURRENT LIABILITIES
Short-term debt........................... 1,280,484 201,461
Accounts payable.......................... 128,246 77,619
Payable to parent company................. 23,473 5,279
Interest accrued.......................... 57,261 26,288
Customer deposits......................... 14,983 15,889
Deferred income taxes .................... 27,321 23,281
Employee benefits......................... 14,861 9,615
Other..................................... 12,736 7,064
------------ ------------
Total current liabilities............... 1,559,365 366,496
------------ ------------
OTHER NONCURRENT LIABILITIES
Deferred income taxes..................... 92,864 41,882
Employee benefits......................... 9,065 10,530
Provision for loss on contracts........... 42,062 14,627
Other..................................... 15,829 8,888
------------ ------------
Total other noncurrent liabilities...... 159,820 75,927
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 15)
TOTAL CAPITALIZATION AND LIABILITIES........ $ 4,600,186 $ 2,334,815
============ ============
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------- ----------- -----------
1999 1998 1997
----------- ----------- -----------
THOUSANDS OF AUSTRALIAN DOLLARS
----------------------------------------
<S> <C> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
Income/(loss) from continuing operations......................... $ (5,851) $ 46,181 $ 26,076
Adjustments to reconcile income/(loss) from continuing
operations to cash provided by (used in) operating activities:
Depreciation and amortization.................................. 117,248 66,274 63,440
Amortization of debt issuance costs............................ 13,365 2,075 2,075
Deferred income taxes - net.................................... (19,807) 35,627 31,051
Loss on sale of property, plant and equipment.................. 1,997 2,148 134
Gain on sale of investments.................................... - (2,939) -
Loss on equity investments .................................... 803 76 -
Changes in operating assets and liabilities:
Accounts receivable............................................ 2,093 (33,465) 1,156
Inventories.................................................... 193 5,987 2,359
Accounts payable............................................... (9,479) 2,494 23,501
Interest accrued .............................................. 30,973 8,464 10,692
Other working capital - net.................................... 1,727 5,886 (7,373)
Payable to parent company...................................... 18,194 4,224 180
Energy risk management asset................................... (200,837) - -
Other - net.................................................... (14,730) (6,976) (4,259)
----------- ----------- -----------
Cash provided by (used in) operating activities from
continuing operations........................................ (64,111) 136,056 149,032
Cash used in operating activities from discontinued
operations................................................... (54,303) (4,475) (6,322)
----------- ----------- -----------
Cash flows provided by (used in) operating
activities................................................... (118,414) 131,581 142,710
----------- ----------- -----------
CASH FLOWS - FINANCING ACTIVITIES
Proceeds from borrowings ........................................ 1,866,500 76,295 -
Repayment of borrowings.......................................... (11,500) - (242,000)
Short-term borrowings - net...................................... 191,023 (51,065) 177,497
Capital contributions............................................ 36,000 - -
Debt issuance costs ............................................. (29,997) - -
----------- ----------- -----------
Cash provided by (used in) financing activities from
continuing operations.......................................... $ 2,052,026 $ 25,230 $ (64,503)
----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
STATEMENTS OF CONSOLIDATED CASH FLOWS (CONT'D)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------- ----------- -----------
1999 1998 1997
----------- ----------- -----------
THOUSANDS OF AUSTRALIAN DOLLARS
----------------------------------------
<S> <C> <C> <C>
CASH FLOWS - INVESTING ACTIVITIES
Purchase of business, net of cash acquired....................... $(1,603,543) $ (52,722) $ (7,680)
Investments in unconsolidated affiliates ........................ - (1,766) -
Other - net...................................................... (906) (389) (322)
Purchase of investments.......................................... - (31,741) -
Proceeds from sale of investments................................ - 34,680 -
Proceeds from sale of property, plant and equipment.............. 2,108 1,533 2,970
Capital expenditures............................................. (260,015) (103,537) (61,844)
----------- ----------- -----------
Cash used in investing activities from continuing
operations..................................................... (1,862,356) (153,942) (66,876)
Cash used in investing activities from discontinued
operations..................................................... (2,003) (4,035) (11,953)
----------- ----------- -----------
Cash used in investing activities.............................. (1,864,359) (157,977) (78,829)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................................ 69,253 (1,166) (622)
CASH AND CASH EQUIVALENTS - BEGINNING
BALANCE............................................................ 1,252 2,418 3,040
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - ENDING
BALANCE............................................................ $ 70,505 $ 1,252 $ 2,418
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAYMENTS - Interest (net of amounts capitalized) $ 159,739 $ 82,659 $ 84,693
NON-CASH INVESTING ACTIVITIES:
Fair value of assets acquired.................................... $ 1,077,477 $ 52,263 $ 2,355
Goodwill......................................................... 746,726 459 5,542
Liabilities assumed.............................................. (188,826) - (217)
Cash acquired.................................................... (31,834) - -
----------- ----------- -----------
Net cash used.................................................. $ 1,603,543 $ 52,722 $ 7,680
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
STATEMENTS OF CONSOLIDATED OWNERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------- ---------- ----------
1999 1998 1997
---------- ---------- ----------
THOUSANDS OF AUSTRALIAN DOLLARS
<S> <C> <C> <C>
PARTNERS' CAPITAL
Balance at beginning of year........... $ 848,000 $ 848,000 $ 848,000
Capital contributions.................. 36,000 - -
---------- ---------- ----------
Balance at end of year................. 884,000 848,000 848,000
---------- ---------- ----------
UNDISTRIBUTED EARNINGS
Balance at beginning of year........... 77,998 32,938 5,713
Net income (loss)...................... (14,391) 45,060 27,225
---------- ---------- ----------
Balance at end of year................. 63,607 77,998 32,938
---------- ---------- ----------
OWNERS' EQUITY........................... $ 947,607 $ 925,998 $ 880,938
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-9
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
In January 1999, Texas Utilities Company, doing business as TXU Corp.,
through a series of subsidiaries created TXU Australia Holdings
(Partnership) Limited Partnership (TXU Australia) to hold, either directly
or indirectly, all of its Australian investments. The partners and their
respective ownership interests in TXU Australia are TXU Australia Holdings
(AGP) Pty Ltd (0.5% general partner), TXU Australia (LP) No. 1 Limited
(49.75% limited partner), and TXU Australia (LP) No. 2 Limited (49.75%
limited partner). All such entities are ultimately controlled by TXU Corp.
Prior to January 1999, TXU Corp. principally conducted business in
Australia through TXU Australia Pty Ltd (formerly known as Texas Utilities
Australia Pty Ltd) and its wholly-owned subsidiaries. TXU Australia,
through a series of transactions, acquired all of TXU Corp.'s interests in
Australia. TXU Australia owns 100% of the share capital of TXU Australia
Holdings Pty Ltd which in turn owns 100% of the share capital of TXU
Australia Pty Ltd. TXU Australia and all of the holding companies and
operating companies directly or indirectly owned by TXU Australia are
collectively referred to as "TXU Australia Group". Companies in TXU
Australia Group other than TXU Australia are sometimes referred to
individually as a "Group company" and collectively as the "Group
companies". The consolidated financial statements of TXU Australia Group
presented herein give retroactive effect to the above transactions which
have been accounted for at historical cost in a manner similar to that in
pooling-of-interests accounting.
TXU Australia Group's principal operations are conducted through three
operating Group companies: TXU Electricity Limited, formerly Eastern Energy
Limited (Eastern Energy), TXU Networks (Gas) Pty Ltd, formerly Westar Pty
Ltd (Westar) and TXU Pty Ltd, formerly Kinetik Energy Pty Ltd (Kinetik
Energy). Through these companies, TXU Australia Group engages in the
purchase, distribution, trading and retailing of electricity and gas,
mainly in the State of Victoria, Australia. In addition, TXU Australia
Group's other operations are conducted through Western Underground Gas
Storage Pty Ltd (Western Underground Gas Storage) and Global Customer
Solutions Pty Ltd (Global Customer Solutions), which provide underground
gas storage and call center management.
TXU Australia Group is a limited partnership organized under the laws of
the State of Victoria, Australia. It is taxed as a separate entity under
Australian income tax law.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements of TXU Australia Group have been
prepared in conformity with accounting principles generally accepted in the
United States of America. All intercompany items and transactions have been
eliminated in consolidation. Investments in unconsolidated affiliates in
which TXU Australia Group has between a 20% and 50% interest are accounted
for by the equity method. All dollar amounts in the consolidated financial
statements and notes to the consolidated financial statements are stated in
thousands of Australian dollars unless otherwise indicated.
USE OF ESTIMATES
The preparation of the consolidated financial statements 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 periods. 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. No material adjustments were made to
previous estimates during the current year.
F-10
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
COMPREHENSIVE INCOME
Comprehensive income for TXU Australia Group is the same as net income
reported in the statements of consolidated operations.
REVENUE RECOGNITION
Sales revenue represents revenue earned (net of discounts and allowances)
from the sale of electricity, gas and related services. Revenue is
recognized when services are provided to customers on the basis of periodic
cycle meter readings and includes an estimated accrual for the value of
electricity and gas provided from the last meter reading date to the end of
the period.
Agency fee income, included in operating revenues, represents commissions
earned from GASCOR, a public authority created under the Gas Industry Act
1994 (as amended from time to time), for the sale of gas to customers by
TXU Australia Group as an agent on behalf of GASCOR. Agency fee revenues
are recognized when gas is delivered to customers and includes an estimated
accrual for gas consumed by customers between the last meter reading date
to the end of the period.
Distribution use of system revenue, included in operating revenues in the
Statement of Consolidated Operations, represents revenue earned for
distribution of gas and electricity on behalf of external retailers.
Distribution use of system revenues are recognized when gas or electricity
is delivered to the external retailers' customers and includes an estimated
accrual for gas or electricity consumed by customers between the last meter
reading date to the end of the period.
GAS SUPPLY
Approximately 95 percent of the natural gas shipped through Westar's
distribution network is supplied from the Esso Australia Resources Limited
(Esso) / BHP Petroleum (Bass Strait) Pty Ltd gas fields in the Bass Strait
of Australia.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Expenditures incurred on
distribution assets are capitalized where the expenditure increases the
service potential of the assets. The cost of assets constructed includes
labor and materials, applicable overhead and interest on funds borrowed to
finance construction. Capitalized interest was $1.0 million, $1.0 million
and $0.9 million during 1999, 1998 and 1997, respectively.
Customer contributions for the construction of distribution system assets
are amortized to income over the life of the constructed asset. The
unamortized amount of these contributions is deducted from property, plant
and equipment.
Depreciation of plant and equipment generally is determined by the
straight-line method over the estimated useful life of the asset. The
weighted average useful lives of each class of asset are as follows:
Buildings........................................ 32 years
Distribution network (gas and electricity)....... 47 years
Computer equipment and software.................. 5 years
Motor vehicles and heavy machinery............... 6 years
Other............................................ 9 years
F-11
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
INVENTORIES
Materials and supplies and gas stored underground are stated at the lower
of cost or market value. Cost is based on weighted average costs.
GOODWILL
Goodwill represents the excess of the purchase consideration plus
acquisition costs over the estimated fair value of the assets acquired and
liabilities assumed for each business acquired. Goodwill is amortized by
systematic charges on a straight line basis against income over the period
in which the benefits are expected to arise, which is from periods of 20 to
40 years.
VALUATION OF LONG-LIVED ASSETS
TXU Australia Group evaluates the carrying value of goodwill and long-lived
assets to be held and used when events and circumstances warrant such a
review. The carrying value of goodwill and long-lived assets is considered
impaired when the projected undiscounted cash flows are less than the
carrying value. In that event, a loss will be recognized based on the
amount by which the carrying value exceeds the fair market value. Fair
market value is determined primarily by available market valuations or, if
applicable, discounted cash flows.
DERIVATIVE INSTRUMENTS
TXU Australia Group's participation in derivative transactions, except for
certain energy marketing activities, has been designated primarily for
hedging purposes and instruments are not held or issued for trading
purposes. Amounts paid or received under interest rate swap agreements are
accrued as interest rates change and are recognized over the life of the
agreements as adjustments to interest expense. The impact of changes in the
market value of the derivative instruments, or other contractual agreements
in connection with the wholesale purchases of energy, which serve as
hedges, are deferred until the related transaction is completed.
To qualify for hedge accounting, the following criteria must be met: the
item being hedged exposes the Group to price risk, it is probable that the
hedge will substantially offset this risk, and the transaction 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 anticipated transactions are deferred and
are recognized in income or as adjustments of carrying amounts when the
hedged transactions occurs. The cash flows relating to derivative financial
instruments are recorded in the same manner as the cash flows relating to
the items being hedged. 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 Operations for that period.
ENERGY MARKETING ACTIVITIES
TXU Australia Group enters into a variety of transactions, involving
physical commodity and derivative instruments. TXU Australia Group uses the
mark-to-market method of accounting for trading activities. (See Note 10).
F-12
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
INCOME TAXES
TXU Australia Group accounts for income taxes under the liability method.
Deferred income taxes represent liabilities to be paid or assets to be
received in the future, and reflect the expected future tax consequences of
the differences between the financial statement carrying amounts of assets
and liabilities and their respective tax bases. Future tax rate changes
would affect the deferred tax assets or liabilities in the period when the
tax rate change is enacted. Future tax benefits, such as carry-forward tax
losses, are recognized to the extent that realization of such benefits is
more likely than not.
CHANGES IN ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as extended, is effective
for TXU Australia Group beginning January 1, 2001. SFAS No. 133 establishes
accounting and reporting standards for derivative financial 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. The TXU Australia Group is
currently evaluating the impact the adoption of the Standard will have on
its statement of financial position and results of operations.
CONSOLIDATED CASH FLOWS
For the purposes of reporting cash and cash equivalents, temporary cash
investments purchased with a remaining maturity of three months or less are
considered to be cash equivalents.
F-13
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS
On February 24, 1999, TXU Australia Group acquired from Gascor Holdings No.
2 Pty Ltd, a controlled entity of the Government of Victoria, the gas
retail business of Kinetik Energy, the gas distribution operations of
Westar and the assets of Westar (Assets) Pty Ltd. The purchase price was
$1.6 billion, which has been financed principally through bank borrowings
by TXU Australia Group. The acquisition was accounted for as a purchase
business combination. The excess of the purchase consideration plus
acquisition costs over the fair value of tangible and identifiable
intangible assets acquired and liabilities assumed resulted in goodwill of
$747 million, which is being amortized over 40 years. The cost of the
acquisition was allocated to the assets acquired and liabilities assumed,
based on their fair values, as follows:
THOUSANDS OF
AUSTRALIAN DOLLARS
Current assets........................... $ 75,682
Property, plant and equipment............ 976,073
Goodwill................................. 746,726
Other non-current assets................. 6,619
Deferred tax asset....................... 19,103
Current liabilities...................... (46,206)
Deferred tax liability................... (99,367)
Non-current liabilities.................. (43,253)
-----------
1,635,377
Less: Cash acquired...................... 31,834
-----------
$1,603,543
===========
In connection with the acquisition of Westar and Kinetik Energy, TXU
Australia Group developed a plan to terminate 90 employees of the acquired
entities and recorded a liability for employee termination costs of $4.6
million. At December 31, 1999, 45 employees had been terminated at a cost
of $2 million. The remaining employee termination costs of approximately
$2.6 million are expected to be paid by June 30, 2000.
Unaudited consolidated pro forma income (loss) for the years ended December
31, 1999 and 1998, assuming the acquisition of Westar and Kinetik Energy
had occurred at the beginning of the respective periods, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------- ----------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
-------------------------- ----------------------------
THOUSANDS OF AUSTRALIAN THOUSANDS OF AUSTRALIAN
DOLLARS DOLLARS
<S> <C> <C> <C> <C>
Revenues................... $ 887,670 $ 907,627 $ 646,777 $ 921,629
Operating income........... 181,202 173,501 174,091 221,475
Income (loss) from
continuing operations.... (5,851) (21,811) 46,181 4,476
</TABLE>
F-14
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (CONT'D)
The above pro forma results are not necessarily indicative of what the
actual results would have been had the acquisition occurred at the
beginning of these periods. Further, the pro forma results are not intended
to be a projection of the future results of the combined companies.
In November 1998, TXU Australia Group acquired Western Underground Gas
Storage Pty Ltd, an underground gas storage facility, for $53 million. This
acquisition was accounted for as a purchase business combination. The
excess of the purchase consideration plus acquisition costs over the fair
value of tangible and identifiable intangible assets acquired and
liabilities assumed resulted in goodwill of $0.5 million, which is being
amortized over 25 years. The cost of the acquisition was allocated to the
assets acquired and liabilities assumed based on their fair values as
follows:
THOUSANDS OF
AUSTRALIAN DOLLARS
Current assets.......................... $ 19,955
Property, plant and equipment........... 32,308
Goodwill................................ 459
---------
$ 52,722
=========
In December 1997, TXU Australia Group acquired certain assets and
liabilities of the Victorian Power Exchange's metering business for $7.7
million. This acquisition was accounted for as a purchase business
combination. The excess of the purchase consideration plus acquisition
costs over the fair value of tangible and identifiable intangible assets
acquired and liabilities assumed resulted in goodwill of $5.5 million,
which is being amortized over 20 years. The cost of the acquisition was
allocated to the assets acquired and liabilities assumed based on their
fair values as follows:
THOUSANDS OF
AUSTRALIAN DOLLARS
Current assets.......................... $ 2,355
Current liabilities..................... (217)
Goodwill................................ 5,542
---------
$ 7,680
=========
Consolidated pro forma income for the years ended December 31, 1998 and
1997, assuming the acquisitions discussed above had occurred at the
beginning of the periods, would not have differed significantly from the
reported results.
The results of the acquired operations have been included in the results of
operations of TXU Australia Group from their respective dates of
acquisition.
F-15
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. DISCONTINUED OPERATIONS
In July 1999, TXU Australia Group determined that it would sell Enetech,
its construction and maintenance subsidiary. In January 2000, the TXU
Australia Group completed the sale of certain assets and liabilities of
Enetech to Tenix Pty Ltd (Tenix), a major Australian technology contractor.
Under the terms of the Purchase Agreement, TXU Australia Group received
cash consideration of $48.6 million, subject to the finalization of any
post closing adjustments. TXU Australia Group entered into a ten year
contract with Tenix to perform engineering and maintenance services for the
Group's gas and electricity networks throughout Victoria.
The results of Enetech for periods through July 31, 1999 (with the
measurement date being August 1, 1999) have been reported separately as
discontinued operations in the Statement of Consolidated Operations. Net
losses of $5.8 million for Enetech from the measurement date to December
31, 1999 have been deferred and will be recognized upon realization of the
ultimate gain from the sale in the first quarter of 2000. The net gain on
the sale of discontinued operations is expected to be $10.7 million after
income taxes of $8.5 million. The Consolidated Financial Statements of TXU
Australia Group for 1998 and 1997 reflect Enetech as a discontinued
operation.
In May 1998, TXU Australia Group acquired certain assets of J W Lanham, an
electrical contracting business, for $0.9 million. In June 1997, TXU
Australia Group, via Enetech, acquired certain assets and liabilities of
Streamline, the former construction and maintenance division of Melbourne
Water Corporation, for $10.6 million and certain assets and liabilities of
a vegetation management company for $0.8 million. The assets and
liabilities of these acquired businesses were sold with Enetech and have
been included in the financial information for discontinued operations.
Components of amounts related to TXU Australia Group's discontinued
operations reflected in the Consolidated Financial Statements are presented
below:
INCOME STATEMENT INFORMATION:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1999 1998 1997
THOUSANDS OF AUSTRALIAN DOLLARS
<S> <C> <C> <C>
Operating revenues........................... $ 69,034 $ 56,293 $ 33,494
Income tax expense/(benefit)................. (3,978) 286 (1,175)
Income/(loss) from discontinued operations... (8,540) (1,121) 1,149
</TABLE>
F-16
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. DISCONTINUED OPERATIONS (CONT'D)
NET ASSETS OF DISCONTINUED OPERATIONS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1999 1998
THOUSANDS OF AUSTRALIAN DOLLARS
<S> <C> <C>
Property, plant and equipment.................. $ 16,113 $ 11,299
Goodwill....................................... 4,655 5,274
Employee benefits.............................. (4,924) (3,493)
--------- ---------
15,844 13,080
Deferred loss for the period from August 1, 1999
to December 31, 1999........................... 5,812 -
--------- ---------
Net assets of discontinued operations.......... $ 21,656 $ 13,080
========= =========
</TABLE>
5. RELATED PARTY TRANSACTIONS
TXU Australia Group engages TXU Corp. to provide, or procure from other
affiliated companies services such as management, technical, financial,
regulatory, engineering, information technology and other services as may
be agreed from time to time. TXU Australia Group reimburses TXU Corp. all
costs and expenses incurred.
At December 31, 1999 and 1998, TXU Australia Group owed to TXU Corp. and
affiliates $23.5 million and $5.3 million, respectively. Charges for the
years ended December 31, 1999, 1998, and 1997 were $18.9 million, $5.5
million, and $2.8 million, respectively.
6. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1999 1998
--------------- ---------------
THOUSANDS OF AUSTRALIAN DOLLARS
<S> <C> <C>
Unbilled revenue............................... $ 171,249 $ 101,922
Customer accounts receivable................... 46,344 28,569
Other accounts receivable...................... 24,569 12,346
--------- ---------
242,162 142,837
Less: Allowances for uncollectable accounts.... (1,980) (1,236)
--------- ---------
$ 240,182 $ 141,601
--------- ---------
</TABLE>
A provision for uncollectable accounts of $2.3 million and $1.5 million was
recorded during the years ended December 31, 1999 and 1998, respectively.
TXU Australia Group did not realize any material recoveries during these
periods. TXU Australia Group wrote-off accounts receivable of $1.6 million
and $1.7 million recorded during the years ended December 31, 1999 and
1998, respectively.
F-17
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SHORT-TERM DEBT
Short-term debt at December 31, 1999 and 1998 is summarized as follows:
DECEMBER 31
----------------------------
1999 1998
------------ ---------------
THOUSANDS OF AUSTRALIAN DOLLARS
Lines of credit............................. $ 72,000 $ 4,000
Syndicated Acquisition Facilities
Tranche A................................. 275,000 -
Subordinated Acquisition Facility......... 413,000 -
Syndicaed Loan Facility..................... 200,000 -
Commercial Paper ........................... 320,484 197,461
----------- -----------
Total short-term debt ...................... $ 1,280,484 $ 201,461
=========== ===========
LINES OF CREDIT
At December 31, 1999, Eastern Energy had three working capital facilities
totaling $100 million. For drawings under the facilities, the interest rate
is set at a given margin over the bank bill rate (a generally accepted
floating rate benchmark used in Australia). At December 31, 1999 and 1998,
Eastern Energy had $72 million and $4 million, respectively, outstanding
under these facilities. Interest and principal are due on maturity. At
December 31, 1999 and 1998, the weighted average interest rates on
outstanding lines of credit were 5.55% and 4.98%, respectively. The working
capital facilities expired on February 24, 2000, and were renegotiated.
Refer to Restructuring of Debts below.
SYNDICATED ACQUISITION FACILITIES AGREEMENT
In February 1999, TXU Australia Group obtained a $1.1 billion acquisition
facility (Syndicated Acquisition Facilities Agreement) with a group of
banking institutions and a $413 million subordinated acquisition facility
(Subordinated Acquisition Facility Agreement) with a banking institution.
Borrowings under these facilities provided financing to acquire the assets
and liabilities of Westar and Kinetik Energy.
The Syndicated Acquisition Facilities Agreement is composed of a $275
million term facility due February 24, 2000 (Tranche A); a $220 million
revolving cash facility due February 24, 2002 (Tranche B) (classified as
long term debt); and a $605 million term facility due February 24, 2002
(Tranche C) (classified as long term debt). At December 31, 1999, $275
million, $220 million and $605 million were outstanding under Tranches A, B
and C, respectively. At December 31, 1999, the weighted average interest
rates on Tranches A, B and C were 6.075%, 6.275% and 6.275%, respectively.
At February 24, 2000, the Syndicated Acquisition Facilities Agreement was
renegotiated. Refer to Restructuring of Debts below.
At December 31, 1999, $413 million was outstanding under the Subordinated
Acquisition Facility Agreement. At December 31, 1999, the interest rate was
7.035%. The facility is due June 30, 2000.
F-18
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SHORT-TERM DEBT (CONT'D)
SYNDICATED LOAN FACILITY
In April 1999, TXU Australia Group obtained a syndicated loan facility for
the amount of $200 million with a banking institution. The interest rate on
any advance under this facility is set at a margin over the bank bill rate.
At December 31, 1999, the interest rate was 6.775%. The facility is due
June 30, 2000. At February 24, 2000, the Syndicated Loan Facility was
renegotiated. Refer to Restructuring of Debts below.
COMMERCIAL PAPER PROGRAM
At December 31, 1999 and 1998, Eastern Energy had total face values of $325
million and $200 million, respectively, outstanding under an Australian
dollar denominated commercial paper program. The program allows for up to
$500 million of commercial paper to be issued for general corporate
purposes; however, borrowings under the program are restricted to the
unused amount of the Australian dollar denominated commercial paper
liquidity support facilities discussed below and qualifying unused debt
facilities. The interest rate on issued commercial paper is set at a
negotiated margin over the bank bill rate for the applicable term of the
commercial paper. At December 31, 1999 and 1998, the weighted average
interest rates on outstanding commercial paper were 5.58% and 5.06%,
respectively. Principal and interest are due on maturity.
In addition, at December 31, 1999 and 1998, TXU Australia Group had
Australian dollar denominated commercial paper liquidity support facilities
totaling $395 million and $200 million, respectively. The facilities allow
for funds to be drawn in the event of a disruption to the market for
commercial paper. A line fee is payable quarterly on the liquidity support
facilities at an annual rate of 0.171% and 0.075% for 1999 and 1998,
respectively. There were no amounts outstanding under this facility at
December 31, 1999 and 1998.
LETTERS OF CREDIT
Several of the TXU Australia Group companies are required to provide
letters of credit in connection with their electricity and gas purchasing
and construction activities. Such letters of credit in effect at December
31, 1999 and 1998 totaled $49.8 million and $48.8 million, respectively. At
December 31, 1999 and 1998, no amounts had been drawn under these letters
of credit.
RESTRUCTURING OF DEBTS
On February 24, 2000 the TXU Australia Group restructured its senior bank
debt. All bank debt previously borrowed by Eastern Energy was repaid and
replaced with bank debt borrowed by TXU Australia and the maturity dates of
certain TXU Australia debt were extended. The terms of all bank debt
previously borrowed by TXU Australia were renegotiated, so that all bank
debt, aggregating approximately $2 billion, now ranks equally as senior
corporate debt of TXU Australia.
F-19
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SHORT-TERM DEBT (CONT'D)
The following table summarizes the changes to the bank debt:
<TABLE>
<CAPTION>
PRINCIPAL INTEREST RATE
OLD FACILITY NEW A$ AFTER RESTRUCTURE
(REFER NOTES 7 & 8) FACILITY MILLION % PER ANNUM NEW MATURITY DATE
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Syndicated Acquisition Facility
(Tranches B & C) Facility A $ 825 6.88 February 24, 2002
Eastern Energy Syndicated
Facility Facility B 625 6.43 October 31, 2001
Working Capital Facilities Facility C 100 6.36 February 23, 2001
Syndicated Loan Facility Facility D 200 6.78 June 30,, 2000
Syndicated Acquisition Facility
(Tranche A) Facility E 275 6.29 December 29, 2000
------
Total $2,025
======
</TABLE>
All debt ranks equally (other than specifically subordinated debt) and is
governed by common terms set forth under a separate Deed of Common Terms
dated February 24, 1999 as amended on February 22, 2000 ("DCT"). The key
representations, warranties, covenants, undertakings, events of default and
related provisions in respect of the facilities with each Senior Lender are
contained in the DCT.
Under the DCT, there are no restrictions on TXU Australia raising further
debt from alternative sources and independent of the terms of the DCT,
provided that certain financial ratio tests are met. Operating companies
within TXU Australia Group are restricted under the terms of the DCT from
raising further debt, except for transactional banking purposes.
The DCT precludes TXU Australia Group from making any distributions to TXU
Corp. before January 1, 2001. Thereafter it is permitted to make such
distributions only if it is in compliance with more stringent financial
ratio tests. Similar restrictions apply to repayment of principal on
subordinated debt.
In March 2000, TXU Australia Group established a $750 million combined
short-term/medium-term note program to replace the commercial paper program
previously issued by Eastern Energy. These notes are unsecured obligations
of TXU Australia and rank equally with all other senior debt of TXU
Australia. It is a requirement of the DCT that all commercial paper issued
by Eastern Energy be repaid by May 24, 2000.
F-20
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT
Long-term debt as of December 31, 1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998
---- ----
THOUSANDS OF AUSTRALIAN
DOLLARS
<S> <C> <C>
Senior notes:
Eastern Energy maturing 2006 (US $250 million)........... $ 359,937 $ 359,937
Eastern Energy maturing 2016 (US $100 million)........... 123,457 123,457
Syndicated Acquisition Facilities
Tranche B................................................ 220,000 -
Tranche C................................................ 605,000 -
Eastern Energy Syndicated Facility Agreement .............. 625,000 483,000
---------- ----------
Total long-term debt .................................... $1,933,394 $ 966,394
========== ==========
</TABLE>
SENIOR NOTES
In December 1996, Eastern Energy issued US $250 million aggregate principal
amount of 6.75% fixed rate senior notes due December 2006 and US $100
million aggregate principal amount of 7.25% fixed rate senior notes due
December 2016. Interest is payable semi-annually.
At the time the senior notes were issued, Eastern Energy entered into a
number of interest rate and cross-currency swaps. The swaps converted
Eastern Energy's fixed rate US dollar obligations into floating rate
Australian dollar obligations. At the time the cross-currency swaps were
executed, the Australian dollar proceeds from the ten and twenty-year
cross-currency swaps were $309 million and $124 million, respectively. In
December 1998, Eastern Energy negotiated with two of the cross-currency
swap counterparties to modify the terms of the swaps and received
approximately $51 million in cash. The $51 million gain was deferred and is
reported with the carrying value of the related debt in the consolidated
balance sheets.
The functional currency is Australian dollar, and the senior notes are
remeasured at each balance date at the applicable exchange rates,
prevailing at balance date. Any gain or loss arising from an exchange rate
movement on the senior notes is matched by an equivalent amount of loss or
gain arising from the applicable exchange rate movement on the
cross-currency swaps. The cross-currency swaps are designated as hedges.
The carrying value of the cross-currency swaps is reported with the
carrying value of the related debt in the consolidated balance sheets. The
carrying value of the cross-currency swaps was $50.1 million at December
31, 1999.
SYNDICATED ACQUISITION FACILITIES AGREEMENT
Refer to Short Term Debt above for information in respect of the long-term
tranches of the Syndicated Acquisition Facilities Agreement. At February
24, 2000, the Syndicated Acquisition Facilities Agreement was renegotiated.
Refer to Note 7.
F-21
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT (CONT'D)
EASTERN ENERGY SYNDICATED FACILITY AGREEMENT
In October 1996, Eastern Energy entered into an Australian dollar
denominated revolving credit facility for general corporate purposes. The
facility agreement provides for borrowings aggregating $625 million at any
one time and expires October 31, 2001. The interest rate on any advance
under this agreement is set at a given margin over the bank bill rate. The
weighted average interest rates at December 31, 1999 and 1998 were 5.53%
and 5.42%, respectively. At February 24, 2000, the Syndicated Facility
Agreement was renegotiated. Refer to Note 7.
9. INCOME TAXES
The components of TXU Australia Group's provisions for income taxes are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---- ---- ----
THOUSANDS OF AUSTRALIAN DOLLARS
<S> <C> <C> <C>
Current......................................... $ - $ - $ 9
Deferred........................................ (19,807) 35,627 31,042
--------- --------- ---------
Total........................................... $ (19,807) $ 35,627 $ 31,051
========= ========= =========
</TABLE>
Reconciliation of income taxes computed at the federal statutory rate to
provision for income taxes:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---- ---- ----
THOUSANDS OF AUSTRALIAN DOLLARS
<S> <C> <C> <C>
Income (loss) from continuing operations
before income taxes............................. $ (25,658) $ 81,808 $ 57,127
========= ========= =========
Income taxes at the Australian Federal Statutory
Rate of 36%..................................... $ (9,237) $ 29,451 $ 20,566
Non-deductible franchise fee.................... - 1,654 6,306
Non-deductible amortization of goodwill 9,147 2,270 2,168
Non-deductible acquisition costs................ 706 1,804 -
Change in tax rates............................. (22,176) - -
Other........................................... 1,753 448 2,011
--------- --------- ---------
Provision for income taxes/(tax benefit)........ $ (19,807) $ 35,627 $ 31,051
========= ========= =========
Effective Tax Rate.............................. (77.20%) 43.55% 54.35%
========= ========= =========
</TABLE>
On December 10, 1999, legislation was enacted that decreases the company
tax rate from 36% to 34% for the year ending December 31, 2000 and to 30%
for the year ending December 31, 2001 and thereafter. Accordingly, TXU
Australia Group's deferred tax assets and liabilities at December 31, 1999
reflect the new tax rates.
F-22
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (CONT'D)
Deferred income taxes are provided for significant temporary differences
between the book and tax bases of assets and liabilities based on tax laws
in effect at the balance sheet dates and are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1999 1998
---------------------------- ----------------------------
NON NON
TOTAL CURRENT CURRENT TOTAL CURRENT CURRENT
-------- -------- -------- -------- -------- --------
THOUSANDS OF AUSTRALIAN THOUSANDS OF AUSTRALIAN
DOLLARS DOLLARS
<S> <C> <C> <C> <C> <C> <C>
Deferred tax assets
Employee benefits................... $ 9,445 $ 6,726 $ 2,719 $ 8,089 $ 3,866 $ 4,223
Net operating loss carryforwards.... 155,595 - 155,595 113,566 - 113,566
Provision for loss on contracts..... 12,618 - 12,618 6,066 - 6,066
Provision for land remediation...... 3,624 - 3,624 - - -
Other............................... 4,626 - 4,626 3,789 708 3,081
-------- -------- -------- -------- -------- --------
Total deferred tax assets............. 185,908 6,726 179,182 131,510 4,574 126,936
-------- -------- -------- -------- -------- --------
Deferred tax liabilities
Bases difference in fixed assets.... 265,852 - 265,852 166,300 - 166,300
Unbilled revenue.................... 34,047 34,047 - 27,855 27,855 -
Other............................... 6,194 - 6,194 2,518 - 2,518
-------- -------- -------- -------- -------- --------
Total deferred tax liabilities...... 306,093 34,047 272,046 196,673 27,855 168,818
-------- -------- -------- -------- -------- --------
Net deferred tax liabilities........ $120,185 $ 27,321 $ 92,864 $ 65,163 $ 23,281 $ 41,882
======== ======== ======== ======== ======== ========
</TABLE>
At December 31, 1999, TXU Australia Group had $519 million (1998: $315
million) of tax loss carryforwards that can be used to offset future
taxable income. Such tax loss carryforwards do not have expiration dates.
No valuation allowance has been recorded for the tax loss carryforwards as
TXU Australia Group projects future taxable income.
10. DERIVATIVE INSTRUMENTS
TXU Australia Group enters into derivative instruments, including options,
swaps, futures and other contractual commitments for both trading and
non-trading purposes. TXU Australia Group enters into derivative
instruments for non-trading purposes in order to manage market risks
related to changes in interest rates, foreign currency exchange rates and
commodity prices. Gains and losses on non-trading derivative instruments
effective as hedges are deferred and recorded as a component of the
underlying transactions when settled. TXU Australia Group also enters into
derivative instruments and other contractual commitments for trading
purposes. Contracts entered into for trading purposes are recorded on a
mark-to-market basis with gains and losses recognized in earnings in the
period in which such valuation changes occur.
F-23
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. DERIVATIVE INSTRUMENTS (CONT'D)
NON-TRADING
FOREIGN CURRENCY RISK MANAGEMENT
TXU Australia Group enters into currency swaps to manage foreign currency
exposures with the US dollar.
At December 31, 1999, Eastern Energy had cross-currency swaps for its US
dollar denominated debt. The notional amount outstanding on cross-currency
swaps was $483 million. These cross-currency swaps mature in December 2006
and December 2016 for $360 million and $123 million, respectively. The
maturity of these swaps coincides with the maturity of the US dollar
denominated debt.
INTEREST RATE RISK MANAGEMENT
TXU Australia Group enters into interest rate swaps to manage exposures to
market risks related to interest rate changes.
At December 31, 1999, TXU Australia Group had interest rate swaps and
forward rate agreements outstanding, denominated in Australian dollars,
with an aggregate notional amount of $2.405 billion. Under these
agreements, TXU Australia Group pays a fixed rate on outstanding debt.
These agreements have remaining terms up to approximately 6 years. In
addition, at December 31, 1999, TXU Australia Group had swaps and forward
rate agreements with a constant notional amount of $432 million
outstanding, denominated in Australian dollars, for the purpose of
eliminating basis risk related to differences between swap settlement and
interest payment dates.
At December 31, 1999 TXU Australia Group had interest rate swaps
outstanding, denominated in US dollars, with an aggregate notional amount
of US$350 million. Under these agreements, TXU Australia Group receives a
fixed rate on outstanding debt. These agreements have remaining terms up to
17 years.
The US dollar denominated interest rate and cross currency swaps
effectively translated the fixed rate US dollar obligations arising from
the issue of senior notes in December 1996 to floating rate Australian
dollar obligations. Taking into account these swaps, the effective weighted
average interest rates at December 31, 1999 and 1998 on the senior notes
due 2006, were 6.12% and 5.20%, respectively, and on the senior notes due
2016, were 6.37% and 5.45%, respectively.
The maturity and payment dates of the interest rate swaps coincide with
those of the underlying debts.
ENERGY PRICE RISK MANAGEMENT
Electricity prices are established through a power pool, which is
controlled by a statutory, independent corporation. Substantially all power
must be sold into and purchased from the pool. In order to manage the
exposure to fluctuations in electricity pool prices, TXU Australia Group
enters into both short- and long-term derivative instruments whereby the
pool price is fixed for an agreed-upon quantity and duration by reference
to an agreed-upon strike price.
TXU Australia Group has entered into wholesale market contracts to cover
most of its forecasted franchise load through the end of 2000. At December
31, 1999, these contracts cover a notional volume of approximately 3.5
million MWh. The Group has also entered into wholesale market contracts to
cover a portion of its contestable load for the period from January 2000
through December 2001. At December 31, 1999, these contracts covered a
notional load of approximately 0.8 million MWh.
F-24
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. DERIVATIVE INSTRUMENTS (CONT'D)
TRADING
The trading activities at TXU Australia Group commenced in May 1999, when
TXU Australia Group entered into a twenty year option agreement with AES
Ecogen which owns 966MW of gas-fired generation facilities that are
typically used during peak periods of demand for electricity in Victoria.
The agreement provides TXU Australia Group with the ability to enter into
contracts with AES Ecogen, at TXU Australia's option, which would require
an exchange of cash for the difference between the amounts specified in the
contracts and the spot price of electricity. TXU Australia Group also has
an agreement to supply gas to AES Ecogen to run the facilities for twenty
years. TXU Australia Group made an initial option premium payment of $201
million and is required to make further future monthly payments over the
term of the agreement. The option is marked to market and had a fair value
of $201 million at December 31, 1999.
TXU Australia Group manages the market risk on a portfolio basis within
limitations imposed by the Board of Directors and in accordance with its
overall risk management policies. Market risks are monitored daily,
utilizing appropriate risk management methodologies, which value the
portfolio of contracts and hypothetical effect on this value from changes
in market conditions. TXU Australia Group uses techniques and methodologies
that simulate forward price curves in the energy market to estimate the
size and probability of changes in market value resulting from price
movements.
TXU Australia Group is subjected to a number of risks and costs associated
with the future contractual commitments, including price risk, credit risk
associated with counter-parties and market liquidity. TXU Australia Group
continuously monitors the valuation of identified risks and adjusts the
portfolio valuation based on present market conditions. To manage its
exposure to price risk, TXU Australia Group has established corporate
strategies, policies and limits, including the adoption of Value At Risk.
The Value At Risk governs the size of the maximum short or long exposure
that TXU Australia Group can adopt. It is measured at a 95% confidence
level. The exposures are monitored regularly against these benchmarks.
In 1999, TXU Australia Group began offering price risk management services
to customers through a variety of financial and other instruments,
including swaps, options, caps and swaptions. TXU Australia Group's sale
and purchase commitments for trading purposes amounting to 2.7 million MWh
and 3.1 million MWh, respectively, with terms extending up to 2002, are
included in the electricity portfolio as of December 31, 1999. The trading
derivatives are measured at fair value, and unrealized gains and losses
from changes in the fair value are included within Operating Revenues on a
net basis. The fair value of the contracts is recorded in other assets or
liabilities, as appropriate. The fair value of the contracts was $3.4
million at December 31, 1999, which was recorded in Other Assets. TXU
Australia Group recorded a net trading gain of $12 million in 1999. TXU
Australia Group had no trading activity in 1998.
CREDIT RISK
Credit risk relates to the risk of loss that TXU Australia Group would
incur as a result of non-performance by counterparties to its respective
derivative instruments. TXU Australia Group maintains credit policies with
regard to its counter-parties that management believes significantly
minimize overall credit risk. TXU Australia Group generally does not obtain
collateral to support the agreements but establishes credit limits and
monitors the financial viability of counterparties. TXU Australia Group
believes the risk of non-performance by counterparties is minimal.
F-25
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The estimated fair values of TXU Australia Group's significant financial
assets and liabilities at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1999 1998
---------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
THOUSANDS OF AUSTRALIAN DOLLARS
<S> <C> <C> <C> <C>
NON CURRENT FINANCIAL ASSETS AND (LIABILITIES):
Long-term debt................................. $(1,933,394) $(1,942,302) $(966,394) $(1,087,526)
OFF-BALANCE SHEET:
Domestic interest rate swaps .................. - 23,322 - (100,082)
Foreign interest rate swaps ................... - (24,544) - 42,271
Cross currency swaps .......................... - 46,308 - 86,274
Forward rate agreements ....................... - (326) - 2,128
</TABLE>
Long-term Debt and Other Off-balance Sheet Instruments
The fair value of long-term debt is based upon quoted market prices. Fair
values for off-balance sheet instruments (interest rate, currency swaps and
forward rate agreements) are based on prevailing interest and foreign
exchange rates, or the cost to terminate the agreement.
Other Financial Assets and Liabilities
The fair values of all other financial assets and liabilities approximate
their carrying values.
12. REGULATION AND RATES
Eastern Energy is subject to regulation by the Office of the Regulator
General (ORG). The ORG has the power to issue licenses for the supply,
distribution and sale of electricity within Victoria and regulates tariffs
for the use of the transmission system, distribution system, and other
ancillary services. The existing tariff under which Eastern Energy operates
is in effect until December 31, 2000.
Eastern Energy holds an exclusive franchise to sell electricity to retail
customers with electricity loads of less than 160 MWh/year within the same
geographic area of Victoria as its distribution license. The maximum prices
to be charged to these franchise customers have been determined by the ORG.
Retail prices for non-franchise customers are not regulated. Eastern
Energy's franchise is in effect until January 1, 2001, when all customers
may purchase from retailers of their choice. While the TXU Australia Group
expects significant competition in the fully contestable retail
marketplace, it cannot predict the outcome of this process.
F-26
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12. REGULATION AND RATES (CONT'D)
Westar is also subject to regulation by the ORG. The ORG has the power to
issue licenses for the supply, distribution and sale of gas within Victoria
and regulates tariffs for the use of the transmission system, distribution
system, and other ancillary services. The existing tariff under which
Westar operates is in effect until December 31, 2002. The ORG will then
review the existing tariff to determine if it will be effective for the
period commencing January 1, 2003. All gas retail prices are scheduled to
be unregulated from September 2001. While the TXU Australia Group expects
significant competition in the fully contestable retail marketplace, it
cannot predict the outcome of this process.
13. PROVISION FOR LOSS ON CONTRACTS
The towns of Ararat, Stawell and Horsham, Victoria, Australia (Wimmera
towns) have been converted from tempered liquefied petroleum gas to natural
gas. The first natural gas was supplied to Ararat in May 1998, and all
three towns were fully converted by the end of 1998. To supply the Wimmera
towns, a new transmission pipeline was constructed. Kinetik Energy has a
transmission contract for use of that pipeline which requires it to pay a
defined amount per annum until 2013 and a supply obligation at regulated
prices through 2013. As part of the acquisition of Westar and Kinetik
Energy, TXU Australia Group assumed a provision for the net present value
of estimated losses on unfavorable long-term gas supply arrangements
totaling $27 million. The provision relates to commitments through the year
2013.
In connection with the purchase of Eastern Energy in 1995, TXU Australia
Group recorded a provision for certain unfavorable long-term electricity
purchase contracts that expire in 2013. During the years ended December 31,
1999, 1998 and 1997, $4.5 million, $6.3 million and $5.8 million,
respectively, of the provision was released to offset expenses recognized
on purchases under these contracts. These amounts were recorded within
"Purchased energy and distribution costs" in the Statements of Consolidated
Operations, and within "Operating Activities: Other - net: Changes in
operating assets and liabilities" in the Statements of Consolidated Cash
Flows.
14. EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLAN
TXU Australia Group sponsors a defined contribution pension plan covering
employees hired after March 31, 1995. Employees may elect to contribute any
percentage of their salary to the plan. In 1999, TXU Australia Group
contribution rates were set at 10% of employee salaries for employees
covered under industry agreements and 7 to 10% for other employees. For
1998 and 1997, the contribution rate was 10%. TXU Australia Group
contributions totaled $1.8 million, $1.2 million and $0.6 million, in 1999,
1998, and 1997, respectively.
TXU Australia Group sponsors three defined benefit pension plans covering
employees hired prior to March 31, 1995. The plan benefits are based on the
participants' contributions, number of years of service and final average
salaries. Employees may elect to contribute at rates up to 7.5% of their
salaries. TXU Australia Group's contributions range from 0% to 13.5% of
participants' salaries depending upon the funding ratio of the plan as
calculated in accordance with the plan's contribution rules. Based upon
these calculations for 1999, TXU Australia Group contributed to one of the
plans at a rate of 9% and was not required to contribute to the other two
plans.
F-27
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. EMPLOYEE BENEFIT PLANS (CONT'D)
DEFINED BENEFIT PLANS
As a result of the acquisitions of Streamline and Westar and Kinetik
Energy, certain employees were terminated causing settlement gains and
curtailment losses of $0.6 million and zero, respectively, for the year
ended December 31, 1999 and $0.1 million and $0.2 million, respectively for
the year ended December 31, 1998.
<TABLE>
<CAPTION>
DECEMBER 31,
------------ ------------
1999 1998
------------ ------------
THOUSANDS OF AUSTRALIAN
DOLLARS
<S> <C> <C>
Change in pension obligation:
Pension obligation at beginning of year........................... $ 107,246 $ 103,539
Obligations acquired on acquisition of Westar and Kinetik Energy.. 23,216 -
Service cost...................................................... 4,692 3,572
Interest cost..................................................... 6,379 6,037
Participant contributions......................................... 2,477 2,256
Transfers in...................................................... 900 -
Actuarial loss.................................................... 2,738 7,285
Benefits paid..................................................... (1,950) (720)
Tax on contributions.............................................. (191) (287)
Curtailments...................................................... 1,755 175
Settlements....................................................... (24,769) (14,611)
---------- ----------
Pension obligation at end of year................................. $ 122,493 $ 107,246
========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------ ------------
1999 1998
------------ ------------
THOUSANDS OF AUSTRALIAN
DOLLARS
<S> <C> <C>
Change in plan assets:
Fair value of assets at beginning of year......................... $ 106,567 $ 104,499
Assets acquired on acquisition of Westar and Kinetik Energy....... 27,108 -
Actual return on assets........................................... 14,591 14,448
Employer contributions............................................ 253 982
Participant contributions......................................... 2,477 2,256
Transfers in...................................................... 900 -
Benefits paid..................................................... (1,950) (720)
Tax on contributions.............................................. (191) (287)
Settlements....................................................... (24,769) (14,611)
---------- ----------
Fair value of assets at end of year............................... $ 124,986 $ 106,567
========== ==========
</TABLE>
F-28
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. EMPLOYEE BENEFIT PLANS (CONT'D)
Funded status:
-------------
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------- ---------------------------
THOUSANDS OF AUSTRALIAN THOUSANDS OF AUSTRALIAN
DOLLARS DOLLARS
-------------------------- ---------------------------
Plans where Plans where Plans where Plans where
Pension Assets Pension Assets
Obligation Exceed Obligation Exceed
Exceeds Pension Exceeds Pension
Assets Obligation Assets Obligation
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Pension obligation............... $ (93,867) $ (28,626) $ (107,246) $ -
Fair value of assets............. 91,666 33,320 106,567 -
--------- --------- ---------- ----------
Funded status.................... (2,201) 4,694 (679) -
Unrecognized net (gain)/loss..... (1,299) (787) (1,905) -
--------- --------- ---------- ----------
Accrued pension cost............. $ (3,500) $ 3,907 $ (2,584) $ -
========= ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Weighted average assumptions:
Discount rate..................................... 5.5% 5.0%
Expected return on plan assets.................... 7.0% 7.0%
Rate of compensation increase..................... 4.5% 4.0%
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
THOUSANDS OF AUSTRALIAN DOLLARS
<S> <C> <C> <C>
Components of net periodic pension cost:
Service cost................................ $ 4,692 $ 3,572 $ 3,619
Interest cost............................... 6,379 6,037 5,554
Expected return on plan assets.............. (9,246) (7,698) (6,575)
Recognized curtailment...................... - 175 -
Recognized settlements...................... (542) (112) -
--------- ---------- ----------
Net periodic pension cost................... $ 1,283 $ 1,974 $ 2,598
--------- ---------- ----------
</TABLE>
15. COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES
The capital expenditures of TXU Australia Group are estimated at $112.1
million for 2000. At December 31, 1999, TXU Australia Group had commitments
of $3.5 million related to these capital expenditures. Approximately 75% of
the estimated capital expenditure will be spent on the electricity and gas
networks, 23% on information technology, and 2% on plant and equipment.
F-29
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. COMMITMENTS AND CONTINGENCIES (CONT'D)
LEASES
TXU Australia Group has entered into operating leases for vehicles,
properties and office equipment. Certain of these leases contain renewal
and purchase options and residual value guarantees. Lease costs charged to
operating expense for the years ended December 31, 1999, 1998 and 1997 were
$6.4 million, $2.1 million and $1.6 million, respectively.
Future minimum lease commitments under operating leases that have initial
or remaining non-cancelable lease terms in excess of one year as of
December 31, 1999, were as follows:
YEAR THOUSANDS OF
---- AUSTRALIAN DOLLARS
2000............................................... $ 3,277
2001............................................... 2,710
2002............................................... 2,629
2003............................................... 2,643
2004............................................... 2,703
Thereafter......................................... 9,989
--------
Total future minimum lease payments................ $ 23,951
========
EMPLOYMENT AGREEMENTS
TXU Australia Group has entered into employment service agreements (ESAs)
with a number of employees. The ESAs set forth compensation and related
terms of their employment. Should TXU Australia Group terminate an ESA
prior to its expiration, other than for illness or acts of dishonesty, TXU
Australia Group would be required to pay the employee's compensation, as
defined in the ESA. As of December 31, 1999, TXU Australia Group would be
required to pay approximately $21.3 million in the event it terminates the
employees covered by all of the ESAs.
LEGAL PROCEEDINGS
LITIGATION
Actions, suits and claims are brought against TXU Australia and the Group
companies from time to time for damage to property and for personal
injuries sustained in the ordinary course of the business of TXU Australia.
All such actions, suits and claims are dealt with in the ordinary course of
business of TXU Australia or the appropriate Group company and are not
expected to have a material, adverse effect upon the financial condition,
results of operations or cash flows of TXU Australia Group.
F-30
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. COMMITMENTS AND CONTINGENCIES (CONT'D)
POTENTIAL SUCCESSOR LIABILITY
Pursuant to Allocation Statements made under the Electricity Industry Act
1993 (Vic.) and the Gas Industry Act 1994 (Vic.), Eastern Energy, Westar,
Kinetik Energy and Western Underground Gas Storage were allocated liability
for all claims arising in respect of certain causes of action accrued
against their predecessors as of September 29, 1994, in the case of Eastern
Energy, October 9, 1998 in the case of Western Underground Gas Storage, and
February 24, 1999 in the case of Westar and Kinetik Energy.
LONGFORD CLAIM
Esso's gas processing plant at Longford exploded in September 1998 causing
prolonged interruption of gas supplies in Victoria. Subsequently, a class
action was commenced in the Federal Court of Australia against Esso on
behalf of a large number of domestic and commercial consumers claiming
damages for loss of supply.
Esso has joined the Victorian Government and related entities to the
action, including those which sold and distributed Esso gas prior to these
businesses being acquired by private operators. Esso has also joined
private operators as well (Esso Cross-Claim), including Westar, Kinetik
Energy and Western Underground Gas Storage, claiming any such liability
passed to them as part of the sale of the businesses from the government.
As currently pleaded before the Federal Court of Australia, the claims
cover actions in negligence and in misleading and deceptive conduct.
On April 3, 2000, the State of Victoria and the state owned entities who
were vendors of the business and assets to Westar and Kinetik Energy served
a Cross-Claim (State Cross-Claim) on Westar and Kinetik Energy. The State
Cross-Claim seeks orders against Westar and Kinetik Energy that they are
liable for any liability of the state-owned vendors which may be found
against those entities in relation to the Esso Cross-Claim. To the extent
the State Cross-Claim raises issues which are already raised against Westar
and Kinetik Energy in the Esso Cross-Claim, it does not materially affect
the potential liability of Westar and Kinetik Energy in the litigation.
If Esso is found liable and is successful in its cross claims, the
potential liability of Westar, Kinetik Energy and Western Underground Gas
Storage could be significant.
Baker & McKenzie, Melbourne, Australia, counsel to TXU Australia Group, has
conducted a legal analysis of pleadings filed so far and the likely
defenses available. Based on their analysis, TXU Australia Group believes
that the claims against Westar, Kinetik Energy and Western Underground Gas
Storage (and the proposed State Cross-Claim) are without merit. However,
given the complexity and magnitude of the claims involved in this
litigation, TXU Australia Group cannot predict the ultimate outcome, and
its impact on the financial condition, results of operations or cash flows
of TXU Australia Group at this time. TXU Australia Group intends to
vigorously pursue all of its defenses in this litigation.
GAS TAKE-OR-PAY CONTRACTS
TXU Australia Group is party to various types of contracts for the purchase
of gas. These include "take-or-pay" obligations under which the buyer
agrees to pay for a minimum quantity of gas in a year. At December 31,
1999, TXU Australia Group had commitments under long-term gas purchase
contracts of an estimated $1 billion through 2009. On the basis of TXU
Australia Group's current expectations of demand from its customers as
compared with its take-or-pay obligations under such purchase contracts,
management does not consider it likely that any material payments will
become due from TXU Australia Group for gas not taken.
F-31
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. COMMITMENTS AND CONTINGENCIES (CONT'D)
LAND RECLAMATION
TXU Australia Group through the Westar and Kinetik Energy acquisition was
allocated certain properties that are contaminated. A provision of $12
million is recorded in the balance sheet for land reclamation in relation
to the contaminated properties. The provision is based on the estimate of
the land reclamation costs following limited site reviews and testing. The
cost of reclamation may increase if the extent of contamination is worse
than testing indicated at the time of the limited reviews. Under the
Environment Protection Act 1970, the Victorian Environment Protection
Authority has the power to order TXU Australia Group to incur such costs to
remedy the contamination of land.
GASCOR PUT OPTION
As a condition to the acquisition of Kinetik Energy, Kinetik Energy granted
to the State of Victoria an option which gives the State the right to put
to Kinetik Energy one third of the issued share capital of Gascor Pty Ltd
(GASCOR) at a price equal to one third of GASCOR's net assets at the time
of exercise. The option cannot be exercised until September 1, 2001, and is
expected to expire on or before December 31, 2002. The terms of the option
agreement are such that, by the time the option is exercisable, the value
of GASCOR's net assets are expected to be minimal.
GENERAL
In addition to the above, the TXU Australia Group is involved in various
legal and administrative proceedings and has other contingencies that, in
the opinion of management, the ultimate resolution should not have a
material effect upon its financial position, results of operations or cash
flows.
16. SEGMENT INFORMATION
The TXU Australia Group's reportable segments are strategic business units
that offer different products or services. They are managed separately
because each business requires different marketing strategies.
The TXU Australia Group has three main reportable operating segments:
(1) NETWORKS - operations engaged in the distribution of
electricity and gas in the State of Victoria
(2) RETAIL - operations engaged in the sale of electricity and
gas in the State of Victoria
(3) ENERGY TRADING - operations engaged in the purchase and trading of
electricity and gas primarily in the State of
Victoria
OTHER - non-segment operations primarily consist of
underground gas storage, call center management
and unallocated goodwill.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. TXU Australia Group
evaluates performance based on net income or loss. TXU Australia Group
accounts for inter-segment sales or transfers as if the sales or transfers
were to third parties, that is, at current market prices.
F-32
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SEGMENT INFORMATION (CONT'D)
Comparative segment information for 1998 and 1997 is not available for
Energy Trading because this activity was not carried out in these years.
<TABLE>
<CAPTION>
ENERGY DISCONTINUED
NETWORKS RETAIL TRADING OTHER OPERATIONS ELIMINATIONS CONSOLIDATED
--------- --------- --------- -------- ---------- ------------ ------------
THOUSANDS OF AUSTRALIAN DOLLARS
<S> <C> <C> <C> <C> <C> <C> <C>
Trade Revenues -
1999............................. $ 104,235 $ 757,145 $ 16,516 $ 9,774 $ - $ - $ 887,670
1998............................. 53,235 585,713 - 7,829 - - 646,777
1997............................. 40,587 580,586 - - - - 621,173
Affiliated Revenues -
1999............................. 303,279 28,866 - 60,179 - (392,324) -
1998............................. 256,993 - - 40,502 - (297,495) -
1997............................. 256,517 - - 4,228 - (260,745) -
Depreciation and Amortization-
1999 ............................ 76,339 2,250 73 38,586 - - 117,248
1998............................. 50,260 223 - 15,791 - - 66,274
1997............................. 47,577 160 - 15,703 - - 63,440
Interest Income -
1999............................. 15,952 159 47 107,592 - (121,670) 2,080
1998............................. 2,373 - - 179 - (2,103) 449
1997............................. 294 - - - - (71) 223
Equity in Earnings of
Unconsolidated
Subsidiaries -
1999............................. - - - (803) - - (803)
1998............................. - - - (76) - - (76)
1997............................. - - - - - - -
Interest Expense -
1999............................. 187,039 23,138 33 117,611 - (121,670) 206,151
1998............................. 85,947 4,156 - 5,198 - (2,103) 93,198
1997............................. 91,382 3,379 - 2,770 - (71) 97,460
Income Tax
Expense/(Benefit) -
1999............................. (15,974) 8,903 (2,235) (10,501) - - (19,807)
1998............................. 17,326 12,703 - 5,598 - - 35,627
1997............................. 9,776 16,644 - 4,631 - - 31,051
Net Income/(Loss)-
1999............................. 26,286 14,989 4,639 (51,765) (8,540) - (14,391)
1998............................. 37,856 21,167 - (12,842) (1,121) - 45,060
1997............................. 29,487 16,966 - (20,377) 1,149 - 27,225
</TABLE>
F-33
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SEGMENT INFORMATION (CONT'D)
<TABLE>
<CAPTION>
ENERGY DISCONTINUED
NETWORKS RETAIL TRADING OTHER OPERATIONS ELIMINATIONS CONSOLIDATED
--------- --------- --------- -------- ---------- ------------ ------------
THOUSANDS OF AUSTRALIAN DOLLARS
<S> <C> <C> <C> <C> <C> <C> <C>
Investment in
Unconsolidated
Affiliates -
1999......................... $ - $ - $ - $ 3,488 $ - $ - $ 3,488
1998......................... - - - 1,690 - - 1,690
1997......................... - - - - - - -
Total Assets -
1999......................... 2,880,526 170,397 442,536 4,616,430 21,656 (3,531,359) 4,600,186
1998......................... 1,572,278 91,307 - 997,926 13,080 (339,776) 2,334,815
1997......................... 1,481,876 59,139 - 887,276 13,956 (236,478) 2,205,769
Capital Expenditures -
1999......................... 133,283 882 439 125,411 2,204 - 262,219
1998......................... 76,472 1,139 - 25,926 3,228 - 106,765
1997......................... 61,836 - - 8 1,351 - 63,195
</TABLE>
17. DISPOSITION OF BUSINESS.
At December 31, 1999, TXU Australia Group held a 26% interest in Eastcoast
Power Pty Ltd (Eastcoast), a company developing a 43 MW power station in
eastern Victoria, Australia. On April 17, 2000, TXU Australia Group sold
its interest in Eastcoast resulting in an $8.7 million gain.
18. SUBSEQUENT EVENT - UNAUDITED
On May 4, 2000 TXU Australia Group was selected by the South Australian
government as the successful bidder for a 100 year lease of the assets of
the South Australian electricity generator, Optima Energy Pty Ltd. The
purchase price, which is payable on the financial closing, expected to be
on June 6, 2000, is $295 million.
F-34
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
----------- -----------
2000 1999
----------- -----------
THOUSANDS OF AUSTRALIAN DOLLARS
OPERATING REVENUES.............................. $ 581,716 $ 384,137
----------- -----------
OPERATING EXPENSES
Purchased energy and distribution costs....... 265,958 174,052
Operation and maintenance..................... 103,895 78,112
Depreciation and other amortization........... 51,524 37,225
Goodwill amortization......................... 18,571 15,042
----------- -----------
Total operating expenses.................... 439,948 304,431
----------- -----------
OPERATING INCOME................................ 141,768 79,706
----------- -----------
OTHER INCOME/(EXPENSE)
Gain on sale of investments .................. 8,700 -
Other income/(expense) - Net.................. (2,209) (1,475)
----------- -----------
Total other income/(expense)................ 6,491 (1,475)
INCOME BEFORE INTEREST AND INCOME TAXES......... 148,259 78,231
----------- -----------
INTEREST INCOME................................. 669 1,039
INTEREST EXPENSE................................ (122,468) (90,720)
----------- -----------
INCOME/(LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES.................................... 26,460 (11,450)
INCOME TAX EXPENSE.............................. 7,613 1,175
----------- -----------
INCOME/(LOSS) FROM CONTINUING OPERATIONS........ 18,847 (12,625)
DISCONTINUED OPERATIONS ........................
Loss from discontinued operations (net of income
tax benefit: 2000 - $2,159, 1999 - $3,978).... (4,210) (7,257)
Gain on sale of discontinued operations (net
of income tax expense of $10,664)........... 14,889 -
----------- -----------
TOTAL INCOME/(LOSS) FROM DISCONTINUED
OPERATIONS.................................... 10,679 (7,257)
----------- -----------
NET INCOME /(LOSS).............................. $ 29,526 $ (19,882)
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
F-35
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
JUNE 30, DECEMBER 31,
----------- -----------
2000 1999
----------- -----------
THOUSANDS OF AUSTRALIAN DOLLARS
PROPERTY, PLANT AND EQUIPMENT
Electricity network........................... $ 1,660,927 $ 1,620,391
Gas network................................... 988,058 987,050
Generation plant under capital lease.......... 203,404 -
Gas processing and storage facility........... 143,100 133,406
Computer equipment and software............... 63,721 69,089
Vehicles and machinery........................ 9,865 14,014
Land.......................................... 36,993 30,718
Other......................................... 10,724 13,579
----------- -----------
Total....................................... 3,116,792 2,868,247
Less accumulated depreciation................... 273,557 229,535
----------- -----------
Net of accumulated depreciation............... 2,843,235 2,638,712
Construction work in progress................... 54,731 58,328
----------- -----------
Net property, plant and equipment............. 2,897,966 2,697,040
----------- -----------
INVESTMENTS
Goodwill (net of accumulated amortization:
2000 - $99,227, 1999 - $80,656)............... 1,504,781 1,297,102
Investments in unconsolidated affiliates........ 2,705 3,488
----------- -----------
Total investments............................. 1,507,486 1,300,590
----------- -----------
CURRENT ASSETS
Cash and cash equivalents..................... 5,745 70,505
Accounts receivable (net of allowances for
uncollectable accounts: 2000 - $1,310,
1999 - $1,980).............................. 298,479 240,182
Inventories - at average cost:
Materials and supplies...................... 7,741 8,405
Gas stored underground...................... 4,276 18,643
Net assets of discontinued operations ........ - 21,656
Other......................................... 24,307 11,774
----------- -----------
Total current assets........................ 340,548 371,165
----------- -----------
OTHER NONCURRENT ASSETS
Unamortized debt issuance costs............... 21,477 24,719
Energy risk management asset.................. 218,738 200,837
Other......................................... 11,532 5,835
----------- -----------
Total other noncurrent assets............... 251,747 231,391
----------- -----------
TOTAL ASSETS $ 4,997,747 $ 4,600,186
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
F-36
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
CAPITALIZATION AND LIABILITIES
JUNE 30, DECEMBER 31,
----------- -----------
2000 1999
----------- -----------
THOUSANDS OF AUSTRALIAN DOLLARS
CAPITALIZATION
Owners' equity................................ $ 1,158,133 $ 947,607
Long-term debt................................ 2,391,394 2,408,394
----------- -----------
Total capitalization........................ 3,549,527 3,356,001
----------- -----------
CURRENT LIABILITIES
Short-term debt............................... 879,547 805,484
Accounts payable.............................. 147,589 128,246
Payable to parent company..................... 8,657 23,473
Interest accrued.............................. 43,666 57,261
Customer deposits............................. 14,665 14,983
Deferred income taxes......................... 30,185 27,321
Employee benefits............................. 22,456 14,861
Provision for generation vesting contracts ... 41,250 -
Other......................................... 5,615 12,736
----------- -----------
Total current liabilities................... 1,193,630 1,084,365
----------- -----------
OTHER NONCURRENT LIABILITIES
Deferred income taxes......................... 93,489 92,864
Employee benefits ............................ 28,063 12,565
Provision for loss on contracts............... 41,339 42,062
Provision for generation vesting contracts ... 71,354 -
Other......................................... 20,345 12,329
----------- -----------
Total other noncurrent liabilities.......... 254,590 159,820
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
TOTAL CAPITALIZATION AND LIABILITIES............ $ 4,997,747 $ 4,600,186
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
F-37
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
----------- -----------
2000 1999
----------- -----------
THOUSANDS OF AUSTRALIAN DOLLARS
CASH FLOWS - OPERATING ACTIVITIES
Income/(loss) from continuing operations...... $ 18,847 $ (12,625)
Adjustments to reconcile income/(loss) from
continuing operations to cash provided by
(used in) operating activities:
Depreciation and amortization............... 70,095 52,267
Amortization of debt issuance costs......... 6,787 2,302
Deferred income taxes - net................. 7,613 1,175
Loss on sale of property, plant and equipment 1,426 445
Gain on sale of investments................. (8,700) -
Loss on equity investments ................. 783 530
Deferred derivative gain ................... (31,376) -
Other....................................... (5,119) -
Changes in operating assets and liabilities:
Accounts receivable......................... (95,779) (18,699)
Inventories................................. 21,958 6,798
Accounts payable............................ 30,659 (3,882)
Interest accrued ........................... (13,595) 2,695
Other working capital - net................. (4,481) (24,763)
Payable to parent company................... (14,816) 13,161
Energy risk management asset................ - (200,838)
Other - net................................. (11,262) (2,137)
----------- -----------
Cash used in operating activities from
continuing operations..................... (26,960) (183,571)
Cash provided by (used in) operating
activities from discontinued operations... 15,224 (7,889)
----------- -----------
Cash flows used in operating activities... (11,736) (191,460)
----------- -----------
CASH FLOWS - FINANCING ACTIVITIES
Proceeds from borrowings ..................... 120,000 1,758,000
Repayment of borrowings....................... (17,000) -
Short-term borrowings - net................... (45,937) 207,488
Capital contributions......................... 181,000 -
Debt issuance costs .......................... (3,545) (23,496)
----------- -----------
Cash provided by financing activities from
continuing operations....................... $ 234,518 $ 1,941,992
----------- -----------
See Notes to Condensed Consolidated Financial Statements.
F-38
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED) (CONT'D)
SIX MONTHS ENDED JUNE 30,
----------- -----------
2000 1999
----------- -----------
THOUSANDS OF AUSTRALIAN DOLLARS
-------------------------
CASH FLOWS - INVESTING ACTIVITIES
Purchase of business, net of cash acquired.... $ (301,173) $(1,603,543)
Other - net................................... - 1,783
Proceeds from sale of investments............. 8,700 -
Proceeds from sale of property, plant
and equipment............................... 17,544 1,502
Capital expenditures.......................... (61,234) (145,123)
----------- -----------
Cash used in investing activities from
continuing operations....................... (336,163) (1,745,381)
Cash provided by (used in) investing
activities from discontinued operations..... 48,621 (2,123)
----------- -----------
Cash used in investing activities........... (287,542) (1,747,504)
----------- -----------
NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... (64,760) 3,028
CASH AND CASH EQUIVALENTS - BEGINNING
BALANCE......................................... 70,505 1,252
----------- -----------
CASH AND CASH EQUIVALENTS - ENDING BALANCE...... $ 5,745 $ 4,280
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAYMENTS - Interest (net of amounts
capitalized) $ 133,217 $ 88,025
NON-CASH INVESTING ACTIVITIES:
Fair value of assets acquired................. $ 238,518 $ 1,077,477
Goodwill...................................... 226,250 746,726
Liabilities assumed........................... (163,592) (188,826)
Cash acquired................................. (3) (31,834)
----------- -----------
Net cash used............................... $ 301,173 $ 1,603,543
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
F-39
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CONSOLIDATED OWNERS' EQUITY
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
----------- -----------
2000 1999
----------- -----------
THOUSANDS OF AUSTRALIAN DOLLARS
PARTNERS' CAPITAL
Balance at beginning of period................ $ 884,000 $ 848,000
Capital contributions......................... 181,000 -
----------- -----------
Balance at end of period...................... 1,065,000 848,000
----------- -----------
UNDISTRIBUTED EARNINGS
Balance at beginning of period................ 63,607 77,998
Net income/(loss)............................. 29,526 (19,882)
----------- -----------
Balance at end of period...................... 93,133 58,116
----------- -----------
OWNERS' EQUITY.................................. $ 1,158,133 $ 906,116
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
F-40
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
In January 1999, TXU Corp., through a series of subsidiaries created TXU
Australia Holdings (Partnership) Limited Partnership (TXU Australia) to
hold, either directly or indirectly, all of its Australian investments. The
partners and their respective ownership interests in TXU Australia are TXU
Australia Holdings (AGP) Pty Ltd (0.5% general partner), TXU Australia (LP)
No. 1 Limited (49.75% limited partner), and TXU Australia (LP) No. 2
Limited (49.75% limited partner). TXU Australia and all of the holding
companies and operating companies directly or indirectly owned by TXU
Australia are collectively referred to as "TXU Australia Group". Companies
in TXU Australia Group other than TXU Australia are sometimes referred to
individually as a "Group company" and collectively as the "Group
companies".
TXU Australia Group's principal operations are conducted through the
following main operating Group companies:
o TXU Electricity Limited, formerly Eastern Energy Limited (Eastern
Energy),
o TXU Networks (Gas) Pty Ltd, formerly Westar Pty Ltd (Westar),
o TXU Pty Ltd, formerly Kinetik Energy Pty Ltd (Kinetik Energy), and
o TXU (South Australia) Pty Ltd (TXU South Australia) and TXU Torrens
Island Pty Ltd.
Through these companies, TXU Australia Group engages in the purchase,
distribution, trading and retailing of electricity and gas, in the State of
Victoria, Australia, and in the generation and trading of electricity in
the State of South Australia. In addition, TXU Australia Group's other
operations are conducted through Western Underground Gas Storage Pty Ltd
(Western Underground Gas Storage) and Global Customer Solutions Pty Ltd
(Global Customer Solutions), which provide underground gas storage and call
center management, respectively.
2. SIGNIFICANT ACCOUNTING POLICIES
The unaudited condensed consolidated financial statements of the Group have
been prepared in conformity with accounting principles generally accepted
in the United States of America (US), and on the same basis as the audited
TXU Australia Group's Consolidated Financial Statements for the year ended
December 31, 1999.
In the opinion of management, all adjustments (constituting only normal
recurring accruals) necessary for a fair presentation of the results of
operations and financial position have been included herein. 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 US Securities and Exchange Commission.
All dollar amounts in the condensed consolidated financial statements and
notes to the condensed consolidated financial statements are stated in
thousands of Australian dollars unless otherwise indicated.
F-41
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
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 Australia Group beginning January 1, 2001. SFAS No. 133
establishes accounting and reporting standards for derivative financial
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
Australia Group is currently evaluating the impact that the adoption of the
Standard will have on its statement of financial position and results of
operations.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified for comparative
purposes. These reclassifications had no effect on net income or
shareholders' equity.
3. ACQUISITIONS
On May 4, 2000, TXU Australia Group through its subsidiary, TXU South
Australia, acquired certain assets and liabilities of Optima Energy Pty Ltd
(Optima Energy), a government-owned electricity generation entity, from the
South Australian Government. The purchase included a 100-year lease of the
power stations and leases for the land on which the power stations are
located and a further area of land adjacent to the land on which the power
stations are located. The power stations are gas-fired and have a capacity
of 1,280 megawatts.
The leases include:
* 100-year capital leases of generating plants.
* 100-year capital leases for the land on which the plants are located.
* 20-year operating lease for a further area of land that is adjacent to
the land on which the plants are located.
The Group has no future obligations under the leases, as the lease payments
were fully prepaid at the inception of the leases. The capital leases
contain a bargain purchase option, and there is no rent payable under the
operating lease. The leased generating assets are amortized over the
shorter of the lease term and the useful life of the assets. As at the
acquisition date of May 4, 2000, the remaining useful life of the assets is
30 years.
The purchase price of $295 million was financed by a capital contribution
from the partners of TXU Australia, and through bank borrowings of TXU
Australia Group. The acquisition was accounted for as a purchase business
combination. The process of determining the fair value of assets acquired
and liabilities assumed from of Optima Energy has not been completed,
however, the excess of the purchase consideration plus the incidental
expenses over a preliminary estimate of net fair value of the net assets
acquired resulted in goodwill of $226 million, which is being amortized
over 30 years. This amount is subject to revision as additional information
about the fair value of the assets acquired, liabilities assumed and
contingencies existing at the acquisition date becomes known. On this basis
and on the basis of their estimated fair values, the cost of the
acquisition was allocated to the assets acquired and liabilities assumed,
as follows:
F-42
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (CONT'D)
THOUSANDS OF
AUSTRALIAN DOLLARS
Inventory.......................................... $ 6,964
Other current assets............................... 10,336
Property, plant and equipment
(including generation plant under capital lease).. 210,371
Goodwill........................................... 226,250
Deferred tax asset................................. 10,847
Current liabilities................................ (59,106)
Non-current liabilities............................ (104,486)
301,176
Less: Cash acquired................................ 3
----------
$ 301,173
==========
The results of the acquired operations have been included in the
results of operations of TXU Australia Group from the acquisition date of
May 4, 2000.
In connection with the acquisition of the business of Optima Energy, TXU
Australia Group is developing a plan to restructure the generation
business. Corporate departments and retail operations of the business will
cease, and the responsibilities are to be transferred to other parts of the
Group. As a result, 13 employees will be terminated. On this basis, the
Group recorded a liability for employee termination costs of $2.5 million.
Plans to restructure operation and maintenance departments are currently
being developed, and further costs may be identified upon a completion of
the plans.
Prior to the acquisition of the business of Optima Energy in May 2000,
Optima Energy had entered into vesting contracts with third parties. As
part of the business acquisition, Optima Energy's rights and obligations
under the vesting contracts were transferred to TXU Australia Group. The
vesting contracts call for difference payments between the contract price
and the pool price, and do not involve an obligation to supply power. At
the time of the acquisition, the fair value of the liabilities associated
with the contracts was $117 million.
On February 24, 1999, TXU Australia Group acquired from Gascor Holdings No.
2 Pty Ltd, a controlled entity of the Government of Victoria, the gas
retail business of Kinetik Energy, the gas distribution operations of
Westar and the assets of Westar (Assets) Pty Ltd. The purchase price was
$1.6 billion, which has been financed principally through bank borrowings
by TXU Australia Group. The acquisition was accounted for as a purchase
business combination. The excess of the purchase consideration plus
acquisition costs over the fair value of tangible and identifiable
intangible assets acquired and liabilities assumed resulted in goodwill of
$747 million, which is being amortized over 40 years. The results of the
acquired operations have been included in the results of operations of TXU
Australia Group since the acquisition date.
Unaudited consolidated pro forma income (loss) for the six months ended
June 30, 2000 and 1999, assuming the acquisitions of the business of Optima
Energy and Westar and Kinetik Energy had occurred at the beginning of the
respective periods, is as follows:
F-43
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS (CONT'D)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999
----------------------- -------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------------------- -------------------------
THOUSANDS OF AUSTRALIAN THOUSANDS OF AUSTRALIAN
DOLLARS DOLLARS
<S> <C> <C> <C> <C>
Revenues................... $ 581,716 $ 648,101 $ 384,137 $ 485,014
Operating income........... 141,768 152,512 79,706 69,578
Income (loss) from
continuing operations.... 18,847 24,398 (12,625) (34,846)
</TABLE>
The above pro forma results are not necessarily indicative of what the
actual results would have been had the acquisition occurred at the
beginning of these periods. Further, the pro forma results are not intended
to be a projection of the future results of the combined companies.
4. DISCONTINUED OPERATIONS
In July 1999, TXU Australia Group determined that it would sell Enetech,
its construction and maintenance subsidiary. In January 2000, the TXU
Australia Group completed the sale of certain assets and liabilities of
Enetech to Tenix Pty Ltd (Tenix), a major Australian technology contractor.
Under the terms of the Purchase Agreement, TXU Australia Group agreed to
sell certain assets and liabilities for consideration of $48.6 million. TXU
Australia Group entered into a ten year contract with Tenix to perform
engineering and maintenance services for the Group's gas and electricity
networks throughout Victoria.
The results of Enetech for the six months ended June 30, 2000 and 1999,
respectively, have been reported separately as discontinued operations in
the Statement of Consolidated Operations. In the Consolidated Financial
Statements for the year ended December 31, 1999, the net gain on sale of
the discontinued operations was estimated to be $10.7 million, after income
taxes of $8.5 million and deferred net losses for Enetech of $5.8 million
from the measurement date (August 1, 1999) to December 31, 1999. The actual
net gain on sale amounted to $14.9 million, after income taxes of $10.7
million and deferred net losses of $5.8 million, and has been recognized in
the six-month period ended June 30, 2000. Losses from discontinued
operations for the six months ended June 30, 2000 and 1999 were $4.2
million and $7.3 million, after income tax benefits of $2.2 million and
$3.9 million, respectively.
Components of amounts related to TXU Australia Group's discontinued
operations reflected in the Condensed Consolidated Financial Statements are
presented below:
INCOME STATEMENT INFORMATION
SIX MONTHS ENDED JUNE 30,
------------------------------
2000 1999
THOUSANDS OF AUSTRALIAN DOLLARS
Operating revenues........................... $ - $ 56,391
Income tax expense/(benefit)................. 8,505 (3,867)
Income/(loss) from discontinued operations... 10,679 (7,257)
F-44
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. DISCONTINUED OPERATIONS (CONT'D)
NET ASSETS OF DISCONTINUED OPERATIONS
JUNE 30, DECEMBER 31,
----------- -----------
2000 1999
THOUSANDS OF AUSTRALIAN DOLLARS
Property, plant and equipment............... $ - $ 16,113
Goodwill.................................... - 4,655
Employee benefits........................... - (4,924)
----------- -----------
- 15,844
Deferred loss for the period from August 1,
1999 to December 31, 1999................... - 5,812
----------- -----------
Net assets of discontinued operations....... - 21,656
----------- -----------
5. GAIN ON SALE OF INVESTMENTS
On April 17, 2000, TXU Australia Group sold its 26% interest in Eastcoast
Power Pty Ltd, a company developing a 43 MW power station in eastern
Victoria, Australia, resulting in an $8.7 million gain.
6. SHORT-TERM DEBT
On February 24, 2000, the TXU Australia Group restructured its senior bank
debt. All bank debt previously borrowed by Eastern Energy was repaid and
replaced with bank debt borrowed by TXU Australia, and the maturity dates
of certain TXU Australia debt were extended. The terms of all bank debt
previously borrowed by TXU Australia were renegotiated, so that all bank
debt, aggregating approximately $2 billion, now ranks equally as senior
debt of TXU Australia. Short-term debt as of June 30, 2000 is summarized as
follows:
JUNE 30,
-----------
2000
-----------
THOUSANDS OF
AUSTRALIAN DOLLARS
Facility C (formerly known as Working Capital
Facilities)........................................ 12,000
Facility F........................................... 120,000
Subordinated Facility Agreement (formerly
Subordinated Acquisition Facility)................. 413,000
Short-term Note Program (formerly Commercial Paper).. 334,547
-----------
Total short-term debt ............................... $ 879,547
============
F-45
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. SHORT-TERM DEBT (CONT'D)
FACILITY F
In June 2000, TXU Australia Group obtained a loan facility for the amount
of $120 million with a banking institution. The interest rate on any
advance under this facility is set at a margin over the bank bill rate. The
interest rate was 6.57% at June 30, 2000. The facility is due on December
29, 2000.
SHORT-TERM NOTE PROGRAM
In March 2000, TXU Australia Group established a $750 million combined
short-term/medium-term note program to replace the commercial paper program
previously issued by Eastern Energy. The short-term borrowings under the
program are restricted to the unused amount of the Australian dollar
denominated short-term note liquidity support facilities plus qualifying
unused debt facilities, which totalled $485 million, at June 30, 2000. The
interest rate on issued notes is set at a negotiated margin over the bank
bill rate for the applicable terms. At June 30, 2000, the amount
outstanding under the program was $335 million, with a face value of $341
million. At June 30, 2000, the weighted average interest rates were 6.34%.
Principal and interest are due on maturity.
Line fees are payable quarterly on the dedicated commercial paper liquidity
support facilities at an average annual rate of 0.196% for 2000. There were
no amounts outstanding under these support facilities at June 30, 2000.
LETTERS OF CREDIT
Several TXU Australia Group companies are required to provide letters of
credit in connection with their electricity and gas purchasing and
construction activities. Such letters of credit in effect at June 30, 2000
totalled $84.1 million. At June 30, 2000 no amounts had been drawn under
these letters of credit.
F-46
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT
As discussed in Note 6, TXU Australia Group restructured its senior bank
debt on February 24, 2000.
Long-term debt as of June 30, 2000 is summarized as follows:
JUNE 30,
----------
2000
----
THOUSANDS OF
AUSTRALIAN
DOLLARS
Senior notes:
Eastern Energy maturing 2006 (US $250 million).......... $ 359,937
Eastern Energy maturing 2016 (US $100 million).......... 123,457
Facility A (formerly known as Syndicated Acquisition
Facilities - Tranches B & C)........................... 825,000
Facility B (formerly Eastern Energy Syndicated Facility
Agreement) ............................................. 608,000
Facility D (formerly Syndicated Loan Facility)............ 200,000
Facility E (formerly Syndicated Acquisition Facilities -
Tranche A).............................................. 275,000
----------
Total long-term debt ................................... $2,391,394
==========
REFINANCING OF FACILITY D AND FACILITY E
In August 2000, TXU Australia Group increased the size of the
Short-Term/Medium-Term Note Program (as referred to in Note 6 "Short-Term
Debt" above) to $1.5 billion. On September 22, 2000, TXU Australia Group
issued two series of medium-term notes in Australian market as follows:
o $200 million 7% fixed rate notes maturing in September 2005. These
Notes replaced Facility D in full. Facility D had been classified as
part of Short-Term Debt prior to the issue of the Notes and has been
reclassified as Long-Term Debt as a result of the refinancing.
Interest is payable semi-annually and principal and accrued interest
are due on maturity.
o $275 million floating rate notes maturing in September 2007. These
Notes replaced Facility E in full. Facility E had been classified as
part of Short-Term Debt prior to the issue of the Notes and has been
reclassified as Long-Term Debt as a result of the refinancing. The
interest rate is set at a negotiated margin over the bank bill rate
for the applicable terms and is payable quarterly. On September 22,
2000, the interest rate was 7.02% per annum. Principal and accrued
interest are due at maturity.
F-47
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. REGULATION AND RATES
Eastern Energy is subject to regulation by the Office of the Regulator
General (ORG). The ORG has the power to issue licenses for the supply,
distribution and sale of electricity within Victoria and regulates tariffs
for the use of the transmission system, distribution system, and other
ancillary services. The existing tariff under which Eastern Energy operates
is in effect until December 31, 2000. On September 21, 2000, the ORG
published its final decision in the 2001 Electricity Distribution Price
Review. The decision, if implemented, would cause Eastern Energy's
distribution revenue for 2001 to be approximately $27 million lower than
for 2000.
TXU Australia has expressed its disappointment with aspects of the final
decision by the ORG. TXU Australia does not believe that the final decision
is consistent with the interests of TXU Australia's customers. TXU
Australia Group lodged an appeal of the decision with the ORG Appeal Panel
on October 2, 2000. On October 16, 2000, the Appeal Panel upheld the ORG's
original decision. TXU Australia is now considering appealing this decision
to the Victorian Supreme Court. If any such appeal occurs, it is unlikely
to be decided before the new tariffs are due to commence on January 1,
2001. In anticipation of such an appeal, Victorian government is in the
process of enacting legislation, which will enable it to set transitional
distribution tariffs that will apply in the event of such an appeal. These
transitional tariffs will apply from January 1, 2001 until either the
Supreme Court upholds the ORG determination and the new tariffs go into
effect, or if the Supreme Court upholds an appeal of TXU Australia Group,
the date on which the tariffs as redetermined by the ORG in accordance with
the Supreme Court's decision take effect.
9. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
TXU Australia Group has entered into employment service agreements (ESAs)
with a number of employees. The ESAs set forth compensation and related
terms of their employment. Should TXU Australia Group terminate an ESA
prior to its expiration, other than for illness or acts of dishonesty, TXU
Australia Group would be required to pay the employee's compensation, as
defined in the ESA. As of June 30, 2000, TXU Australia Group would be
required to pay approximately $13.2 million in the event it terminates the
employees covered by all of the ESAs.
LEGAL PROCEEDINGS
LITIGATION
Actions, suits and claims are brought against TXU Australia and the Group
companies from time to time for damage to property and for personal
injuries sustained in the ordinary course of the business of TXU Australia.
All such actions, suits and claims are dealt with in the ordinary course of
business of TXU Australia or the appropriate Group company and the ultimate
resolution of these matters is not expected to have a material adverse
effect upon the financial condition, results of operations or cash flows of
TXU Australia Group.
F-48
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES (CONT'D)
POTENTIAL SUCCESSOR LIABILITY
Pursuant to Allocation Statements made under the Electricity Industry Act
1993 (Vic.) and the Gas Industry Act 1994 (Vic.), Eastern Energy, Westar,
Kinetik Energy and Western Underground Gas Storage were allocated liability
for all claims arising in respect of certain causes of action accrued
against their predecessors as of September 29, 1994, in the case of Eastern
Energy, October 9, 1998 in the case of Western Underground Gas Storage, and
February 24, 1999 in the case of Westar and Kinetik Energy. TXU Australia
Group is liable for claims arising in respect of certain causes of action
against TXU South Australia's predecessors as at May 4, 2000, in respect of
the assets acquired from Optima Energy, in accordance with the terms on
which these assets were acquired. TXU Australia Group cannot predict the
impact on the financial condition, results of operations or cash flows of
TXU Australia Group at this time.
LONGFORD CLAIM
Esso's gas processing plant at Longford exploded in September 1998 causing
prolonged interruption of gas supplies in Victoria. Subsequently, a class
action suit was commenced in the Federal Court of Australia against Esso on
behalf of a large number of domestic and commercial consumers claiming
damages for loss of supply.
Esso has joined the Victorian Government and related entities to the
action, including those which sold and distributed Esso's gas prior to
these businesses being acquired by private operators. Esso has also joined
private operators as well (Esso Cross-Claim), including Westar, Kinetik
Energy and Western Underground Gas Storage, claiming any such liability
passed to them as part of the sale of the businesses from the government.
As currently pleaded before the Federal Court of Australia, the claims
cover actions in negligence and in misleading and deceptive conduct.
On April 3, 2000, the State of Victoria and the state owned entities who
were vendors of the business and assets to Westar and Kinetik Energy served
a Cross-Claim (State Cross-Claim) on Westar and Kinetik Energy. The State
Cross-Claim seeks orders against Westar and Kinetik Energy that they are
liable for any liability of the state-owned vendors which may be found
against those entities in relation to the Esso Cross-Claim. To the extent
the State Cross-Claim raises issues which are already raised against Westar
and Kinetik Energy in the Esso Cross-Claim, it does not materially affect
the potential liability of Westar and Kinetik Energy in the litigation.
If Esso is found liable and is successful in its cross claims, the
potential liability of Westar, Kinetik Energy and Western Underground Gas
Storage could be significant.
Baker & McKenzie, Melbourne, Australia, counsel to TXU Australia Group, has
conducted a legal analysis of pleadings filed so far and the likely
defenses available. Based on their analysis, TXU Australia Group believes
that the claims against Westar, Kinetik Energy and Western Underground Gas
Storage (and the proposed State Cross-Claim) are without merit. However,
given the complexity and magnitude of the claims involved in this
litigation, TXU Australia Group cannot predict the ultimate outcome and its
impact on the financial condition, results of operations or cash flows of
TXU Australia Group. TXU Australia Group intends to vigorously pursue all
of its defenses in this litigation.
F-49
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES (CONT'D)
GAS TAKE-OR-PAY CONTRACTS
TXU Australia Group is party to various types of contracts for the purchase
of gas. These include "take-or-pay" obligations under which the buyer
agrees to pay for a minimum quantity of gas in a year. At June 30, 2000,
TXU Australia Group had commitments under long-term gas purchase contracts
of an estimated $1.4 billion, through 2009. On the basis of TXU Australia
Group's current expectations of demand from its customers as compared with
its take-or-pay obligations under such purchase contracts, management does
not consider it likely that any material payments will become due from TXU
Australia Group for gas not taken.
LAND RECLAMATION AND SITE RESTORATION
TXU Australia Group through the Westar and Kinetik Energy and Optima
acquisitions was allocated certain properties that are contaminated. A
provision of $12 million is recorded in the balance sheet for land
reclamation in relation to Westar and Kinetik Energy's contaminated
properties. A provision of $7 million is also recorded for site restoration
in relation to the acquisition of the business of Optima Energy. The
provisions are based on the estimate of the land reclamation and site
restoration costs following limited site reviews and testings. These costs
may increase if the extent of contamination is worse than testing indicated
at the time of the limited reviews. Under the Victorian Environment
Protection Act 1970 and the South Australian environmental legislation, the
Victorian and South Australian Environment Protection Authorities have the
power to order TXU Australia Group to incur such costs to remedy the
contamination of land.
F-50
<PAGE>
TXU AUSTRALIA HOLDINGS (PARTNERSHIP) LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. SEGMENT INFORMATION
TXU Australia Group's reportable segments are strategic business units that
offer different products or services. They are managed separately because
each business requires different marketing strategies.
As at June 30, 2000, TXU Australia Group has four main reportable operating
segments:
(1) NETWORKS - Operations engaged in the distribution of
electricity and gas in the State of Victoria
(2) RETAIL - Operations engaged in the sale of electricity and
gas in the State of Victoria
(3) ENERGY TRADING - Operations engaged in the purchase and trading of
electricity and gas primarily in the States of
Victoria and South Australia
(4) ELECTRICITY
GENERATION - Operations engaged in electricity generation
primarily in the State of South Australia
OTHER - Non-segment operations primarily consist of
underground gas storage, call center management
and unallocated goodwill.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. TXU Australia Group
evaluates performance based on net income or loss. TXU Australia Group
accounts for inter-segment sales or transfers as if the sales or transfers
were to third parties, that is, at current market prices. The segment
information for the six months ended June 30, 2000 and 1999, is set out
below:
<TABLE>
<CAPTION>
ENERGY ELECTRICITY DISCONTINUED
NETWORKS RETAIL TRADING GENERATION 1 OTHER OPERATIONS ELIMINATIONS CONSOLIDATED
----------- ----------- ---------- ------------ ---------- ------------ -------------- ------------
THOUSANDS OF AUSTRALIAN DOLLARS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Trade Revenues -
2000................... $ 57,141 $ 439,083 $ 33,941 $ 42,360 $ 9,191 $ - $ - $ 581,716
1999................... 42,056 336,471 481 - 5,129 - - 384,137
Affiliated Revenues -
2000................... 155,622 5 183,297 3,721 49,029 - (391,674) -
1999................... 143,133 23 106,192 - 26,865 - (276,213) -
Net Income/(Loss)-
2000................... 7,404 15,219 2,901 12,346 (19,023) 10,679 - 29,526
1999................... 3,915 2,656 (421) - (18,775) (7,257) - (19,882)
Total Assets -
2000................... 2,919,044 283,917 661,598 465,811 5,265,098 - (4,597,721) 4,997,747
19992.................. 2,880,526 170,397 442,536 - 4,616,430 21,656 (3,531,359) 4,600,186
</TABLE>
------------------------
1 Includes results of the generation business from the acquisition date of
May 4, 2000.
2 Assets as at December 31, 1999
F-51
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
REPORT OF INDEPENDENT AUDITORS
------------------------------
To: Gascor Holdings No. 2 Pty Ltd:
We have audited the accompanying consolidated balance sheet of Gascor Holdings
No. 2 Pty Ltd and subsidiaries (Gascor Holdings) as of June 30, 1998 and the
related statement of consolidated operations, shareholder's equity and cash
flows for the year ended June 30, 1998. These financial statements are the
responsibility of Gascor Holdings' management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
As disclosed in Note 2, the property, plant and equipment of Gascor Holdings was
recorded at fair value as of July 1, 1997, upon allocation of the assets and
liabilities to Gascor Holdings by the Government of Victoria, Australia. This
valuation was used to prepare the beginning balance sheet of Gascor Holdings as
no historical cost basis information was available. In our opinion, generally
accepted accounting principles require that property, plant and equipment be
recorded at historical cost.
In our opinion, except for the use of fair value to record property, plant and
equipment as discussed in the preceding paragraph, such consolidated financial
statements referred to above present fairly, in all material respects, the
financial position of Gascor Holdings as of June 30, 1998, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE TOUCHE TOHMATSU
Melbourne, Australia
April 28, 2000
F-52
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
YEAR ENDED JUNE 30, 1998
-----------------------
THOUSANDS OF AUSTRALIAN
DOLLARS
OPERATING REVENUES.......................................... $ 262,896
----------
OPERATING EXPENSES
Purchased gas and distribution costs...................... 97,321
Operation and maintenance................................. 64,340
Depreciation and amortization............................. 11,754
----------
Total operating expenses................................ 173,415
----------
OPERATING INCOME............................................ 89,481
OTHER INCOME - NET......................................... 208
----------
INCOME BEFORE INTEREST AND INCOME TAXES..................... 89,689
INTEREST INCOME............................................. 441
INTEREST EXPENSE............................................ (23,623)
----------
INCOME BEFORE INCOME TAXES.................................. 66,507
INCOME TAX EXPENSE.......................................... 24,054
----------
NET INCOME.................................................. $ 42,453
==========
See Notes to Consolidated Financial Statements.
F-53
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
JUNE 30, 1998
-----------------------
THOUSANDS OF AUSTRALIAN
DOLLARS
PROPERTY, PLANT AND EQUIPMENT
Gas network............................................... $ 381,772
Land...................................................... 4,427
Buildings................................................. 6,759
Other..................................................... 4,009
----------
Total................................................... 396,967
Less accumulated depreciation............................... 11,754
----------
Net of accumulated depreciation........................... 385,213
Construction work in progress............................... 900
----------
Net property, plant and equipment......................... 386,113
----------
INVESTMENTS................................................. 247
----------
CURRENT ASSETS
Cash and cash equivalents................................. 30,039
Accounts receivable....................................... 65,328
Inventories - at average cost:
Materials and supplies...................................... 902
Fuel stock.................................................. 82
Property held for sale.................................... 324
Other current assets...................................... 2,236
----------
Total current assets.................................... 98,911
----------
OTHER NON-CURRENT ASSETS
Deferred tax assets....................................... 67,557
Prepaid pension cost...................................... 4,158
----------
Total other non-current assets.......................... 71,715
----------
TOTAL ASSETS ............................................... $ 556,986
==========
See Notes to Consolidated Financial Statements.
F-54
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
CAPITALIZATION AND LIABILITIES
JUNE 30, 1998
-----------------------
THOUSANDS OF AUSTRALIAN
DOLLARS
CAPITALIZATION
Share capital............................................. $ -
Retained earnings......................................... 3,953
----------
Total shareholder's equity................................ 3,953
Long-term debt............................................ 418,220
----------
Total capitalization.................................... 422,173
----------
CURRENT LIABILITIES
Agency commission advance from GASCOR..................... 30,000
Accounts payable.......................................... 28,530
Dividends payable......................................... 32,000
Interest accrued.......................................... 1,183
Other current liabilities................................. 3,429
----------
Total current liabilities............................... 95,142
----------
OTHER NONCURRENT LIABILITIES
Provision for losses on contracts .......................... 26,761
Provision for land reclamation.............................. 10,645
Other....................................................... 2,265
----------
Total other non-current liabilities..................... 39,671
----------
COMMITMENTS AND CONTINGENCIES (Note 12)
TOTAL CAPITALIZATION AND LIABILITIES........................ $ 556,986
==========
See Notes to Consolidated Financial Statements.
F-55
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
YEAR ENDED JUNE 30, 1998
------------------------
THOUSANDS OF AUSTRALIAN
DOLLARS
CASH FLOWS - OPERATING ACTIVITIES
Net income................................................ $ 42,453
Adjustments to reconcile net income to cash provided by
operating activities:.....................................
Depreciation and amortization........................... 11,754
Deferred income taxes - net............................. 24,054
Equity share in profits of associate.................... (247)
Loss on sale of fixed assets............................ 39
Changes in operating assets and liabilities:
Accounts receivable..................................... (65,305)
Inventories............................................. (207)
Other working capital - net............................. (4,681)
Accounts payable........................................ 21,541
Accrued interest........................................ 1,183
Unearned agency commission.............................. 30,000
Other - net............................................. 44
----------
Cash provided by operating activities................. 60,628
----------
CASH FLOWS - FINANCING ACTIVITIES
Dividends paid............................................ (6,500)
Proceeds from borrowings.................................. 13,100
Repayment of borrowings................................... (13,280)
----------
Cash used in financing activities..................... (6,680)
----------
CASH FLOWS - INVESTING ACTIVITIES
Construction expenditures................................. (23,923)
Proceeds on sale of property, plant and equipment......... 14
----------
Cash used in investing activities..................... (23,909)
----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 30,039
CASH AND CASH EQUIVALENTS - BEGINNING BALANCE............... -
----------
CASH AND CASH EQUIVALENTS - ENDING BALANCE.................. $ 30,039
==========
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAYMENTS - Interest.................................... $ 22,440
NON-CASH INVESTING ACTIVITIES:
Assets acquired........................................... 473,333
Liabilities assumed....................................... (473,333)
See Notes to Consolidated Financial Statements.
F-56
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED SHAREHOLDER'S EQUITY
YEAR ENDED JUNE 30, 1998
------------------------
THOUSANDS OF AUSTRALIAN
DOLLARS
SHARE CAPITAL
Ordinary shares (100,000,000 authorized, 12 issued and
outstanding) $ -
RETAINED EARNINGS
Balance at beginning of year.............................. -
Net income.............................................. 42,453
Dividends declared...................................... (38,500)
----------
Balance at end of year.................................... 3,953
----------
SHAREHOLDER'S EQUITY........................................ $ 3,953
==========
See Notes to Consolidated Financial Statements.
F-57
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND FORMATION
On December 11, 1997, pursuant to the Gas Industry Act 1994, as amended
from time to time, (the GIA), the gas industry in Victoria was restructured
by the Victorian government transferring certain property, rights and
liabilities of GASCOR (trading as Gas and Fuel) to Gascor Holdings No. 2
Pty Ltd and its subsidiaries Westar Pty Ltd (Westar), Westar (Assets) Pty
Ltd (Westar Assets), and Kinetik Energy Pty Ltd (Kinetik Energy)
(collectively "Gascor Holdings") (see Allocation of Assets, Note 3).
As a result of the internal restructuring of GASCOR, Gascor Holdings No. 2
Pty Ltd, including Westar and Kinetik Energy, functioned as a discrete
group from July 1, 1997. However, the group did not carry on business in
its own right prior to December 11, 1997. All group companies commenced
operations on that date, when the specified assets and liabilities of
GASCOR were vested in the companies pursuant to Allocation Statements made
under the GIA. The GIA requires that the results for the year ended June
30, 1998 include the operations of the companies from July 1, 1997
notwithstanding that the formal disaggregation did not occur until December
11, 1997. These financial statements have been prepared on this basis.
The principal activities of Gascor Holdings are the distribution and sale
of natural gas and tempered liquefied petroleum gas, primarily in the State
of Victoria, Australia.
Westar Assets owns distribution assets, including approximately 4,850 miles
of pipelines over approximately 1,190 square miles in western Victoria, and
leases them to Westar. Westar is responsible for the distribution of
natural gas and tempered liquefied petroleum gas. Westar currently
distributes gas for two retailers - Kinetik Energy and Ikon Energy Pty Ltd
- who have retail franchise customers in areas served by Westar. Westar
also distributes gas for GASCOR, which is used by affiliates of gas
producers Esso Australia Resources Limited (Esso) and/or BHP Petroleum Pty
Ltd.
Kinetik Energy is a Victorian-based energy retailer that sells natural gas
and tempered liquefied petroleum gas as an agent for GASCOR. Gascor
Holdings' gas franchise customers are situated in western Victoria. Kinetik
Energy's gas is delivered by two distributors - Westar and Stratus Networks
Pty Ltd - and by two transmission companies - Transmission Pipelines
Australia Pty Ltd and Coastal Gas Pipelines Victoria Pty Ltd.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Gascor
Holdings and its majority owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Investments in unconsolidated affiliates are accounted for by the equity
method. The consolidated financial statements were prepared in accordance
with accounting principles generally accepted in the United States of
America except for the valuation of property, plant and equipment at July
1, 1997 as discussed under "Property, Plant and Equipment". All dollar
amounts in the consolidated financial statements and notes to the
consolidated financial statements are stated in thousands of Australian
dollars unless otherwise indicated.
F-58
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
USE OF ESTIMATES
The preparation of the consolidated financial statements 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 revenues and expenses
during the reporting periods. In the event estimates and/or assumptions
prove to be different than actual amounts, adjustments are made in the
subsequent periods to reflect more current information. No material
adjustments were made to previous estimates during the current year.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of July 1, 1997, was recorded at fair
value as determined by the Government of Victoria. Expenditures incurred on
distribution assets are capitalized where the expenditure increases the
service potential of the assets. Additions to property, plant and equipment
are recorded at cost. The cost of assets constructed includes labor and
materials, applicable overhead and interest on funds borrowed to finance
construction. Capitalized interest during 1998 was insignificant.
Customer contributions for the construction of gas distribution system
assets are amortized to income over the life of the constructed assets. The
unamortized amount of these contributions is deducted from property, plant
and equipment.
Depreciation of plant and equipment generally is determined by the
straight-line method over the estimated useful life of the asset. Leasehold
improvements are depreciated over their estimated useful life or the life
of the lease, whichever is shorter. The useful lives used to depreciate
each class of asset are as follows:
Buildings......................................... 40 years
Building fixtures on leasehold land............... 40 years
Gas network....................................... 40 years
Machinery, plant and equipment.................... 10 years
Office furniture and equipment.................... 10 years
Motor vehicles and heavy machinery................ 12.5 years
PROPERTY HELD FOR SALE
Properties which have been identified as surplus to the continuing
requirements of Gascor Holdings and are designated for sale, are shown in
the Consolidated Balance Sheet as Property Held for Sale. These properties
have been valued at the lower of carrying amount or fair value less cost to
sell.
INVENTORY
Materials and supplies and fuel stock are stated at the lower of cost or
market value. Cost is based on weighted average costs.
F-59
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
INCOME TAXES
Gascor Holdings is exempt from Federal income tax under Division 1 AB of
the Income Tax Assessment Act 1936 (1936 Act). However, Gascor Holdings is
subject to the Victorian State Equivalent Tax ("SET") system that
effectively replicates the 1936 Act. The enacted corporate tax rate per SET
is 36%.
Gascor Holdings accounts for income taxes under the liability method.
Deferred income taxes represent liabilities to be paid or assets to be
received in the future, and reflect the expected future tax consequences of
the differences between the financial statement carrying amounts of assets
and liabilities and their respective tax bases. Future tax rate changes
would affect the deferred tax assets or liabilities in the period when the
tax rate change is enacted. Future tax benefits, such as carryforward tax
losses, are recognized to the extent that realization of such benefits is
more likely than not.
REVENUE RECOGNITION
Agency fee income, included in operating revenues, represents commissions
earned from GASCOR, for the sale of gas to customers by Gascor Holdings as
agent on behalf of GASCOR. Agency fee revenues are recognized when gas is
delivered to customers and includes an estimated accrual for gas consumed
by customers between the last meter reading date to the end of the period.
Distribution use of system revenue, included in operating revenues,
represents amounts earned for the distribution of gas on behalf of
retailers. Distribution use of system revenues are recognized when gas is
delivered to the external retailers' customers and includes an estimated
accrual for gas consumed by customers between the last meter reading date
to the end of the period.
GAS SUPPLY
Approximately 95 percent of the natural gas shipped through Westar's
distribution network is supplied from the Esso Australia Resources Limited
(Esso)/BHP Petroleum (Bass Strait) Pty Ltd gas fields in the Bass Strait of
Australia.
COMPREHENSIVE INCOME
Comprehensive income for Gascor Holdings is the same as net income reported
in the statement of consolidated operations.
CONSOLIDATED CASH FLOWS
For the purposes of reporting cash and cash equivalents, temporary cash
investments purchased with a remaining maturity of three months or less are
considered to be cash equivalents.
F-60
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ALLOCATION OF ASSETS
On December 11, 1997, at the direction of the Treasurer of Victoria, Gascor
Holdings entered into disaggregation contracts with other entities in the
restructured gas industry whereby certain specified assets and liabilities
of GASCOR were vested in Gascor Holdings pursuant to the Allocation
Statements made under the Gas Industry Act 1994. Pursuant to the Allocation
Statements, Westar and Kinetik Energy were also allocated liability for all
claims arising in respect of certain causes of action accrued against
GASCOR and its successors prior to Westar and Kinetik Energy.
The Allocation Statements were prepared by the Government from the
accounting records of GASCOR as at July 1, 1997 after having made various
adjustments to asset and liability values considered appropriate by the
Government. These adjustments approximate fair value based on market
appraisals prepared for the Government. A subsequent amendment to the
Westar Assets Allocation Statement, also with effect from July 1, 1997, has
been incorporated into the consolidated financial statements. The GIA
requires that the results for the year ended June 30, 1998 include the
operations of the entities from July 1, 1997 notwithstanding that the
formal disaggregation did not occur until December 11, 1997. The allocation
of assets and liabilities to Gascor Holdings was as follows:
Current assets......................................... $ 3,190
Property, plant and equipment.......................... 373,997
Deferred tax assets.................................... 91,554
Prepaid pension cost................................... 4,592
Current liabilities.................................... (14,872)
Long-term debt......................................... (418,400)
Provision for losses on contracts...................... (26,761)
Provision for land reclamation......................... (10,645)
Other liabilities...................................... (2,655)
4. RELATED PARTY TRANSACTIONS
Transactions with related parties under common ownership by the Government
of Victoria are entered into in the normal course of business in accordance
with disaggregation service contracts. All amounts due/receivable are
non-interest bearing, except for Treasury Corporation of Victoria (TCV)
transactions.
The nature of significant related party transactions include:
- GASCOR for 100% of Gascor Holdings' agency commission revenue and for
95% of its natural gas supply.
- Transmission Pipelines Australia Pty Ltd (TPA) for transmitting all of
Gascor Holdings' natural gas through the transmission network and for
delivering natural gas to Gascor Holdings' distribution network.
- Stratus Networks for distribution of approximately 50% of Gascor
Holdings' natural gas through its distribution network.
- Ikon Energy which sells approximately 50% of the natural gas which is
distributed through Gascor Holdings' distribution network.
- VENCorp for control of the transmission and distribution networks.
- Gas Services Business for provision of a range of common gas industry
services.
- TCV for supply of funds.
GASCOR, TPA, Stratus Networks, Ikon Energy, VENCorp, Gas Services Business
and TCV were all owned by the Victorian Government at June 30, 1998.
F-61
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM DEBT
Gascor Holdings' borrowing requirements are all met through loan facilities
with TCV. The borrowings are repayable in full to TCV on privatization of
Gascor Holdings. At June 30, 1998, the borrowings of $418 million had
varying maturities ranging from July 1998 to June 1999. Under the
facilities, Gascor Holdings has the option to roll over its debt as it
matures on an ongoing basis without limitation, including to dates beyond
June 30, 1999.
As indicated, the terms of the debt with TCV required payment in full upon
privatization. On February 24, 1999, Gascor Holdings was purchased by TXU
Australia Group and the balance of the debt was paid in full. The debt has
been reflected in this balance sheet as long-term debt. This classification
is in accordance with the original terms with TCV and more appropriately
reflects the nature of the borrowing.
Gascor Holdings' borrowings from TCV were unsecured, but had the benefit of
a guarantee of the Treasurer of the State of Victoria in favor of TCV.
JUNE 30, 1998
-------------
5.45 % Fixed Interest Loan due June 15, 1999............ $ 334,720
5.00 % Fixed Interest Loan due July 31, 1998............. 25,000
5.26 % Fixed Interest Loan due August 31, 1998........... 25,000
Variable Rate Revolving Credit Facility 33,500
----------
(Interest rate based upon Bank Bill rate)
(The weighted average interest rate was 4.8 % per annum).
Total long-term debt.................................. $ 418,220
==========
F-62
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES
The components of Gascor Holdings' provision for income taxes are as
follows:
YEAR ENDED JUNE 30,
1998
Deferred income tax expense............................ $ 24,054
==========
Reconciliation of income taxes computed at the
Victorian State Equivalent Tax rate to the provision
for income taxes:
YEAR ENDED JUNE 30,
1998
Income before income taxes............................. $ 66,507
==========
Income taxes at the Victorian state $ 23,942
equivalent tax rate of 36%...........................
Non-deductible expenses................................ 112
----------
Provision for income taxes............................. $ 24,054
==========
Effective tax rate..................................... 36.17%
==========
F-63
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES (CONT'D)
Deferred income taxes provided for significant temporary differences
between the book and tax bases of assets and liabilities based on tax laws
in effect at June 30, 1998 are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------
TOTAL CURRENT NON-CURRENT
-------- ------- -----------
<S> <C> <C> <C>
Deferred Tax Assets:
Basis difference in property, plant and equipment.... $ 46,388 $ - $ 46,388
Provision for loss on contracts...................... 9,634 - 9,634
Net operating loss carryforwards..................... 7,716 - 7,716
Provision for land remediation....................... 3,832 - 3,832
Employee benefits.................................... 1,848 - 1,848
Other................................................ 118 72 46
-------- ------- --------
Total deferred tax assets.......................... 69,536 72 69,464
-------- ------- --------
Customer contributions............................... 410 - 410
Prepayments.......................................... 98 98 -
Prepaid pension costs................................ 1,497 - 1,497
Other................................................ 31 31 -
-------- ------- --------
Total deferred tax liabilities..................... 2,036 129 1,907
-------- ------- --------
Net deferred asset (liability)..................... $ 67,500 $ (57) $ 67,557
======== ======= ========
</TABLE>
At June 30, 1998, Gascor Holdings had approximately $21 million of tax loss
carryforwards that could be used to offset future taxable income. Such tax
loss carryforwards do not have expiration dates. These financial statements
were prepared on the assumption that operations would continue. As a
result, no valuation allowance has been recorded as it is more likely than
not that Gascor Holdings would be able to utilize the tax loss
carryforwards. On February 24, 1999, Gascor Holdings was purchased by TXU
Australia Holdings (Partnership) Limited Partnership, at which time Gascor
Holdings' deferred tax assets were realized.
F-64
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. REGULATION AND RATES
Gascor Holdings is subject to regulation by the Office of the Regulator
General (ORG). The ORG has the power to issue licenses for the supply,
distribution and sale of gas within Victoria and regulates tariffs for the
use of the transmission system, distribution system, and other ancillary
services. The existing tariff under which Gascor Holdings operates is in
effect through December 31, 2002. The ORG will review the existing tariff
to determine if it will be effective for the period commencing January 1,
2003. All gas retail prices are scheduled to be unregulated from September
1, 2001. While Gascor Holdings expects significant competition in the fully
competitive retail market it cannot predict the outcome of this process.
8. SHARE CAPITAL
Gascor Holdings No. 2 Pty Ltd was incorporated on June 30, 1997 by the
subscription of 12 ordinary shares of $1 each.
9. DIVIDEND REQUIREMENTS
The Gas Industry Act 1994 requires Gascor Holdings to pay to the Victorian
Government dividends as determined by the Victorian Government Treasurer
after consultation with the Board of Directors of Gascor Holdings. Gascor
Holdings is required to pay total dividends equal to 65 per cent of its
pre-tax profits, provided such amounts do not cause debt levels to rise
above those allocated to Gascor Holdings on July 1, 1997. For the period
ended June 30, 1998, Gascor Holdings paid $6.5 million in dividends and, at
June 30, 1998 declared an additional $32.0 million dividend which was paid
in December 1998.
10. FINANCIAL INSTRUMENTS
INTEREST RATE RISK
Gascor Holdings' revolving credit facility is subject to floating interest
rates. Gascor Holdings does not enter into any interest rate swap
agreements to manage its exposure to fluctuating interest rates.
Accordingly, each 0.25% change in the bank bill lending rate will result in
changes to interest expense of $84 thousand per year.
CONCENTRATION OF CREDIT RISK
Credit risk relates to the risk of loss that Gascor Holdings would incur as
a result of non-performance by counterparties to their respective financial
instruments. Gascor Holdings maintains credit policies with regard to its
counterparties that management believes significantly minimizes the overall
credit risk.
Gascor Holdings' financial instruments that are exposed to concentrations
of credit risk consist primarily of accounts receivables, of which 97% are
related to two customers. Gascor Holdings believes the risk of
non-performance by counterparties is minimal.
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The fair values of financial assets and liabilities approximate their
carrying values.
F-65
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLAN
Gascor Holdings sponsors a defined contribution pension plan covering
employees hired after March 31, 1995. Employees can contribute at any level
as a percentage of their salary. Gascor Holdings contributions were
determined at a rate of 6% of each covered employee's salary and totaled
$266 thousand for the year ended June 30, 1998.
DEFINED BENEFIT PLAN
Gascor Holdings sponsors a defined benefit pension plan covering employees
hired prior to March 31, 1995. The plan benefits are based on participants'
contributions, and number of years of service and final average salaries.
Employees contribute at 5% of their salaries. Gascor Holdings'
contributions range from up to 13% of participants' salaries depending upon
the funding ratio of the plan as calculated in accordance with the plan's
contribution rules. Based upon these calculations, no contributions to the
plan were required during the year ended June 30, 1998.
JUNE 30, 1998
-------------
Change in pension obligation:
----------------------------
Pension benefit obligation at beginning of year..... $ 20,074
Service cost........................................ 956
Interest cost....................................... 1,255
Participant contributions........................... 234
Benefits paid....................................... (1,377)
Tax paid............................................ (5)
Amounts received from other funds................... 211
Actuarial loss...................................... 98
---------
Pension obligation at end of year................... $ 21,446
=========
Change in plan assets:
---------------------
Fair value of assets at beginning of year........... $ 24,666
Actual return on assets ............................ 1,491
Participant contributions........................... 234
Benefits paid....................................... (1,377)
Tax paid............................................ (5)
Amounts received from other funds................... 211
---------
Fair value of assets at end of year................. $ 25,220
=========
Funded status:
-------------
Pension obligation.................................. (21,446)
Fair value of assets................................ 25,220
Unamortized loss brought forward.................... 384
---------
Prepaid pension cost................................ $ 4,158
=========
F-66
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. EMPLOYEE BENEFIT PLANS (CONT'D)
JUNE 30, 1998
Weighted average assumptions:
----------------------------
Discount rate....................................... 6.0%
Expected return on plan assets...................... 7.0%
Rate of compensation increase....................... 4.5%
Components of net periodic pension cost:
---------------------------------------
Service cost........................................ $ 956
Interest cost....................................... 1,255
Expected return on plan assets...................... (1,777)
---------
Net periodic pension cost........................... $ 434
=========
12. COMMITMENTS AND CONTINGENCIES
OPERATING EXPENDITURES
Gascor Holdings is obligated under non-cancelable service contracts entered
into by Gascor Holdings on disaggregation at July 1, 1997 with various
related parties under common ownership by the Government of Victoria for $8
million through February 2000, and non-cancelable maintenance contracts
with a third party for the maintenance of the gas distribution assets for
$13 million through September 1999.
LAND RECLAMATION
Gascor Holdings was allocated certain properties on December 11, 1997 that
were contaminated. A provision for land reclamation in relation to the
contaminated properties was allocated and is recorded in the balance sheet.
The provision is based on the estimate of the land reclamation costs
following site reviews and limited testing. The cost of reclamation may
increase if the extent of contamination is found to be worse than testing
indicated at the time of the reviews. Under the Environment Protection Act
1970, the Victorian Environment Protection Authority has the power to order
Gascor Holdings to incur such costs to remedy contamination of the land.
F-67
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES (CONT'D)
GAS OUTAGE
In June 1998, an ice blockage at the gas processing plant at Longford,
Gippsland, prevented it from supplying the usual volume of gas into the
Victorian natural gas network. As a consequence of this emergency, VENCorp
directed all Victorian gas retailers, including Gascor Holdings, to curtail
supply of gas to certain customers. Gascor Holdings carried out those
directions.
Some customers have indicated their intention to make claims against Gascor
Holdings for unspecified damages arising from the curtailment. To date, no
court proceedings have commenced.
LEGAL PROCEEDINGS
Esso's gas processing plant at Longford exploded in September 1998 causing
prolonged interruption of gas supplies in Victoria. Subsequently, a class
action was commenced in the Federal Court of Australia against Esso on
behalf of a large number of domestic and commercial consumers claiming
damages for loss of supply.
Esso has joined the Victorian Government and related entities to the
action, including those which sold and distributed Esso gas prior to these
businesses being acquired by private operators. Esso has also joined
private operators as well, (Esso Cross-Claim) including Westar, Kinetik
Energy and Western Underground Gas Storage, claiming any such liability
passed to them as part of the sale of the businesses from the government.
As currently pleaded before the Federal Court of Australia, the claims
cover actions in negligence and in misleading and deceptive conduct.
On April 3, 2000, the State of Victoria and the state owned entities who
were vendors of the business and assets to Westar and Kinetik Energy served
a Cross-Claim (State Cross-Claim) on Westar and Kinetik Energy. The State
Cross-Claim seeks orders against Westar and Kinetik Energy that they are
liable for any liability of the state owned vendors which may be found
against those entities in relation to the Esso Cross-Claim. To the extent
the State Cross-Claim raises issues which are already raised against Westar
and Kinetik Energy in the Esso Cross-Claim, it does not materially affect
the potential liability of Westar and Kinetik Energy in the litigation. If
Esso is found liable and is successful in its cross claims, the potential
liability of Westar, Kinetik Energy and Western Underground Gas Storage
could be significant.
Based on legal analysis of pleadings filed so far and the likely defenses
available, TXU Australia Group believes that the claims against Westar,
Kinetik Energy and Western Underground Gas Storage (and the proposed State
Cross-Claim) are without merit. However, given the complexity and magnitude
of the claims involved in this litigation, TXU Australia Group cannot
predict the ultimate outcome at this time. TXU Australia Group intends to
vigorously pursue all of its defenses in this litigation.
F-68
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES (CONT'D)
SUPPLY OF NATURAL GAS TO THE WIMMERA REGION
The towns of Ararat, Stawell and Horsham, Victoria, Australia (Wimmera
towns) were fully converted from tempered liquefied petroleum gas to
natural gas by the end of 1998. The first natural gas was supplied to
Ararat in May 1998. To supply the Wimmera towns, a new transmission
pipeline was constructed. Gascor Holdings has a transmission contract for
use of that pipeline which requires it to pay a defined amount per annum
until 2013 and a supply obligation at regulated prices through 2013.
Gascor Holdings expects to incur losses in the amount of $53 million (in
1998 dollars undiscounted) over the period 2001 to 2013. Gascor Holdings
recorded a provision for the discounted value of the expected losses of $27
million upon disaggregation of GASCOR on July 1, 1997.
EMPLOYMENT AGREEMENTS
Gascor Holdings has entered into employment service agreements (ESA's) with
certain employees. The agreements set forth compensation and related terms
of their employment. Should Gascor Holdings terminate an ESA prior to its
expiration, other than for illness or acts of dishonesty, Gascor Holdings
would be required to pay the employee's compensation, as defined in the
ESA. As of June 30, 1998, Gascor Holdings would be required to pay
approximately $1.4 million in the event Gascor Holdings terminates the
employees covered by all of the ESA's.
GAS TAKE-OR-PAY CONTRACTS
Gascor Holdings is party to various types of contracts for the purchase of
gas. These include "take-or-pay" obligations under which the buyer agrees
to pay for a minimum quantity of gas in a year. At June 30, 1998, Gascor
Holdings had commitments under long-term gas purchase contracts of
approximately $1.3 billion through 2009. Management does not consider it
likely that any material payments will be required for gas not taken.
SUPPLY AND SALE ARRANGEMENTS
Gascor Holdings has entered into supply and sale arrangements with related
parties as disclosed in Note 4 to the consolidated financial statements.
GENERAL
In addition to the above, Gascor Holdings is involved in various legal and
administrative proceedings and has other contingencies, that, in the
opinion of management, the ultimate resolution should not have a material
effect upon its financial position, results of operations or cash flows.
F-69
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SEGMENT INFORMATION
Gascor Holdings' reportable segments are strategic business units that
offer different products or services. They are managed separately because
each business requires different marketing strategies.
Gascor Holdings has two reportable operating segments:
(1) NETWORKS - operations engaged in the distribution of natural gas
in the State of Victoria.
(2) RETAIL - operations engaged in the purchase and sale of natural
gas primarily in the State of Victoria.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Gascor Holdings evaluates
performance based on net income or loss. Gascor Holdings accounts for
intersegment sales or transfers as if the sales or transfers were to third
parties, that is, at current market prices.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998
-----------------------------------------------
NETWORK RETAIL ELIMINATIONS CONSOLIDATED
-----------------------------------------------
THOUSANDS OF AUSTRALIAN DOLLARS
-------------------------------
<S> <C> <C> <C> <C>
Trade Revenues.................. $ 64,952 $ 197,944 $ - $ 262,896
Affiliated Revenues............. 54,817 - (54,817) -
Depreciation and Amortization... 11,386 368 - 11,754
Interest Income................. 10 431 - 441
Interest Expense................ 23,623 - - 23,623
Income Tax Expense.............. 16,448 7,606 - 24,054
Net Income...................... 31,674 10,779 - 42,453
Investment in Unconsolidated
Affiliates...................... 247 - - 247
Total Assets.................... 460,997 95,989 - 556,986
Capital Expenditures............ 23,514 409 - 23,923
</TABLE>
F-70
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SUBSEQUENT EVENTS
ACQUISITION OF THE ASSETS AND LIABILITIES OF THE WESTAR AND KINETIK ENERGY
BUSINESSES OF GASCOR HOLDINGS NO. 2 PTY LTD BY TXU AUSTRALIA HOLDINGS
(PARTNERSHIP) LIMITED PARTNERSHIP
On February 24, 1999, TXU Australia Holdings (Partnership) Limited
Partnership acquired from Gascor Holdings the gas retail business of
Kinetik Energy Pty Ltd, the gas distribution operations of Westar Pty Ltd
and the assets of Westar (Assets) Pty Ltd. The purchase price was $1.6
billion.
In accordance with the terms of the debt agreement with Treasury
Corporation of Victoria, the outstanding debt was paid in full upon
privatization.
In addition, Gascor Holdings determined its outstanding obligation for
State Equivalent Tax up to the date of acquisition and made final payment
of $275 million to the Government of Victoria.
F-71
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED DECEMBER 31,
--------------------------------
1998 1997
---- ----
THOUSANDS OF AUSTRALIAN DOLLARS
OPERATING REVENUES............................... $ 143,824 $ 131,866
----------- ---------
OPERATING EXPENSES
Purchased gas and distribution costs........... 55,678 52,906
Operation and maintenance...................... 33,344 33,327
Depreciation and amortization.................. 6,151 5,552
Loss from interruption of gas supply (Note 3).. 4,401 -
----------- ---------
Total operating expenses..................... 99,574 91,785
----------- ---------
OPERATING INCOME................................. 44,250 40,081
OTHER INCOME/(EXPENSE) - NET..................... (79) 56
----------- ---------
INCOME BEFORE INTEREST AND INCOME TAXES ......... 44,171 40,137
INTEREST INCOME.................................. 925 92
INTEREST EXPENSE................................. (11,508) (11,954)
----------- ---------
INCOME BEFORE INCOME TAXES....................... 33,588 28,275
INCOME TAX EXPENSE............................... 12,105 10,193
----------- ---------
NET INCOME....................................... $ 21,483 $ 18,082
=========== =========
See Notes to Condensed Consolidated Financial Statements.
F-72
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
DECEMBER 31, JUNE 30,
---------------------------------
1998 1998
---- ----
THOUSANDS OF AUSTRALIAN DOLLARS
PROPERTY, PLANT AND EQUIPMENT
Gas distribution and pipeline.................. $ 390,913 $ 381,772
Land........................................... 4,427 4,427
Buildings...................................... 6,788 6,759
Other.......................................... 4,251 4,009
----------- ---------
Total........................................ 406,379 396,967
Less accumulated depreciation.................. 17,858 11,754
----------- ---------
Net of accumulated depreciation.............. 388,521 385,213
Construction work in progress.................. 4,399 900
----------- ---------
Net property, plant and equipment............ 392,920 386,113
----------- ---------
INVESTMENTS...................................... 194 247
----------- ---------
CURRENT ASSETS
Cash and cash equivalents...................... 31,908 30,039
Accounts receivable ........................... 35,219 65,328
Inventories - at average cost:
Materials and supplies....................... 778 902
Fuel stock................................... 46 82
Property held for sale......................... - 324
Other current assets........................... 2,084 2,236
----------- ---------
Total current assets 70,035 98,911
----------- ---------
OTHER NONCURRENT ASSETS
Deferred tax assets............................ 55,371 67,557
Prepaid pension asset ......................... 4,019 4,158
----------- ---------
Total other non-current assets............... 59,390 71,715
----------- ---------
TOTAL ASSETS..................................... $ 522,539 $ 556,986
=========== =========
See Notes to Condensed Consolidated Financial Statements.
F-73
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
CAPITALIZATION AND LIABILITIES
DECEMBER 31, JUNE 30,
---------------- --------------
1998 1998
---- ----
THOUSANDS OF AUSTRALIAN DOLLARS
CAPITALIZATION
Share capital.................................. $ - $ -
Retained earnings.............................. 25,436 3,953
----------- ---------
Total shareholder's equity................... 25,436 3,953
Long-term debt................................. 400,120 418,220
----------- ---------
Total capitalization......................... 425,556 422,173
----------- ---------
CURRENT LIABILITIES
Accounts payable............................... 22,666 28,530
Agency commission advance from GASCOR.......... 30,000 30,000
Dividend payable............................... - 32,000
Interest accrued............................... 1,109 1,183
Other current liabilities...................... 3,457 3,429
----------- ---------
Total current liabilities.................... 57,232 95,142
----------- ---------
OTHER NONCURRENT LIABILITIES
Provision for losses on contract............... 26,761 26,761
Provision for land reclamation................. 10,521 10,645
Other.......................................... 2,469 2,265
----------- ---------
Total other non-current liabilities.......... 39,751 39,671
----------- ---------
COMMITMENTS AND CONTINGENCIES (Note 5)
TOTAL CAPITALIZATION AND LIABILITIES............. $ 522,539 $ 556,986
=========== =========
See Notes to Condensed Consolidated Financial Statements.
F-74
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED DECEMBER 31,
--------------------------------
1998 1997
---- ----
THOUSANDS OF AUSTRALIAN DOLLARS
CASH FLOWS - OPERATING ACTIVITIES
Net income..................................... $ 21,483 $ 18,082
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization................ 6,151 5,552
Deferred income taxes - net.................. 12,129 10,193
Equity interest in losses (profits) of
associate.................................. 53 (88)
Loss on sale of fixed assets................. 26 32
Changes in operating assets and liabilities:
Accounts receivable ......................... 30,109 (4,877)
Inventories.................................. 160 (434)
Accounts payable............................. (5,864) 9,826
Interest accrued ............................ (74) 1,311
Other working capital - net ................. 699 (409)
Other - net.................................. 81 (286)
----------- ---------
Cash provided by operating activities...... 64,953 38,902
----------- ---------
CASH FLOWS - FINANCING ACTIVITIES
Repayment of borrowings........................ (50,000) (13,280)
Proceeds from borrowings....................... 31,900 -
Cash dividends paid............................ (32,000) -
----------- ---------
Cash used in financing activities.......... (50,100) (13,280)
----------- ---------
CASH FLOWS - INVESTING ACTIVITIES
Construction expenditures...................... (13,306) (9,614)
Proceeds from sale of fixed assets............. 322 -
----------- ---------
Cash used in investing activities.......... (12,984) (9,614)
----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,869 16,008
CASH AND EQUIVALENTS - BEGINNING BALANCE 30,039 -
----------- ---------
CASH AND EQUIVALENTS - ENDING BALANCE $ 31,908 $ 16,008
----------- ---------
See Notes to Condensed Consolidated Financial Statements.
F-75
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED SHAREHOLDER'S EQUITY (UNAUDITED)
SIX MONTHS ENDED DECEMBER 31,
--------------------------------
1998 1997
---- ----
THOUSANDS OF AUSTRALIAN DOLLARS
SHARE CAPITAL
Ordinary shares (100,000,000 authorized,
12 issued and outstanding)..................... $ - $ -
RETAINED EARNINGS:
Balance at beginning of the period............. 3,953 -
Net income..................................... 21,483 18,082
Dividends declared............................. - (6,500)
----------- ---------
Balance at end of the period................... 25,436 11,582
----------- ---------
SHAREHOLDER'S EQUITY $ 25,436 $ 11,582
=========== =========
See Notes to Condensed Consolidated Financial Statements.
F-76
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND FORMATION
GASCOR HOLDINGS
Gascor Holdings No. 2 Pty Ltd (Gascor Holdings), through its subsidiaries
Westar Pty Ltd (Westar), Westar (Assets) Pty Ltd (Westar Assets), and
Kinetik Energy Pty Ltd (Kinetik Energy) (collectively Gascor Holdings),
engages in the distribution and sale of natural gas and tempered liquefied
petroleum gas in the State of Victoria, Australia.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements of Gascor Holdings have
been prepared in conformity with accounting principles generally accepted
in the United States of America (US) except for the valuation of property,
plant and equipment, which is stated at fair value, consistent with the
June 30, 1998 consolidated financial statements.
In the opinion of management, all adjustments (constituting only normal
recurring accruals) necessary for a fair presentation of the results of
operations and financial position have been included therein. Certain
information and footnote disclosures normally included in annual
consolidated financial statements prepared in accordance with US generally
accepted accounting principles have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission.
All dollar amounts in the condensed consolidated financial statements and
tables in the notes are stated in thousands of Australian dollars unless
otherwise indicated.
3. LOSS FROM INTERRUPTION OF GAS SUPPLY
In September 1998, an explosion occurred at Esso Australia Resources
Limited's (Esso) processing plant at Longford, Victoria and caused a
significant interruption to gas supply. As a result, Gascor Holdings
incurred costs relating to the restoration of gas supplies, resulting in a
loss of $4.4 million.
4. LONG-TERM DEBT
In October 1998, Gascor Holdings borrowed $15 million from the Treasury
Corporation of Victoria (TCV) at a fixed interest rate of 4.77% and a
maturity date of February 26, 1999. The terms of the debt with TCV required
payment in full upon privatization. On February 24, 1999, Gascor Holdings
was purchased by TXU Australia Holdings (Partnership) Limited Partnership
(TXU Australia Group) and the debt was paid in full. The debt has been
reflected in this balance sheet according to the original terms of the
facility under which such debt could be rolled over upon the maturity on an
ongoing basis without limitation, including dates beyond December 31, 1999.
F-77
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. COMMITMENTS AND CONTINGENCIES
GAS OUTAGE
In June 1998, an ice blockage at the gas processing plant at Longford,
Gippsland, prevented it from supplying the usual volume of gas into the
Victorian natural gas network. As a consequence of this emergency, VENCorp
directed all Victorian gas retailers, including Gascor Holdings, to curtail
supply of gas to certain customers. Gascor Holdings carried out those
directions.
Some customers have indicated their intention to make claims against Gascor
Holdings for unspecified damages arising from the curtailment. To date, no
court proceedings have commenced.
LEGAL PROCEEDINGS
Esso's gas processing plant at Longford exploded in September 1998 causing
prolonged interruption of gas supplies in Victoria. Subsequently, a class
action was commenced in the Federal Court of Australia against Esso on
behalf of a large number of domestic and commercial consumers claiming
damages for loss of supply.
Esso has joined the Victorian Government and related entities to the
action, including those which sold and distributed Esso gas prior to these
businesses being acquired by private operators. Esso has also joined
private operators as well, (Esso Cross-Claim) including Westar, Kinetik
Energy and Western Underground Gas Storage, claiming any such liability
passed to them as part of the sale of the businesses from the government.
As currently pleaded before the Federal Court of Australia, the claims
cover actions in negligence and in misleading and deceptive conduct.
On April 3, 2000, the State of Victoria and the state owned entities who
were vendors of the business and assets to Westar and Kinetik Energy served
a Cross-Claim (State Cross-Claim) on Westar and Kinetik Energy. The State
Cross-Claim seeks orders against Westar and Kinetik Energy that they are
liable for any liability of the state owned vendors which may be found
against those entities in relation to the Esso Cross-Claim. To the extent
the State Cross-Claim raises issues which are already raised against Westar
and Kinetik Energy in the Esso Cross-Claim, it does not materially affect
the potential liability of Westar and Kinetik Energy in the litigation
If Esso is found liable and is successful in its cross claims, the
potential liability of Westar, Kinetik Energy and Western Underground Gas
Storage could be significant.
Based on a legal analysis of pleadings filed so far and the likely defenses
available, TXU Australia Group believes that the claims against Westar,
Kinetik Energy and Western Underground Gas Storage (and the proposed State
Cross-Claim) are without merit. However, given the complexity and magnitude
of the claims involved in this litigation, TXU Australia Group cannot
predict the ultimate outcome at this time. TXU Australia Group intends to
vigorously pursue all of its defenses in this litigation
GENERAL
In addition to the above, Gascor Holdings is involved in various legal and
administrative proceedings and has other contingencies, the ultimate
resolution of which, in the opinion of management, should not have a
material effect upon its financial position, results of operations or cash
flows.
F-78
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. SEGMENT INFORMATION
Gascor Holdings' reportable segments are strategic business units that
offer different products or services. They are managed separately because
each business requires different marketing strategies.
Gascor Holdings has two reportable operating segments:
(1) NETWORK- operations engaged in the distribution of natural gas in
the State of Victoria.
(2) RETAIL- operations engaged in the purchase and sale of natural
gas primarily in the State of Victoria.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Gascor Holdings evaluates
performance based on net income or loss. Gascor Holdings accounts for
intersegment sales or transfers as if the sales or transfers were to third
parties, that is, at current market prices.
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
NETWORK RETAIL OTHER ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------------------------
THOUSANDS OF AUSTRALIAN DOLLARs
<S> <C> <C> <C> <C> <C>
Trade Revenues -
1998.............. $ 35,124 $ 108,700 $ - $ - $ 143,824
1997.............. 33,676 98,190 - - 131,866
Affiliated Revenues -
1998.............. 29,163 44 - (29,207) -
1997.............. 29,638 - - (29,638) -
Net Income -
1998.............. 16,771 4,712 - - 21,483
1997.............. 16,254 1,828 - - 18,082
</TABLE>
F-79
<PAGE>
GASCOR HOLDINGS NO. 2 PTY LTD AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. SUBSEQUENT EVENTS
ACQUISITION OF THE ASSETS AND LIABILITIES OF THE WESTAR AND KINETIK ENERGY
BUSINESSES OF GASCOR HOLDINGS NO. 2 PTY LTD BY TXU AUSTRALIA HOLDINGS
(PARTNERSHIP) LIMITED PARTNERSHIP
On February 24, 1999, TXU Australia Holdings (Partnership) Limited
Partnership acquired from Gascor Holdings the gas retail business of
Kinetik Energy Pty Ltd, the gas distribution operations of Westar Pty Ltd
and the assets of Westar (Assets) Pty Ltd. The purchase price was $1.6
billion.
In accordance with the terms of the debt agreement with Treasury
Corporation of Victoria, the outstanding debt was paid in full upon
privatization.
In addition, Gascor Holdings determined its outstanding obligation for
State Equivalent Tax up to the date of acquisition and made final payment
of $275 million to the Government of Victoria.
F-80
<PAGE>
EXHIBIT INDEX
PREVIOUSLY FILED
----------------
WITH FILE AS
EXHIBIT NUMBER EXHIBIT DESCRIPTION
--------- ------ ------- -------------
1 * Form of Underwriting Agreement.
3(a) * Limited Partnership Deed, dated January 27, 1999,
between TXU Australia Holdings (AGP) Pty Limited,
TXU Australia (LP) No.1 Limited and TXU Australia
(LP) No.2 Limited.
3(b) * Deed of Amendment to the Partnership Deed, dated
February 23, 1999, between TXU Australia Holdings
(AGP) Pty Limited, TXU Australia (LP) No.1 Limited
and TXU Australia (LP) No.2 Limited.
3(c) ** Second Deed of Amendment to the Partnership Deed,
dated May 16, 2000, between TXU Australia Holdings
(AGP) Pty Limited, TXU Australia (LP) No.1 Limited
and TXU Australia (LP) No.2 Limited.
3(d) ** Third Deed of Amendment to the Partnership Deed,
dated May 31, 2000, between TXU Australia Holdings
(AGP) Pty Limited, TXU Australia (LP) No.1 Limited
and TXU Australia (LP) No.2 Limited
4(a) * Form of Indenture between TXU Australia and
Trustee.
4(b) * Form of Officer's Certificate of TXU Australia,
establishing the terms of the JUMPS.
4(c) * Deed of Common Terms, dated February 24, 1999,
among TXU Australia, certain of its affiliates and
the Senior Lenders.
4(d) * Indenture, dated as of December 1, 1996, between
Eastern Energy and The Bank of New York as
Trustee.
4(e) Indenture (for Unsecured Debt Securities), dated
August 15, 2000, between TXU Australia and The
Bank of New York as Trustee.
4(f) Credit Wrapped MTN Deed Poll, dated September 11,
2000, by TXU Australia and TXU Holdings in favor
of MTN Holders.
4(g) Non-Credit Wrapped MTN Deed Poll, dated September
11, 2000, by TXU Australia and TXU Holdings in
favor of MTN Holders.
4(h) MTN Deed of Guarantee and Indemnity, dated
September 11, 2000, by TXU Australia and TXU
Holdings in favor of MTN Holders.
4(i) Credit Wrapped AUD Medium Term Notes Reimbursement
Agreement, dated September 11, 2000, between TXU
Australia, TXU Australia (Holdings) AGP, TXU (No.
8) Pty, TXU Australia Holdings and MBIA Insurance
Company.
4(j) Subordinated Facility Agreement, dated February
24, 1999, between TXU Australia, Eastern Energy
and Citibank, N.A.
<PAGE>
4(k) Amended and Restated Subordinated Facility
Agreement, dated June 30, 2000, between TXU
Australia, Citibank, N.A. and Citisecurities
Limited.
4(l) Amendment and Restatement Agreement relating to
Subordinated Facility Agreement, dated June 30,
2000, between TXU Australia, TXU Electricity, TXU
Corp., Citibank, B.A. Australia, Westpac Banking
Corporation and Citisecurities Limited.
4(m) Deed Poll, dated June 30, 2000, by TXU Australia
in favor of Financiers, Arranger and
Administrative Agent.
5(a) Opinion of Worsham Forsythe Wooldridge LLP.
5(b) Opinion of Thelen Reid & Priest LLP.
5(c) Opinion of Baker & McKenzie, Melbourne, Australia.
8(a) Tax opinion of Thelen Reid & Priest (included in
the opinion filed as Exhibit 5(b))
8(b) Tax opinion of Baker & McKenzie, Melbourne,
Australia (included in the opinion filed on
Exhibit 5(c)
10(a) ** Master Agreement, dated December 23, 1998, between
Gascor, Energy 21 Pty Ltd, Ikon Energy Pty Ltd,
Kinetik Energy Pty Ltd and Gas Release Co. Pty
Ltd.
10(b) ** Agency Agreement, dated August 14, 1998, between
Gascor and Kinetik Energy Pty Ltd.
10(c) ** Sub-Sales Agreement, dated August 14, 1998,
between Gascor and Kinetik Energy Pty Ltd.
10(d) Network Services Alliance Agreement, between TXU
Australia, Tenix, Eastern Energy, Westar, Akaman
Pty Ltd. and TXU Networks Pty Ltd.
12 Computation of ratio of earnings to fixed charges.
21 * TXU Australia Group companies.
23(a) Consent of Deloitte Touche Tohmatsu, independent
auditors.
23(b) Consents of Worsham Forsythe Wooldridge LLP,
Thelen Reid & Priest LLP and Baker & McKenzie
(included in the Opinions filed as Exhibits 5(a),
5(b), 5(c) and 8, hereto).
24 ** Powers of Attorney.
25 * Statement of Eligibility of Trustee.
27 Financial Data Schedule.
* Previously filed with the original Registration Statement (No. 333-36484)
on May 5, 2000.
** Previously filed with the Amendment No. 1 to the original Registration
Statement (No. 333-36484) on October 2, 2000.
