UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
-- OR--
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
EXACT NAME OF REGISTRANT AS
SPECIFIED IN ITS CHARTER; STATE OR OTHER
COMMISSION ADDRESS OF PRINCIPAL EXECUTIVE I.R.S. EMPLOYER JURISDICTION OF
FILE NUMBER OFFICES; AND TELEPHONE NUMBER IDENTIFICATION NO. INCORPORATION
- --------------------------------------------------------------------------------
001-15709-01 TXU EUROPE CAPITAL I To Be Applied For Delaware
Energy Plaza
1601 Bryan Street
Dallas, Texas 75201-3411
(214) 812-4600
333-82307-02 TXU EUROPE FUNDING I, L.P. To Be Applied For Delaware
Suite 350
1013 Centre Street
Wilmington, Delaware 19805
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
REGISTRANT TITLE OF EACH CLASS WHICH REGISTERED
- ---------- ------------------- ----------------
TXU Europe Capital I 9 3/4% Trust Originated New York Stock Exchange
Preferred Securities
- --------------------------------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes No X
---- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of common stock
held by non-affiliates: TXU Europe Capital I - None
TXU Europe Funding I, L.P. - None
Common stock outstanding at May 4, 2000: TXU Europe Capital I - None
TXU Europe Funding I, L.P. - None
DOCUMENTS INCORPORATED BY REFERENCE: PROSPECTUS, DATED FEBRUARY 24, 2000,
FILED PURSUANT TO RULE 424(B) (3) IN CONNECTION WITH REGISTRATION STATEMENT ON
FORM S-1 (NOS. 333-93509, 333-93509-01, 333-93509-02 AND 333-93509-03) FILED BY
THE REGISTRANTS, TXU EASTERN FUNDING COMPANY AND TXU EUROPE LIMITED,
INCORPORATED IN PART BY REFERENCE IN PART I.
<PAGE>
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS .......................................................... 1
SUMMARY CORPORATE STRUCTURE........................................ 1
TXU EUROPE CAPITAL I .............................................. 1
TXU EUROPE FUNDING I, L.P.......................................... 1
TXU EUROPE LIMITED................................................. 2
ITEM 2. PROPERTIES......................................................... 2
ITEM 3. LEGAL PROCEEDINGS.................................................. 2
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 2
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................ 2
ITEM 6. SELECTED FINANCIAL DATA............................................ 3
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................. 3
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......... 3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ 3
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...........................................10
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................10
ITEM 11. EXECUTIVE COMPENSATION.............................................11
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....11
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................11
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K....11
SIGNATURES ...............................................................14
i
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PART I
ITEM 1. BUSINESS
SUMMARY CORPORATE STRUCTURE
TEXAS UTILITIES COMPANY (doing business as TXU Corp.)
TXU EUROPE LIMITED
TXU Europe CP, Inc.
TXU Europe Capital I
TXU Europe Funding I, L.P.
TXU EUROPE CAPITAL I
TXU Europe Capital I (TXU Europe Capital or the Trust) is a statutory business
trust created under the Delaware Business Trust Act pursuant to a trust
agreement (Trust Agreement) and the filing of a certificate of trust with the
Secretary of State of the State of Delaware on November 22, 1999. The Trust
Agreement was subsequently amended by an Amended and Restated Trust Agreement
dated as of March 2, 2000. TXU Europe CP, Inc. (the Control Party), a Delaware
corporation, retains administrative and appointment powers with respect to the
trust by virtue of its ownership of the trust's control certificate. The control
certificate does not provide any economic interest in the trust to the Control
Party. The trust exists for the exclusive purpose of (i) issuing the control
certificate and 9 3/4% Trust Originated Preferred Securities (Preferred Trust
Securities) representing undivided beneficial ownership interest in the assets
of the Trust, (ii) investing the gross proceeds from the issuance of the
Preferred Trust Securities in 9.75% Preferred Partnership Securities of TXU
Europe Funding I, L.P. (TXU Europe Funding or the Partnership), representing the
limited partnership interests of the Partnership and (iii) engaging in only
those other activities necessary or incidental thereto. The Trust has a
perpetual existence, subject to certain termination events as provided in its
Amended and Restated Trust Agreement. The Trust has no employees.
TXU EUROPE FUNDING I, L.P.
TXU Europe Funding I, L.P. is a limited partnership that was formed
under the Delaware Revised Uniform Limited Partnership Act, as amended, pursuant
to an agreement of limited partnership and the filing of a certificate of
limited partnership with the Secretary of State of Delaware on November 22,
1999, which was subsequently amended by an amended and restated agreement of
limited partnership dated as of March 2, 2000. TXU Europe Limited is the sole
general partner of the Partnership. The Partnership is managed by the general
partner and exists for the exclusive purpose of (i) issuing its Partnership
interests, (ii) purchasing certain eligible debt instruments of TXU Eastern
Funding Company (TXU Eastern Funding) and TXU Europe Group plc with the proceeds
from (a) the sale of its 9.75% Preferred Partnership Securities, representing
limited partnership interests in the Partnership, to the Trust and (b) a capital
contribution from TXU Europe Limited in exchange for the general partnership
interest in the Partnership (collectively, the Partnership Proceeds) and (iii)
engaging in only those other activities necessary or incidental thereto. The
Partnership has no employees.
The information set forth under the headings "TXU Europe Capital I",
"TXU Europe Funding I, L.P." "Description of the TOPrS", "Description of the
Trust Guarantee", "Description of the Preferred Partnership Securities",
1
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"Description of the Partnership Guarantee" and "Description of the Funding
Debentures" in the Prospectus dated February 24, 2000 of the Trust and the
Partnership are incorporated by reference herein.
TXU EUROPE LIMITED
TXU Europe Limited is the sole general partner of the Partnership. In
addition, the Control Party is a wholly-owned subsidiary of TXU Europe Limited.
TXU Europe Limited is a private limited company incorporated under the laws of
England and Wales on February 5, 1998 and is an indirect wholly-owned subsidiary
of TXU Corp. TXU Corp. is a holding company that, through its subsidiaries, is
engaged in the generation, purchase, transmission, distribution and sale of
electricity; the gathering, processing, transmission and distribution of natural
gas; energy services; and telecommunications, primarily in the United States
(US), Europe and Australia. TXU Europe Limited is a holding company for TXU
Corp.'s United Kingdom (UK) and other European operations.
Almost all of TXU Europe Limited's operating income is derived from TXU
Europe Group plc (TXU Europe Group) and TXU Europe Group's subsidiaries, and
almost all of TXU Europe Limited's consolidated assets are held by TXU Europe
Group and TXU Europe Group's subsidiaries. TXU Europe Limited owns 90% of the
outstanding ordinary shares of TXU Finance (No. 2) Limited, (TXU Finance). The
remaining 10% of TXU Finance's outstanding ordinary shares are owned by a
wholly-owned US subsidiary of TXU Corp.
TXU Eastern Funding is a private unlimited company incorporated under
the laws of England and Wales and is a wholly-owned indirect subsidiary of TXU
Europe Limited. TXU Eastern Funding was organized solely to provide funding for
the operations of TXU Europe Limited and its subsidiaries by issuing debt
securities and lending the proceeds to TXU Europe Limited.
ITEM 2. PROPERTIES
None
ITEM 3. LEGAL PROCEEDINGS
TXU Europe Capital and TXU Europe Funding know of no material legal or
arbitration proceedings which could have a material adverse effect upon TXU
Europe Capital's or TXU Europe Funding's businesses or financial positions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The control certificate of the Trust and the general partnership interest in the
Partnership are owned directly or indirectly by TXU Europe Limited and
ultimately held indirectly by TXU Corp.
2
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ITEM 6. SELECTED FINANCIAL DATA
None. The Trust and the Partnership have been in existence from formation
(November 22, 1999), and there have been no changes in the financial condition
or results of operations for the period from formation through December 31,
1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
None. The Trust and the Partnership have been in existence from formation
(November 22, 1999), and there have been no changes in the financial condition
or results of operations for the period from formation through December 31,
1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None. The Trust and the Partnership have been in existence from formation
(November 22, 1999), and there have been no transactions involving market risk
for the period from formation through December 31, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
3
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INDEPENDENT AUDITORS' REPORT
----------------------------
To the Trustees of TXU Europe Capital I
We have audited the accompanying balance sheet of TXU Europe Capital I
(the "Trust") as of December 31, 1999. This balance sheet is the responsibility
of the Trust's management. Our responsibility is to express an opinion on this
balance sheet 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 balance
sheet is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the balance sheet. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of the Trust as of December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America.
/S/ DELOITTE & TOUCHE
May 4, 2000
London, England
4
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BALANCE SHEET OF
TXU EUROPE CAPITAL I
December 31, 1999
-----------------
Assets.................................................$ 0
==========
Trust Originated Preferred Securities..................$ 0
==========
NOTES TO BALANCE SHEET OF TXU EUROPE CAPITAL I
1. DESCRIPTION OF BUSINESS
TXU Europe Capital I (TXU Europe Capital or the Trust) is a
statutory business trust formed on November 22, 1999 under the laws of
the State of Delaware for the exclusive purpose of (i) issuing Trust
Originated Preferred Securities (Preferred Trust Securities)
representing undivided beneficial ownership interest in the assets of
the Trust, (ii) purchasing Preferred Partnership Securities
representing the limited partnership interests of TXU Europe Funding I,
L.P. (TXU Europe Funding or the Partnership) with the proceeds from the
sale of the Preferred Trust Securities, and (iii) engaging in only
those other activities necessary or incidental thereto. The Trust has a
perpetual existence, subject to certain termination events as provided
in its Trust Agreement.
The proceeds from the Trust's sale of the Preferred Trust
Securities will be used to purchase the Preferred Partnership
Securities from the Partnership. Holders of the Preferred Trust
Securities will have limited voting rights and will not be entitled to
vote to appoint, remove or replace, or to increase or decrease the
number of, Trustees, which voting rights are vested exclusively in the
holder of a control certificate.
TXU Europe Limited will be obligated to pay compensation to the
underwriters of the offering of the Preferred Trust Securities. TXU
Europe Limited will pay all fees and expenses related to the
organization and operations of the Trust (including any taxes, duties,
assessments or governmental charges of whatever nature (other than
withholding taxes) imposed by the United States or any other domestic
taxing authority upon the Trust) and the offering of the Preferred
Trust Securities and be responsible for all debts and other obligations
of the Trust (other than the Preferred Trust Securities). TXU Europe
Limited will also agree to indemnify the trustees and certain other
persons.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America (US
GAAP).
USE OF ESTIMATES - The preparation of the Trust's 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 period covered by the consolidated
financial statements. In the event estimates and/or assumptions prove
to be different from actual amounts, adjustments are made in subsequent
periods to reflect more current information.
5
<PAGE>
3. SUBSEQUENT EVENT - ISSUANCE OF PREFERRED TRUST SECURITIES
On March 2, 2000, the Trust issued to investors 6,000,000 units of
9 3/4% Preferred Trust Securities in an aggregate liquidation amount of
$150 million. In a series of related transactions, the proceeds from
this issuance were invested in Preferred Partnership Securities issued
by the Partnership. The Partnership, in turn, used those funds, along
with a capital contribution of approximately $26 million from TXU
Europe Limited received March 2, 2000, to purchase junior subordinated
debentures issued by TXU Eastern Funding Company and TXU Europe Group
plc. The Preferred Trust Securities have a liquidation preference of
$25 per unit. The only assets of the Trust are the Preferred
Partnership Securities. The Preferred Trust Securities are subject to
mandatory redemption upon payment of the Preferred Partnership
Securities which may be redeemed at the option of TXU Europe Limited,
in whole, or in part, at any time on or after March 2, 2005. The Trust
will use distributions it receives on the Preferred Partnership
Securities to make cash distributions on the Preferred Trust
Securities. TXU Europe Limited has issued guarantees of the Preferred
Trust Securities, the Preferred Partnership Securities and the junior
subordinated debentures held by the Partnership.
6
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the General Partner and Initial Limited Partner of TXU Europe Funding I, L.P.
We have audited the accompanying balance sheet of TXU Europe Funding I,
L.P. (the "Partnership") as of December 31, 1999. This balance sheet is the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on this balance sheet 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 balance
sheet is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the balance sheet. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of the Partnership as of December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ DELOITTE & TOUCHE
May 4, 2000
London, England
7
<PAGE>
BALANCE SHEET OF
TXU EUROPE FUNDING I, L.P.
DECEMBER 31, 1999
Assets................................................$ 0
========
Partnership Securities
Limited partner interest..................... $ 85
General partner interest..................... 15
-----
100
Less: Receivables from partners for subscribed
partnership interests.......................... (100)
-----
Partnership Equity....................................$ 0
======
NOTES TO BALANCE SHEET OF TXU EUROPE FUNDING I, L.P.
1. DESCRIPTION OF BUSINESS
TXU Europe Funding I, L.P. (the Partnership) is a limited
partnership that was formed under the Delaware Revised Uniform Limited
Partnership Act on November 22, 1999, for the exclusive purpose of (i)
issuing its Partnership interests, (ii) purchasing certain eligible
debt instruments of TXU Eastern Funding Company and one or more
subsidiaries of TXU Europe Limited with the proceeds from (a) the sale
of Preferred Partnership Securities to TXU Europe Capital I (the Trust)
and (b) a capital contribution from TXU Europe Limited in exchange for
the general partnership interest in the Partnership (collectively, the
Partnership Proceeds) and (iii) engaging in only those other activities
necessary or incidental thereto.
Except as provided in the forms of Amended and Restated Limited
Partnership Agreement and Preferred Partnership Securities Guarantee
Agreement, and as otherwise provided by law, the holders of the
Preferred Partnership Securities will have no voting rights.
The Partnership Proceeds will be used initially to purchase debt
instruments from TXU Eastern Funding Company and one or more eligible
subsidiaries of TXU Europe Limited, and other eligible debt securities.
The Partnership will have a perpetual existence subject to certain
termination events. TXU Europe Limited is the sole general partner of
the Partnership and, in that capacity, has agreed to pay all fees and
expenses related to the organization and operations of the Partnership
(including any taxes, duties, assessments or government charges of
whatever nature (other than withholding taxes) imposed by the United
States or any other domestic taxing authority upon the Partnership) and
the offering of the Preferred Partnership Securities and be responsible
for all debts and other obligations of the Partnership (other than with
respect to the Preferred Partnership Securities). TXU Europe Limited,
as sole general partner, will agree to indemnify certain officers and
agents of the Partnership.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The financial statements are prepared in conformity with
accounting principles generally accepted in the United States of
America (US GAAP).
USE OF ESTIMATES - The preparation of the Partnership's financial
statements requires management to make estimates and assumptions about
future events that affect the reporting and disclosure of assets and
8
<PAGE>
liabilities at the balance sheet dates and the reported amounts of
revenue and expense during the period covered by the consolidated
financial statements. In the event estimates and/or assumptions prove
to be different from actual amounts, adjustments are made in subsequent
periods to reflect more current information.
3. SUBSEQUENT EVENT - ISSUANCE OF PREFERRED TRUST SECURITIES
On March 2, 2000, the Trust issued to investors 6,000,000 units of
9 3/4% Trust Originated Preferred Securities (Preferred Trust
Securities) in an aggregate liquidation amount of $150 million. In a
series of related transactions, the proceeds from this issuance were
invested in Preferred Partnership Securities issued by the Partnership.
The Partnership, in turn, used those funds, along with a capital
contribution of approximately $26 million from TXU Europe Limited
received on March 2, 2000, to purchase junior subordinated debentures
issued by TXU Eastern Funding Company and TXU Europe Group plc. The
Preferred Trust Securities and the Preferred Partnership Securities
have a liquidation preference of $25 per unit. The only assets of the
Trust are the Preferred Partnership Securities. The Preferred Trust
Securities are subject to mandatory redemption upon payment of the
Preferred Partnership Securities which may be redeemed at the option of
TXU Europe Limited, in whole, or in part, at any time on or after March
2, 2005. The Trust will use distributions it receives on the Preferred
Partnership Securities to make cash distributions on the Preferred
Trust Securities. TXU Europe Limited has issued guarantees of the
Preferred Trust Securities, the Preferred Partnership Securities and
the junior subordinated debentures held by the Partnership.
9
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Trust has no directors or officers. The Trustees of the Trust are as
follows:
Administrative Trustees: Kirk R. Oliver
Laura Anderson
Philip S. Toler
Jacqueline Harrison
Property Trustee: The Bank of New York
Delaware Trustee: The Bank of New York (Delaware)
Mr. Oliver is the Vice President and Treasurer of TXU Corp. and certain
of its subsidiaries. Ms. Anderson is the Manager of Corporate Finance and
Compliance of TXU Corp. and Assistant Treasurer of TXU Business Services
Company, a subsidiary of TXU Corp. Mr. Toler is a Financial Consultant at TXU
Business Services. Ms. Harrison is the Manager of TXU Shareholder Services of
TXU Business Services Company.
The Partnership has no directors or executive officers. However, the
Amended and Restated Agreement of Limited Partnership provides that TXU Europe
Limited, as general partner of the Partnership, is solely responsible for the
management and direction of the Partnership. Limited partners do not take part
in the management of the Partnership's business.
The following table lists information with respect to the management of
TXU Europe Limited:
NAME AGE POSITION
---- --- --------
Erle Nye 62 Director
H. Jarrell Gibbs 61 Director
Michael J. McNally 45 Director
Robert A. Wooldridge 61 Director
Philip G. Turberville 48 Director
Paul C. Marsh 41 Director
Derek C. Bonham 56 Director
Erle Nye has been a director of TXU Europe Limited since February 1998.
He has served as a director and Chairman of the Board and Chief Executive of TXU
Corp. since May 1997 and of TXU Gas Company since August 1997. He has also been
a director and Chairman of the Board and Chief Executive of TXU Electric Company
for more than the last five years. Mr. Nye is also a director of TXU Eastern
Funding. In addition, Mr. Nye was President of TXU Corp. from February 1987
through May 1995 and President and Chief Executive of TXU Corp. from May 1995
through May 1997.
H. Jarrell Gibbs has served as a director of TXU Europe Limited since
February 1998. He is Vice Chairman of TXU Corp. and a director and Vice Chairman
of the Board of TXU Gas Company. Before that, Mr. Gibbs was the President of TXU
Electric Company and Vice President and Principal Financial Officer of TXU
Corp.. Mr. Gibbs is also a director of TXU Europe Group and of TXU Eastern
Funding.
10
<PAGE>
Michael J. McNally has served as a director of TXU Europe Limited since
February 1998. He is the Executive Vice President and Chief Financial Officer of
TXU Corp. Before that, Mr. McNally was President of the Transmission Division of
TXU Electric Company; Executive Vice President of TXU Electric Company;
Principal of Enron Development Corporation; Managing Director of Industrial
Services of Enron Capital and Trade Resources; and President of Houston Pipe
Line Company and Enron Gas Liquids, Inc. Mr. McNally is also a director of TXU
Electric Company, TXU Gas Company and TXU Eastern Funding.
Robert A. Wooldridge has been a director of TXU Europe Limited since
February 1998. Mr. Wooldridge is a partner in the law firm Worsham, Forsythe &
Wooldridge L.L.P. in Dallas, Texas, which provides legal services to TXU Europe
Limited and TXU Eastern Funding, as well as TXU Corp. and other subsidiaries of
TXU Corp. Mr. Wooldridge is also a director of TXU Gas Company and TXU Eastern
Funding.
Philip G. Turberville has served as a director of TXU Europe Limited
since May 1999. Mr. Turberville has served as a director and the Chairman of the
Board and Chief Executive Officer of TXU Europe Group since January 4, 1999.
Before that, Mr. Turberville was President of the Europe Oil Products division
of The Royal Dutch Shell Group, where he had worked in a variety of roles
providing him with extensive international experience since 1976. Mr.
Turberville is also a director of TXU Eastern Funding.
Paul C. Marsh has served as a director of TXU Europe Limited since May
1999. He has been with TXU Europe Group since October 1992 and has served as
Finance Director of TXU Europe Group since February 24, 1997. Before that, Mr.
Marsh worked in Ernst & Young's Corporate Advisory Services Division. Before
that, Mr. Marsh served as Finance Director in two medium sized private sales and
trading groups. Mr. Marsh is also a director of TXU Europe Group and TXU Eastern
Funding.
Derek C. Bonham has served as a director of TXU Europe Limited since May
1999. He has served as Chairman of Imperial Tobacco Group PLC since October
1996. Before that, Mr. Bonham was Chairman of The Energy Group PLC from February
1997 through July 1998. Before that, Mr. Bonham served as Deputy Chairman and
Chief Executive of Hanson PLC from November 1993 through February 1997 and as
Chief Executive of Hanson PLC from April 1992 through November 1993. Mr. Bonham
is also a director of Glaxo Wellcome PLC, Imperial Tobacco Group PLC, Newsquest
PLC, Fieldens PLC and TXU Corp.
ITEM 11. EXECUTIVE COMPENSATION
None of the Administrative Trustees of the Trust receives any compensation for
serving as an Administrative Trustee or acting in any capacity for the Trust
separate from his or her compensation as an employee of TXU Corp. None of the
Directors of TXU Europe Limited receives any compensation for acting in any
capacity for the Partnership separate from their compensation as a Director or
employee of TXU Europe Limited or TXU Corp.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The control certificate of the Trust and the general partnership interest in the
Partnership are owned directly or indirectly by TXU Europe Limited and
ultimately held indirectly by TXU Corp.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TXU Europe Limited has agreed to pay all fees and expenses related to the
organization and operations of the Trust and the Partnership.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The financial statement schedules are omitted because of the absence of
the conditions under which they are required or because the required
information is included in the consolidated financial statements or
notes thereto.
11
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(b) Reports on Form 8-K:
None
(c) Exhibits:
a) Exhibits filed as a part of Part II are:
<TABLE>
<CAPTION>
PREVIOUSLY FILED*
-------------------------------
EXHIBIT WITH FILE NUMBER AS EXHIBIT
--------- --------------------------------
<S> <C> <C> <C>
3(a) 333-93509; 3(e) - Trust Agreement of TXU Europe Capital I, dated as of
333-93509-01; November 22, 1999.
333-93509-02 and;
333-93509-03
3(b) 333-93509; 3(f) - Certificate of Trust of TXU Europe Capital I, dated
333-93509-01; November 22, 1999.
333-93509-02 and;
333-93509-03
3(c) 333-93509; 3(g) - Partnership Agreement of TXU Europe Funding I, L.P.,
333-93509-01; dated as of November 22, 1999.
333-93509-02 and;
333-93509-03
3(d) 333-93509; 3(h) - Certificate of Limited Partnership of TXU Europe
333-93509-01; Funding I, L.P., dated November 22, 1999.
333-93509-02 and;
333-93509-03
3(e) 1-12833 4(rrr) - Amended and Restated Trust Agreement, dated as of
Form 10-K (1999) March 2, 2000, among TXU Business Services Company,
TXU Europe Limited, TXU Europe CP, Inc., and The Bank
of New York, The Bank of New York (Delaware), and the
Administrative Trustees of TXU Europe Capital I.
3(f) 1-12833 4(sss) - Amended and Restated Partnership Agreement of
Form 10-K (1999) Limited Partnership, dated as of March 2, 2000, of
TXU Europe Funding I, L.P.
4(a) 1-12833 4(ttt) - Preferred Trust Securities Guarantee, dated as of
Form 10-K (1999) March 2, 2000, between TXU Europe Limited and The
Bank of New York.
4(b) 1-12833 4(uuu) - Preferred Partnership Securities Guarantee, dated
Form 10-K (1999) as of March 2, 2000, between TXU Europe Limited and
The Bank of New York.
4(c) 1-12833 4(vvv) - Indenture (for Unsecured Subordinated Debt
Form 10-K (1999) Securities), dated as of March 2, 2000, among
Funding, TXU Europe Limited and The Bank of New York.
4(d) 1-12833 4(www) - Officer's certificate, dated as of March 2, 2000,
Form 10-K (1999) establishing the terms of the 9.75% Junior
Subordinated Deferrable Interest Debentures,
Series A, due March 2, 2020, of Funding.
4(e) 1-12833 4(xxx) - Deposit Agreement, dated as of March 2, 2000,
Form 10-K (1999) between The Bank of New York and Funding.
12
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4(f) 1-12833 4(yyy) - Indenture (for Unsecured Subordinated Debt
Form 10-K (1999) Securities) dated as of March 2, 2000, among TXU
Europe Group, TXU Europe Limited and The Bank of New
York.
4(g) 1-12833 4(zzz) - Officer's Certificate, dated as of March 2, 2000,
Form 10-K (1999) establishing the terms of the 9.75% Junior
Subordinated Deferrable Interest Debentures,
Series A, due March 2, 2020 of TXU Europe Group.
4(h) 1-12833 4(A) - Deposit Agreement, dated as of March 2, 2000,
Form 10-K (1999) between The Bank of New York TXU Europe Group plc.
27(a) - Financial Data Schedule - TXU Europe Capital I
27(b) - Financial Data Schedule - TXU Europe Funding I, L.P.
99(a) - Prospectus, dated February 24, 2000, relating to the
Preferred Trust Securities
-----------------------
* Incorporated herein by reference.
</TABLE>
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, TXU Europe Capital I has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Signatures Title Date
---------- ----- ----
/s/ Kirk Oliver Administrative Trustee
- -------------------------------------
(Kirk Oliver)
/s/ Laura Anderson Administrative Trustee
- -------------------------------------
(Laura Anderson)
/s/ Phillip Toler Administrative Trustee May 10, 2000
- -------------------------------------
(Phillip Toler)
/s/ Jackie Harrison Administrative Trustee
- -------------------------------------
(Jackie Harrison)
TXU Europe Capital I has no principal executive officer, principal
financial officer, principal accounting officer or board of directors. The
Trustees of the Trust, (which include the Administrative Trustees, the Property
Trustee and the Delaware Trustee) together exercise all powers and perform all
functions with respect to the Trust.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, TXU Europe Funding I, L.P. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
TXU EUROPE FUNDING I, L.P.
Date: May 10, 2000 By /s/ Paul C. Marsh
------------------------------
Name: Paul C. Marsh
For and on behalf of TXU
Europe Limited, General
Partner
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF TXU
EUROPE LIMITED, GENERAL PARTNER TO THE PARTNERSHIP, AND IN THE CAPACITIES
AND ON THE DATE INDICATED.
Signatures Title Date
---------- ----- ----
/s/ Erle Nye Director
- -------------------------------------------
(Erle Nye)
/s/ Philip G. Turberville Director
- -------------------------------------------
(Philip G. Turberville)
/s/ Paul C. Marsh Director
- -------------------------------------------
(Paul C. Marsh)
/s/ Derek C. Bonham Director
- -------------------------------------------
(Derek C. Bonham) May 10, 2000
/s/ H. Jarrell Gibbs Director
- -------------------------------------------
(H. Jarrell Gibbs)
/s/ Michael J. McNally Director
- -------------------------------------------
(Michael J. McNally)
/s/ Robert A. Wooldridge Director
- -------------------------------------------
(Robert A. Wooldridge)
TXU Europe Funding I, L.P. has no principal executive officer,
principal financial officer, principal accounting officer or board of directors.
The Partners of the Partnership, (which include the General Partner and the
Limited Partner) together exercise all powers and perform all functions with
respect to the Partnership.
15
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
PREVIOUSLY FILED*
-------------------------------
EXHIBIT WITH FILE NUMBER AS EXHIBIT
--------- --------------------------------
<S> <C> <C> <C>
3(a) 333-93509; 3(e) - Trust Agreement of TXU Europe Capital I, dated as of
333-93509-01; November 22, 1999.
333-93509-02 and;
333-93509-03
3(b) 333-93509; 3(f) - Certificate of Trust of TXU Europe Capital I, dated
333-93509-01; November 22, 1999.
333-93509-02 and;
333-93509-03
3(c) 333-93509; 3(g) - Partnership Agreement of TXU Europe Funding I, L.P.,
333-93509-01; dated as of November 22, 1999.
333-93509-02 and;
333-93509-03
3(d) 333-93509; 3(h) - Certificate of Limited Partnership of TXU Europe
333-93509-01; Funding I, L.P., dated November 22, 1999.
333-93509-02 and;
333-93509-03
3(e) 1-12833 4(rrr) - Amended and Restated Trust Agreement, dated as of
Form 10-K (1999) March 2, 2000, among TXU Business Services Company,
TXU Europe Limited, TXU Europe CP, Inc., and The Bank
of New York, The Bank of New York (Delaware), and the
Administrative Trustees of TXU Europe Capital I.
3(f) 1-12833 4(sss) - Amended and Restated Partnership Agreement of
Form 10-K (1999) Limited Partnership, dated as of March 2, 2000, of
TXU Europe Funding I, L.P.
4(a) 1-12833 4(ttt) - Preferred Trust Securities Guarantee, dated as of
Form 10-K (1999) March 2, 2000, between TXU Europe Limited and The
Bank of New York.
4(b) 1-12833 4(uuu) - Preferred Partnership Securities Guarantee, dated
Form 10-K (1999) as of March 2, 2000, between TXU Europe Limited and
The Bank of New York.
4(c) 1-12833 4(vvv) - Indenture (for Unsecured Subordinated Debt
Form 10-K (1999) Securities), dated as of March 2, 2000, among
Funding, TXU Europe Limited and The Bank of New York.
4(d) 1-12833 4(www) - Officer's certificate, dated as of March 2, 2000,
Form 10-K (1999) establishing the terms of the 9.75% Junior
Subordinated Deferrable Interest Debentures,
Series A, due March 2, 2020, of Funding.
4(e) 1-12833 4(xxx) - Deposit Agreement, dated as of March 2, 2000,
Form 10-K (1999) between The Bank of New York and Funding.
4(f) 1-12833 4(yyy) - Indenture (for Unsecured Subordinated Debt
Form 10-K (1999) Securities) dated as of March 2, 2000, among TXU
Europe Group, TXU Europe Limited and The Bank of New
York.
4(g) 1-12833 4(zzz) - Officer's Certificate, dated as of March 2, 2000,
Form 10-K (1999) establishing the terms of the 9.75% Junior
Subordinated Deferrable Interest Debentures,
Series A, due March 2, 2020 of TXU Europe Group.
4(h) 1-12833 4(A) - Deposit Agreement, dated as of March 2, 2000,
Form 10-K (1999) between The Bank of New York TXU Europe Group plc.
27(a) - Financial Data Schedule - TXU Europe Capital I
27(b) - Financial Data Schedule - TXU Europe Funding I, L.P.
99(a) - Prospectus, dated February 24, 2000, relating to the
Preferred Trust Securities
-----------------------
* Incorporated herein by reference.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0001099392
<NAME> TXU EUROPE CAPITAL I
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> NOV-22-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 0
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 0
<TOTAL-DEFERRED-CHARGES> 0
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 0
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 0
<TOTAL-COMMON-STOCKHOLDERS-EQ> 0
0
0
<LONG-TERM-DEBT-NET> 0
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 0
<TOT-CAPITALIZATION-AND-LIAB> 0
<GROSS-OPERATING-REVENUE> 0
<INCOME-TAX-EXPENSE> 0
<OTHER-OPERATING-EXPENSES> 0
<TOTAL-OPERATING-EXPENSES> 0
<OPERATING-INCOME-LOSS> 0
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 0
<TOTAL-INTEREST-EXPENSE> 0
<NET-INCOME> 0
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 0
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0001099393
<NAME> TXU EUROPE FUNDING I,L.P.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> NOV-22-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 0
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 0
<TOTAL-DEFERRED-CHARGES> 0
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 0
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 0
<TOTAL-COMMON-STOCKHOLDERS-EQ> 0
0
0
<LONG-TERM-DEBT-NET> 0
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 0
<TOT-CAPITALIZATION-AND-LIAB> 0
<GROSS-OPERATING-REVENUE> 0
<INCOME-TAX-EXPENSE> 0
<OTHER-OPERATING-EXPENSES> 0
<TOTAL-OPERATING-EXPENSES> 0
<OPERATING-INCOME-LOSS> 0
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 0
<TOTAL-INTEREST-EXPENSE> 0
<NET-INCOME> 0
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 0
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
Filed pursuant to Rule 424(b)(4)
File Nos. 333-93509, 333-93509-01,
333-93509-02 and 333-93509-03.
PROSPECTUS
6,000,000 PREFERRED TRUST SECURITIES
TXU EUROPE CAPITAL I
9 3/4% TRUST ORIGINATED PREFERRED SECURITIES SM ("TOPRS SM")
LIQUIDATION AMOUNT $25 PER TOPRS
GUARANTEED TO THE EXTENT DESCRIBED IN THIS PROSPECTUS BY
TXU EUROPE LIMITED
--------------------------------
THE TOPRS:
o TOPrS represent preferred beneficial ownership interests in the assets
of TXU Europe Capital I. The sole assets of TXU Europe Capital I will
be the Preferred Partnership Securities of TXU Europe Funding I, L.P.
which represent preferred ownership interests in TXU Europe Funding I,
L.P.
o The sole assets of TXU Europe Funding I, L.P. will be the debentures
issued by TXU Eastern Funding Company and one or more other eligible
subsidiaries of TXU Europe Limited and other eligible debt securities
described in this prospectus.
o The TOPrS and the Preferred Partnership Securities do not have any
stated maturity.
o TXU Europe Capital I has applied to have the TOPrS trade on the New
York Stock Exchange starting within 30 days after the TOPrS are
issued.
o Closing Date: March 2, 2000.
DISTRIBUTIONS ON THE TOPRS:
o Each TOPrS pays a quarterly distribution at the rate of 9.75% or
$2.4375 per TOPrS per year, if TXU Europe Funding I, L.P. pays
distributions on the Preferred Partnership Securities. Distributions
not paid by TXU Europe Funding I, L.P. on the scheduled payment date
will accumulate and compound quarterly at the rate of 9.75% per year.
o If TXU Europe Capital I and TXU Europe Funding I, L.P. redeem the
TOPrS and the Preferred Partnership Securities, the holders of the
TOPrS will receive $25 plus accumulated distributions for each TOPrS
owned.
o If TXU Europe Capital I redeems the TOPrS or is liquidated, but TXU
Europe Funding I, L.P. does not redeem the Preferred Partnership
Securities, the holders of the TOPrS will receive Preferred
Partnership Securities rather than cash.
o TXU Europe Limited will guarantee the TOPrS and the Preferred
Partnership Securities to the extent described in this prospectus.
INVESTING IN THE TOPRS INVOLVES RISKS THAT ARE DESCRIBED IN THE RISK
FACTORS SECTION BEGINNING ON PAGE 13 OF THIS PROSPECTUS.
--------------------------------
PER TOPRS TOTAL
--------- -----
Public offering price(1)...................... $25.00 $150,000,000
Underwriting commission to be paid by TXU Europe
Limited..................................... $.7875 $ 4,725,000
Proceeds to TXU Europe Capital I.............. $25.00 $150,000,000
(1) Plus accumulated distributions from
March 2, 2000 if settlement occurs after
that date
Neither the Securities and Exchange Commission nor any state
securities 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.
The underwriters may also purchase up to an additional 900,000 TOPrS
from TXU Europe Capital I at the public offering price within 30 days from the
date of this prospectus to cover over-allotments. TXU Europe Limited will pay an
underwriting commission of $.7875 per additional TOPrS purchased.
The TOPrS will be ready for delivery in book-entry form through The
Depository Trust Company on or about March 2, 2000.
--------------------------------
MERRILL LYNCH & CO.
<TABLE>
<CAPTION>
<S> <C> <C>
A.G. EDWARDS & SONS, INC. GOLDMAN, SACHS & CO.
LEHMAN BROTHERS MORGAN STANLEY DEAN WITTER
PAINEWEBBER INCORPORATED PRUDENTIAL SECURITIES
SALOMON SMITH BARNEY
BNY CAPITAL MARKETS, INC. BANC OF AMERICA SECURITIES LLC BANC ONE CAPITAL MARKETS, INC.
CIBC WORLD MARKETS CREDIT SUISSE FIRST BOSTON FIRST UNION SECURITIES, INC.
FLEETBOSTON ROBERTSON STEPHENS TD SECURITIES (USA) INC. UTENDAHL CAPITAL PARTNERS, L.P.
</TABLE>
The date of this prospectus is February 24, 2000.
--------------------------------
"TOPrS SM" and "Trust Originated Preferred Securities" are service
marks owned by Merrill Lynch & Co., Inc.
<PAGE>
TABLE OF CONTENTS
Summary....................................................................3
Risk Factors..............................................................13
Presentation of Currency, Financial and Other Information.................18
TXU Europe Limited........................................................18
TXU Europe Group plc......................................................18
TXU Eastern Funding Company...............................................19
TXU Europe Capital I......................................................19
TXU Europe Funding I, L.P.................................................20
Capitalization of TXU Europe Limited......................................21
Exchange Rates............................................................22
Use of Proceeds...........................................................22
Forward-Looking Statements................................................23
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................24
Industry Background.......................................................39
TXU Europe Group Business Overview........................................45
Security Ownership........................................................61
Management of TXU Eastern Funding Company.................................61
Management of TXU Europe Limited..........................................62
Relationships of Management to Funding and TXU Europe Limited
and Related Transactions.............................................64
Management of TXU Europe Group plc........................................64
Description of the TOPrS..................................................65
Description of the Trust Guarantee........................................76
Description of the Preferred Partnership Securities.......................80
Description of the Partnership Guarantee..................................92
Description of the Funding Debentures.....................................96
Material Income Tax Considerations.......................................105
Underwriting.............................................................109
Experts..................................................................111
Legality.................................................................111
Where You Can Find More Information......................................112
Index To Financial Statements............................................F-1
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
NEITHER TXU EUROPE LIMITED, TXU EASTERN FUNDING COMPANY, TXU EUROPE CAPITAL I
NOR TXU EUROPE FUNDING I, L.P. HAVE AUTHORIZED ANYONE TO PROVIDE YOU, WITH
DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT
INFORMATION, YOU SHOULD NOT RELY ON IT. NEITHER TXU EUROPE LIMITED, TXU EASTERN
FUNDING COMPANY, TXU EUROPE CAPITAL I NOR TXU EUROPE FUNDING I, L.P. ARE MAKING
AN OFFER OF THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT COVER OF
THIS PROSPECTUS. THE BUSINESS PROFILE, FINANCIAL CONDITION, RESULTS OF
OPERATIONS AND PROSPECTS OF TXU EUROPE LIMITED, TXU EASTERN FUNDING COMPANY, TXU
EUROPE CAPITAL I OR TXU EUROPE FUNDING I, L.P. MAY HAVE CHANGED SINCE THAT DATE.
2
<PAGE>
SUMMARY
This summary may not contain all the information that may be important
to you. You should read the entire prospectus, including the financial
statements and related notes, before making an investment decision.
CORPORATE AND TRANSACTION STRUCTURE
[CHART OMITTED]
* TXU Europe Funding I, L.P. will also invest in junior subordinated
debentures of one or more eligible subsidiaries of TXU Europe Limited and
eligible debt securities, as described in this prospectus. The junior
subordinated debentures will be guaranteed by TXU Europe Limited.
3
<PAGE>
TXU EUROPE LIMITED AND TXU EASTERN FUNDING COMPANY
TXU Europe Limited, formerly TXU Eastern Holdings Limited, is a
private limited company (Company No. 3505836) incorporated under the laws of
England and Wales on February 5, 1998. TXU Europe Limited is an indirect
wholly-owned subsidiary of Texas Utilities Company. Texas Utilities Company is
now doing business as TXU Corp. TXU Europe Limited is a holding company for TXU
Corp's UK and other European operations.
TXU Eastern Funding Company (Funding) is a private unlimited company
(Company No. 3710529) incorporated on February 4, 1999 under the laws of England
and Wales. It is a wholly-owned indirect subsidiary of TXU Europe Limited.
Funding was organized solely to provide funding for the operations of TXU Europe
Limited and its subsidiaries by issuing debt securities, including the
subordinated debentures that will be issued to the partnership, and lending the
proceeds to TXU Europe Limited. In May 1999, Funding issued $1.5 billion
((pound)921 million) of senior notes guaranteed on a senior basis by TXU Europe
Limited. On December 17, 1999, Funding exchanged these senior notes for the same
amount of new senior notes registered under the Securities Act of 1933. On
February 17, 2000, Funding agreed to issue in the UK (pound)225 million of
senior notes guaranteed on a senior basis by TXU Europe Limited. The proceeds of
this offering will be used to repay corporate debt.
TXU Europe Limited's and Funding's principal offices are located at
The Adelphi, 1-11 John Adam Street, London, England WC2N 6HT and the telephone
number is (011) 44 207 879-8081.
TXU EUROPE GROUP PLC
TXU Europe Group plc (TXU Europe Group or Group), formerly Eastern
Group plc, which is an indirect subsidiary of TXU Europe Limited, is the holding
company for a group of companies engaged in a variety of energy businesses in
Europe. The management of these businesses is coordinated to give TXU Europe
Group access to many energy markets, to provide the Group's customers access to
a range of energy products and to enable the Group to respond efficiently to
changes in demand for and prices of energy throughout Europe. The Group's
principal business operations are electricity networks and energy businesses in
the UK.
The networks, or electricity distribution, business of TXU Europe
Group is the largest distributor of electricity in England and Wales, with over
3 million customers in an authorized service area covering approximately 20,300
square kilometers in the east of England and parts of north London.
The energy businesses include retailing of electricity and gas, as
well as generation of electric power, gas production and energy portfolio
management operations. TXU Europe Group is one of the largest generators of
electricity in the UK, based on registered generating capacity as of December
31, 1999. It currently owns, operates or has an interest in approximately 9.4%
of the total UK generating capacity. TXU Europe Group is also one of the largest
retailers of electricity and natural gas in England and Wales, with
approximately 3.9 million electric and natural gas customers. TXU Europe Group
is also forming business alliances with European power companies in order to
position itself to implement its strategy of integrating energy businesses
across the rest of Europe, as these markets open to competition.
4
<PAGE>
SUMMARY INFORMATION REGARDING TXU EUROPE CAPITAL I,
TXU EUROPE FUNDING I, L.P. AND THE TOPRS
This summary includes questions and answers that highlight selected
information from this prospectus to help you understand the TOPrS. You should
carefully read this prospectus to fully understand the terms of the TOPrS, as
well as the tax and other considerations that are important in making a decision
about whether to invest in the TOPrS. You should pay special attention to the
section of this prospectus titled RISK FACTORS to determine whether an
investment in the TOPrS is appropriate for you.
WHAT ARE THE TOPRS?
Each TOPrS represents an undivided beneficial interest in the assets
of TXU Europe Capital I, or the trust. The assets of the trust will be Preferred
Partnership Securities of TXU Europe Funding I, L.P., or the partnership, which
represent preferred ownership interests in the partnership. The partnership will
use the proceeds from the sale of the Preferred Partnership Securities and the
capital contribution from TXU Europe Limited, as general partner of the
partnership, to purchase subordinated debentures of Funding and one or more
other eligible subsidiaries of TXU Europe Limited and certain eligible debt
securities as described in this prospectus under DESCRIPTION OF THE PREFERRED
PARTNERSHIP SECURITIES -- "Partnership Investments."
WHAT IS THE TRUST?
TXU Europe Capital I is a Delaware statutory business trust that
exists for the sole purpose of issuing the TOPrS, investing the proceeds from
that issuance and engaging in incidental activities. The sole assets of the
trust will be the Preferred Partnership Securities.
WHAT IS THE PARTNERSHIP?
TXU Europe Funding I, L.P. is a Delaware limited partnership.
Generally, the partnership, subject to the investment criteria described in this
prospectus, may invest in debentures of eligible subsidiaries of TXU Europe
Limited and in other eligible debt securities. The assets of the partnership
initially will consist solely of subordinated debentures of Funding and, to a
limited extent, one or more other eligible subsidiaries of TXU Europe Limited
and other eligible debt securities. TXU Europe Limited is the general partner of
the partnership.
WHAT DISTRIBUTIONS WILL I RECEIVE ON THE TOPRS?
The trust expects to pay the holders of the TOPrS a quarterly cash
distribution at the rate of 9.75% per annum. Distributions are expected to be
paid on each March 31, June 30, September 30 and December 31, commencing June
30, 2000. Distributions on the TOPrS will be paid out of distributions by the
partnership on the Preferred Partnership Securities if declared by the general
partner. These distributions will accumulate from March 2, 2000, the date of
original issuance of the TOPrS. The initial cash distribution is expected to be
paid on June 30, 2000, and to equal $0.8125 for each $25 TOPrS. Distributions on
the TOPrS will be deferred if interest payments on the subsidiary debentures are
deferred as described below.
WHAT WILL AFFECT THE TRUST'S DISTRIBUTIONS?
The ability of the trust to pay the holders of the TOPrS is entirely
dependent on its receipt of corresponding distributions on the Preferred
Partnership Securities held by the trust. In turn, the partnership's ability to
pay the trust is entirely dependent on its receipt of payments on the subsidiary
debentures and the eligible debt securities held by the partnership. In
addition, the partnership has no obligation to make distributions to the trust.
If distributions are not made to the holders of the TOPrS, TXU Europe Limited
and its subsidiaries will not be permitted to make specified payments and loans
as described below.
WHAT ARE THE SUBSIDIARY DEBENTURES?
The subsidiary debentures are long term debt obligations of Funding
and one or more other eligible subsidiaries of TXU Europe Limited. These
subsidiary debentures will be unsecured and subordinated obligations and will be
junior in right of payment to the senior debt of those subsidiaries, as defined
in the indentures under which the subsidiary debentures are issued. All of the
subsidiary debentures in which the partnership initially holds beneficial
interests will be fully and unconditionally guaranteed on a subordinated basis
by TXU Europe Limited. An issuer of subsidiary debentures may elect to defer
interest payments for a period not exceeding six consecutive quarters.
5
<PAGE>
WHAT ARE THE GUARANTEES?
TXU Europe Limited provides several subordinated guarantees in
connection with the issuance of the TOPrS. These are guarantees of
o distributions by the partnership to the trust, and by the trust to the
holders of the TOPrS;
o the amount due to the holders of the TOPrS upon redemption of the
TOPrS;
o the liquidation amount of the TOPrS if the trust is dissolved; and
o payments under the subsidiary debentures initially held by the
partnership.
The guarantees, when taken together with TXU Europe Limited's
obligations to pay all fees and expenses of the trust and the partnership,
constitute a guarantee, to the extent set forth in the guarantees, by TXU Europe
Limited of selected obligations relating to the distribution, redemption and
liquidation amounts payable to the holders of the TOPrS. However, the guarantees
do not apply to (1) current distributions by the partnership unless and until
the partnership declares distributions out of funds legally available for
payment, (2) current distributions by the trust unless and until the trust has
funds legally available for payment or (3) liquidating distributions by the
partnership and the trust unless there are partnership or trust assets, as the
case may be, legally available for payment.
TXU Europe Limited's obligations under the guarantees of subsidiary
debentures are subordinate and junior in right of payment to all other
unsubordinated liabilities of TXU Europe Limited and will be effectively
subordinated to existing and future liabilities and preference share capital of
TXU Europe Limited's subsidiaries. TXU Europe Limited's obligations under the
guarantees of subsidiary debentures will rank equally with other subordinated
obligations of TXU Europe Limited that are not subordinated by their terms to
the guarantees and with similar guarantees issued by TXU Europe Limited in
respect of any subordinated debentures of any other subsidiary. TXU Europe
Limited's obligations under the guarantees of the TOPrS and the Preferred
Partnership Securities will be subordinated to its obligations under the
guarantees of subsidiary debentures and will rank equally with any preference
share capital of TXU Europe Limited issued in the future and with similar
guarantees issued by TXU Europe Limited in respect of any preferred security of
any other finance subsidiary.
ARE THERE ANY RISKS ASSOCIATED WITH AN INVESTMENT IN THE TOPRS?
Yes, an investment in the TOPrS involves risks. Please refer to the
section entitled RISK FACTORS in this prospectus.
WHAT HAPPENS IF THE TRUST DOESN'T PAY A DISTRIBUTION ON THE TOPRS?
If at any time:
o the holders of the TOPrS have not received a distribution in the full
expected quarterly amount of $0.609375 for each $25 TOPrS (plus any
compounded amounts) for six consecutive quarters,
o an investment event of default occurs and is continuing on any
subsidiary debentures and on the related guarantee by TXU Europe
Limited, or
o TXU Europe Limited defaults on its obligations under the trust
guarantee or the partnership guarantee,
then:
o the Property Trustee on behalf of the trust may direct a special
representative appointed on behalf of holders of Preferred Partnership
Securities to enforce the partnership's creditors' rights and other
rights, including the right to receive payments under the subsidiary
debentures and any of TXU Europe Limited's guarantees of the
subsidiary debentures,
o the Property Trustee on behalf of the trust has the right to direct
the special representative to enforce the terms of the Preferred
Partnership Securities to receive distributions only if and to the
extent declared out of funds legally available for payment on the
Preferred Partnership Securities, and
o the Trust Guarantee Trustee, as the holder of the trust guarantee, the
Partnership Guarantee Trustee, as the holder of the partnership
guarantee, or the special representative appointed on behalf of
holders of Preferred Partnership Securities may enforce those
guarantees, including the right to enforce the covenant restricting
specified payments and loans by TXU Europe Limited and its
subsidiaries as described below.
You should be aware that a special representative would not have the
authority to cause the partnership to declare distributions on the Preferred
Partnership Securities. If the partnership does not declare and pay
distributions on the Preferred Partnership Securities, the trust will not have
sufficient funds to make distributions on the TOPrS.
TXU Europe Limited and any issuer of subsidiary debentures will agree
that if:
6
<PAGE>
o for any quarterly period, the trust does not pay to holders of TOPrS
an amount equal to distributions at the full fixed rate on a
cumulative basis on any Preferred Partnership Securities,
o an investment event of default occurs and is continuing on any
subsidiary debentures and on the related guarantee by TXU Europe
Limited, or
o TXU Europe Limited is in default on any of its obligations under the
trust guarantee or the partnership guarantee,
then, during that period, TXU Europe Limited and any issuer of subsidiary
debentures will not, directly or indirectly, make distributions on their issued
share capital or payments on specified obligations that rank equally with or
junior to the subsidiary debentures or the related TXU Europe Limited
guarantees. In addition, TXU Europe Limited, any issuer of subsidiary debentures
and any other subsidiary of TXU Europe Limited will not make specified payments
in respect of debt held or issued by, or loans to, affiliates (other than such
payments made to TXU Europe Limited or its subsidiaries).
There are a number of exceptions to this limitation. For a more
detailed discussion, see DESCRIPTION OF THE TRUST GUARANTEE -- "Covenants in the
Trust Guarantee" and DESCRIPTION OF THE PARTNERSHIP GUARANTEE -- "Covenants in
the Partnership Guarantee".
OPTIONAL REDEMPTION
The partnership has the option to redeem the Preferred Partnership
Securities, in whole at any time or in part from time to time, on and after
March 2, 2005 for an amount equal to $25 per Preferred Partnership Security plus
accumulated and unpaid distributions on the Preferred Partnership Securities. If
the Preferred Partnership Securities are redeemed, the TOPrS will in turn be
redeemed for $25 per TOPrS plus accumulated and unpaid distributions. Neither
the Preferred Partnership Securities nor the TOPrS have any scheduled maturity.
WHO WILL CONTROL THE TRUST?
A wholly-owned subsidiary of TXU Europe Limited organized in the US
and designated under the terms of the trust agreement, known as the Control
Party, will retain administrative and appointment powers with respect to the
trust by virtue of its ownership of the trust's control certificate. The control
certificate will not provide any economic interest in the trust to the Control
Party.
DO I HAVE VOTING RIGHTS?
Generally, holders of the TOPrS will not have any voting rights.
However, the holders of a majority in liquidation amount of the TOPrS have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Property Trustee on behalf of the trust, or direct the
exercise of any trust or power conferred upon the Property Trustee on behalf of
the trust. See DESCRIPTION OF THE TOPrS -- "Voting Rights" and DESCRIPTION OF
THE PREFERRED PARTNERSHIP SECURITIES -- "Voting Rights".
WHAT HAPPENS IF THE TRUST IS DISSOLVED?
If the trust is dissolved, other than in connection with the
occurrence of changes in the US or UK tax laws, sometimes referred to as a tax
event, or changes in the US Investment Company Act of 1940, sometimes referred
to as an investment company event, that affect the status of the trust, the
partnership or the subsidiary debentures, the partnership will be dissolved and
the Preferred Partnership Securities will be redeemed, in whole, but not in
part, for $25 per Preferred Partnership Security plus accumulated and unpaid
distributions on the Preferred Partnership Securities. This, in turn, would
cause a redemption of the TOPrS at the same price.
WHAT ARE ADDITIONAL AMOUNTS?
All payments made on the subsidiary debentures or with respect to the
TXU Europe Limited subordinated guarantees will be made without withholding or
deduction for taxes or other governmental charges, unless required by law.
Subject to customary exceptions, if withholding is required with respect to
payments made on the subsidiary debentures or these guarantees, the issuers of
the subsidiary debentures or TXU Europe Limited, as applicable, will pay
"Additional Amounts" so that the partnership, in the case of the subsidiary
debentures or the related TXU Europe Limited guarantees, or the holders of the
Preferred Partnership Securities or the holders of the TOPrS, in the case of the
Partnership Guarantee and the Trust Guarantee, respectively, would receive the
same payments with respect to these instruments as if no withholding or
deduction had been made.
WHAT HAPPENS IF A TAX EVENT OR AN INVESTMENT COMPANY EVENT OCCURS?
Upon the occurrence of a trust tax event, which event will generally
be triggered upon the occurrence of specified adverse tax consequences with
respect to the trust, Additional Amounts being payable on the subsidiary
debentures or the TXU Europe Limited subordinated guarantees, or the denial of
an interest deduction on the subsidiary debentures held by the partnership, in
each case, as a result of a change in law, or upon the occurrence of a trust
investment company event, which event will generally be triggered if the trust
is considered an "investment company" under the Investment Company Act as a
result of a change in law, except in limited circumstances, the Administrative
Trustees will have the right to liquidate the trust and cause Preferred
Partnership Securities to be distributed to the holders of the TOPrS. In most
circumstances involving a partnership tax event, which event will generally be
7
<PAGE>
triggered upon the occurrence of specified adverse tax consequences with respect
to the partnership, Additional Amounts being payable on the subsidiary
debentures or the TXU Europe Limited subordinated guarantees, or the denial of
an interest deduction on the subsidiary debentures held by the partnership, in
each case, as a result of a change in law, or upon the occurrence of a
partnership investment company event, which event will generally be triggered if
the partnership is considered an "investment company" under the Investment
Company Act as a result of a change in law, the partnership will have the right
to redeem the Preferred Partnership Securities, in whole, but not in part, at
$25 per Preferred Partnership Security plus accumulated and unpaid distributions
on the Preferred Partnership Securities and, therefore, cause a redemption of
the TOPrS at the same price.
LISTING
TXU Europe Limited has applied to have the TOPrS listed on The New
York Stock Exchange, or NYSE.
FORM OF THE TOPRS
The TOPrS will be represented by one or more global certificates
registered in the name of Cede & Co., as nominee for The Depository Trust
Company, or DTC. Beneficial interests in the TOPrS will be evidenced by, and
transfers of beneficial interests will be effected through, records maintained
by the participants in either DTC (in the United States) or Clearstream Banking,
societe anonyme, or Morgan Guaranty Trust Company of New York, Brussels Office,
as operator of Euroclear (in Europe). Except in certain limited circumstances,
TOPrS in certificated form will not be issued in exchange for the global
certificate or certificates.
USE OF PROCEEDS
All of the proceeds from the issuance and sale of the TOPrS will be
invested by the trust in the Preferred Partnership Securities. The partnership
will use the funds, together with the capital contribution of TXU Europe
Limited, as general partner, to make investments in the subsidiary debentures
and other eligible debt securities. Funding will lend the proceeds from the sale
of its junior subordinated debentures to TXU Europe Limited. TXU Europe Limited
will use the funds to repay corporate debt, including under the Sterling Credit
Agreement, and for general corporate purposes. Any other subsidiary of TXU
Europe Limited that will issue initial subsidiary debentures will use the
proceeds from the sale of these debentures to repay corporate debt and for
general corporate purposes.
RATINGS
The TOPrS are expected to be assigned ratings of "BBB"- by Standard &
Poor's Ratings Services, or S&P, and "baa2" by Moody's Investors Service, Inc.,
or Moody's. These ratings will have been obtained with the understanding that
S&P and Moody's will continue to monitor the credit rating of the issuers and
will make future adjustments to the extent warranted. A rating reflects only the
views of S&P or Moody's, as the case may be, and is not a recommendation to buy,
sell or hold the TOPrS. There is no assurance that any such rating will be
retained for any given period of time or that it will not be revised downward or
withdrawn entirely by S&P or Moody's, as the case may be, if, in their
respective judgments, circumstances so warrant.
8
<PAGE>
SELECTED FINANCIAL INFORMATION
On May 19, 1998, TXU Europe Limited obtained control of The Energy
Group PLC, or TEG, the former holding company of TXU Europe Group. At the same
time, TEG disposed of its US and Australian coal businesses and its US energy
marketing business. For financial reporting purposes, TXU Europe Group is
considered to be the "Predecessor Company" to TXU Europe Limited. TXU Europe
Group constituted 97% of TXU Europe Limited's assets as of September 30, 1999
and generated 100% of TXU Europe Limited's operating revenues for the nine
months ended September 30, 1999. The principal difference between the results of
operation of TXU Europe Group and the results of operation of the continuing
businesses of TEG is the interest expense associated with debt securities issued
by Energy Group Overseas, B.V., or Overseas, a financing subsidiary of TEG. See
TXU Europe Limited's unaudited condensed consolidated pro forma statement of
income for the year ended December 31, 1998 included elsewhere in this
prospectus. This pro forma statement of income includes TXU Europe Group's
operation and the interest expense of Overseas, as if TXU Europe Limited had
acquired TEG on January 1, 1998. See also the financial statements of Overseas
included elsewhere in this prospectus.
The selected financial data of TXU Europe Group for, and as of, each
of the four years in the period ended March 31, 1998 and for the period from
April 1, 1998 through May 18, 1998, have been derived from financial statements
of TXU Europe Group, which have been audited by PricewaterhouseCoopers,
independent accountants. The financial statements of TXU Europe Group for each
of the four years in the period ended March 31, 1998 have been prepared in
accordance with UK GAAP. The financial statements of TXU Europe Group for the
years ended March 31, 1997 and 1998 also have been prepared in accordance with
US GAAP. TXU Europe Group's financial statements for the period from April 1,
1998 through May 18, 1998 have been prepared in accordance with US GAAP.
In October 1997, Overseas issued $500 million aggregate principal
amount of guaranteed debt securities. Overseas is now a subsidiary of TXU Europe
Limited, and its financial statements for the periods from its formation through
March 31, 1998 and from April 1, 1998 through May 18, 1998 are included
elsewhere in this prospectus. If interest expense of Overseas had been included
in TXU Europe Group's financial statements, (1) UK GAAP net income/(loss), ratio
of earnings to fixed charges and net interest expense would have been (pound)42
million, 2.5 and (pound)95 million, respectively, for the year ended March 31,
1998, (2) US GAAP net income/(loss), ratio of earnings to fixed charges and net
interest expense would have been (pound)(45) million, 1.7 and (pound)136
million, respectively, for the year ended March 31, 1998 and (pound)(23)
million, 0.1 and (pound)19 million, respectively, for the period from April 1,
1998 through May 18, 1998, (3) UK GAAP long-term debt and other obligations,
less amounts due currently, would have been (pound)1.8 billion as of March 31,
1998 and (4) US GAAP long-term debt and other obligations, less amounts due
currently, would have been (pound)2.3 billion as of March 31, 1998.
The selected financial data of TXU Europe Limited for the period from
formation (February 5, 1998) through December 31, 1998, for the period from
formation through March 31, 1999 and as of December 31, 1998 and March 31, 1999,
have been derived from financial statements of TXU Europe Limited, which have
been audited by PricewaterhouseCoopers, independent accountants. The selected
financial data of TXU Europe Limited for the nine months ended September 30,
1999 have been derived from the unaudited financial statements of TXU Europe
Limited. The financial statements of TXU Europe Limited have been prepared in
accordance with US GAAP. TXU Europe Limited recorded its approximately 22%
equity interest in the net income of TEG for the period from March to May 18,
1998 and has accounted for TEG and TXU Europe Group as consolidated subsidiaries
since May 19, 1998. Results of TXU Europe Limited for the periods from formation
through December 31, 1998 and March 31, 1999 and for the nine months ended
September 30, 1999 are not indicative of results for an annual period. Because
TXU Europe Limited obtained control of TEG on May 19, 1998, earnings of TXU
Europe Group are not reflected in TXU Europe Limited's results before May 19,
1998, other than as a result of TXU Europe Limited's 22% equity interest in the
net income of TEG for the period from March through May 18, 1998. In addition,
TXU Europe Limited's operations are affected by seasonal weather patterns.
For more information, see MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS and the consolidated financial
statements and related notes of TXU Europe Group as of March 31, 1998 and for
the two years in the period then ended, and for the period from April 1, 1998
through May 18, 1998 and of TXU Europe Limited as of, and for the periods from
formation through December 31, 1998 and March 31, 1999 and as of, and for, the
nine months ended September 30, 1999 included elsewhere in this prospectus.
TXU Europe Limited's unaudited pro forma condensed consolidated income
statement and other consolidated data presented below for the year ended
December 31, 1998 reflect the acquisition by TXU Europe Limited of TEG as if it
had occurred as of January 1, 1998. That unaudited pro forma condensed
consolidated income statement and other consolidated data have been prepared by
TXU Europe Limited from US GAAP historical information and assumptions deemed
proper by it and include the effects of an allocation of the purchase price
paid. The unaudited pro forma condensed consolidated income statement and other
data presented in this prospectus are shown for illustrative purposes only and
are not necessarily indicative of the future results of operations of TXU Europe
Limited or of the results of operations of TXU Europe Limited if the transaction
had occurred as of January 1, 1998. This information should be read in
conjunction with the unaudited condensed consolidated pro forma statement of
income and related notes of TXU Europe Limited included elsewhere in this
prospectus.
9
<PAGE>
<TABLE>
<CAPTION>
TXU EUROPE GROUP PLC
(PREDECESSOR COMPANY)
UK GAAP US GAAP
---------------------------- ---------------------------------------------
YEAR ENDED MARCH 31, PERIOD FROM PERIOD FROM
------------------------------------------- APRIL 1, 1998 JANUARY 1, 1988
THROUGH THROUGH
1995 1996 1997 1998 1997 1998 MAY 18, 1998 MAY 18, 1998
---- ---- ---- ---- ---- ---- ------------ ----------------
((POUND) MILLION) (UNAUDITED)
CONSOLIDATED INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues....... 2,061 2,119 2,984 3,475 2,984 3,475 425 1,563
Operating income/(loss).. 244 43 346 337 298 267 (11) 91
Net income/(loss)........ 141 221 265 49 (90) (38) (21) 16
</TABLE>
<TABLE>
<CAPTION>
UK GAAP US GAAP
----------------------------------- -----------------
AS OF MARCH 31,
--------------------------------------------------------
1995 1996 1997 1998 1997 1998
---- ---- ---- ---- ---- ----
((POUND) MILLION)
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C>
Total assets............. 2,053 2,364 3,709 3,888 5,422 5,826
Common stock equity...... 832 1,189 1,314 1,167 2,025 1,802
Minority interest........ (1) (2) 19 6 19 6
Long-term debt and other
obligations, less amounts
due currently.......... 484 682 1,466 1,499 1,837 1,976
</TABLE>
<TABLE>
<CAPTION>
UK GAAP US GAAP
---------------------------- ---------------------------------------------
YEAR ENDED MARCH 31, PERIOD FROM PERIOD FROM
------------------------------------------- APRIL 1, 1998 JANUARY 1, 1988
THROUGH THROUGH
1995 1996 1997 1998 1997 1998 MAY 18, 1998 MAY 18, 1998
---- ---- ---- ---- ---- ---- ------------ ----------------
((POUND) MILLION, EXCEPT RATIOS) (UNAUDITED)
CONSOLIDATED CASH FLOW DATA (1):
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating activities...... 284 (189) (116) 614 292 341 74 154
Investing activities......(452) 306 (1,052) (238) (229) (234) (78) (139)
Financing activities...... (5) 560 915 (148) (316) 121 16 27
OTHER CONSOLIDATED DATA:
Earnings before interest,
taxes and minority interest
(EBIT) (unaudited)(2)... 217 280 364 347 303 277 (10) 92
Earnings before interest,
taxes, minority interest,
depreciation and amortization
(EBITDA) (unaudited)(2). 273 345 436 436 464 462 16 165
Ratio of earnings to fixed charges
(unaudited)(3).......... 5.8 4.9 4.2 2.6 2.5 1.7 0.1 1.6
Net interest expense...... 14 22 46 85 88 126 16 41
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
TXU EUROPE LIMITED
(SUCCESSOR COMPANY)
US GAAP
PERIOD FROM FORMATION PERIOD FROM
(FEBRUARY 5, 1998) THROUGH PRO FORMA YEAR FORMATION NINE MONTHS
--------------------------- ENDED THROUGH ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1998 1999
--------------- ----------- ---------------- ------------- --------------
(UNAUDITED)
((POUND) MILLION)
CONSOLIDATED INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Operating revenues..... 2,165 3,338 3,690 939 2,686
Operating income....... 314 484 508 53 354
Net income (loss)...... 77 126 94 (25) 71
</TABLE>
AS OF AS OF AS OF
DECEMBER 31, 1998 MARCH 31, 1999 SEPTEMBER 30, 1999
----------------- -------------- ------------------
(UNAUDITED)
((POUND) MILLION)
CONSOLIDATED BALANCE SHEET DATA:
Total assets............... 8,529 8,583 8,429
Total common stock equity.. 1,535 1,581 1,607
Minority interest.......... 190 200 197
Note payable to TXU Corp... 682 682 -
Long-term debt, less amounts
due currently............ 3,629 3,754 4,495
<TABLE>
<CAPTION>
PERIOD FROM FORMATION NINE MONTHS
(FEBRUARY 5, 1998) THROUGH PERIOD FROM ENDED
------------------------------- FORMATION THROUGH SEPTEMBER 30,
DECEMBER 31, 1998 MARCH 31, 1999 SEPTEMBER 30, 1998 1999
----------------- -------------- ------------------ -------------
(UNAUDITED)
((POUND) MILLION)
CONSOLIDATED CASH FLOW DATA:
<S> <C> <C> <C> <C>
Operating activities... 37 44 12 447
Investing activities...(1,767) (1,858) (1,569) (347)
Financing activities... 2,197 2,228 3,427 (206)
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM FORMATION PERIOD FROM
(FEBRUARY 5, 1998) THROUGH PRO FORMA YEAR FORMATION NINE MONTHS
---------------------------- ENDED THROUGH ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1998 1999
----------------- ---------- ----------------- --------------- -------------
(UNAUDITED)
((POUND) MILLION)
OTHER CONSOLIDATED DATA:
<S> <C> <C> <C> <C> <C>
Earnings before interest, taxes and
minority interest (EBIT)
(unaudited)(2)................... 360 531 539 81 359
Earnings before interest, taxes,
minority interest, depreciation
and amortization (EBITDA)
(unaudited)(2)................... 504 733 771 165 542
Ratio of earnings to fixed charges
(unaudited)(3)................... 1.5 1.7 1.4 0.7 1.6
Net interest expense............... 205 278 341 128 213
</TABLE>
11
<PAGE>
(1) Cash flow information on a UK GAAP basis for the years ended March 31,
1995, 1996, 1997 and 1998 has been reformatted to US GAAP presentation
style.
(2) EBIT equals earnings before interest income, interest expense, income
taxes and minority interest. EBITDA equals earnings before interest
income, interest expense, income taxes, minority interest,
depreciation and amortization. This information is provided for
informational purposes only. EBIT and EBITDA are not measures defined
under US GAAP and have not been presented in accordance with US GAAP.
Neither EBIT nor EBITDA should be construed as an alternative to
operating income under US GAAP as an indicator of operating
performance, or as an alternative to cash flows from operating
activities under US GAAP as a measure of liquidity. EBIT and EBITDA
are widely accepted financial indicators of a company's ability to
incur and service debt. However, these measures of EBIT and EBITDA may
not be comparable to similar measures presented by other companies.
(3) The ratio of earnings to fixed charges is computed as the sum of
earnings plus fixed charges divided by fixed charges. Earnings consist
of the aggregate of net income (loss) before minority interests,
income taxes and fixed charges excluding interest capitalized. Fixed
charges consist of interest expensed and capitalized and the estimated
interest portion of rent expense. For TXU Europe Group, for the period
from April 1, 1998 through May 18, 1998 total fixed charges exceeded
total earnings by (pound)26 million. For TXU Europe Limited, for the
period from formation through September 30, 1998, total fixed charges
exceeded total earnings by (pound)50 million.
12
<PAGE>
RISK FACTORS
In addition to the other information in this prospectus, the following
factors pertain to an investment in the TOPrS.
BECAUSE TXU EUROPE LIMITED'S GUARANTEES AND THE SUBSIDIARY DEBENTURES ARE
SUBORDINATED OBLIGATIONS, THE CLAIMS OF GENERAL CREDITORS OF TXU EUROPE LIMITED
AND OF THE ISSUERS OF THE SUBSIDIARY DEBENTURES ARE SENIOR TO CLAIMS OF HOLDERS
OF TOPRS UNDER THOSE GUARANTEES AND SUBSIDIARY DEBENTURES.
TXU Europe Limited's obligations under the guarantees and the
obligations of the issuers of the subsidiary debentures under those debentures
are subordinated to the claims of general creditors of TXU Europe Limited and
the issuers of those debentures. As of September 30, 1999, there was an
aggregate of (pound)2.2 billion of long-term debt of TXU Europe Limited that
would have been senior to the guarantees. Upon liquidation or reorganization of
TXU Europe Limited, or an issuer of subsidiary debentures, the claims of senior
creditors generally will be paid before payments can be made on the guarantees
or the subsidiary debentures, as the case may be.
BECAUSE TXU EUROPE LIMITED IS A HOLDING COMPANY, CLAIMS OF CREDITORS OF TXU
EUROPE LIMITED'S SUBSIDIARIES ALSO ARE EFFECTIVELY SENIOR TO CLAIMS OF HOLDERS
OF TOPRS UNDER TXU EUROPE LIMITED'S GUARANTEES. FUNDING IS A SPECIAL PURPOSE
ENTITY THAT IS ENTIRELY DEPENDENT ON TXU EUROPE LIMITED AND ITS AFFILIATES.
TXU Europe Limited is a holding company. Almost all of its operating
income comes from TXU Europe Group and TXU Europe Group's subsidiaries. Almost
all of TXU Europe Limited's consolidated assets are held by TXU Europe Group and
TXU Europe Group's subsidiaries. Accordingly, the ability of TXU Europe Limited
to service its debt, including its obligations under the guarantees, is
primarily dependent on the earnings of TXU Europe Group and its subsidiaries and
the payment of those earnings to TXU Europe Limited in the form of dividends,
loans or advances and through repayment of loans or advances from TXU Europe
Limited. Neither the subsidiaries of TXU Europe Limited, except for the trust,
nor TXU Europe Group and its subsidiaries have any obligation to pay any amounts
due on the TOPrS.
Funding is a special purpose entity formed solely as a financing
vehicle for TXU Europe Limited and its affiliates. Therefore, Funding's ability
to make interest and other payments on the debentures that it will issue to the
partnership is entirely dependent on TXU Europe Limited and its affiliates
making payments on their obligations to Funding as and when required. If TXU
Europe Limited and its affiliates were not to make such payments for any reason,
Funding would not have sufficient funds to make payments on these debentures. In
this event, the partnership, as the beneficial holder of these debentures,
would, except to the extent Funding can exercise its rights to defer interest,
rely on the enforcement of its rights against TXU Europe Limited pursuant to the
terms of its guarantee of these debentures.
Unexpected declines in TXU Europe Group's future business, which may
result from the increasingly competitive environment in the UK electric and gas
utility industries, increases in operating or capital costs, changes in
regulatory policies or the inability to borrow additional funds, could impair
TXU Europe Group's ability to meet its debt service obligations, or to make
distributions to TXU Europe Limited. This could adversely affect (a) the ability
of the issuers of the subsidiary debentures to make payments on their
obligations to the partnership as well as the partnership's ability to declare
distributions on the Preferred Partnership Securities that the trust would need
to pay distributions on the TOPrS and (b) TXU Europe Limited's ability to make
any payments pursuant to the guarantees. No assurance can be given that
additional financing will be available when needed, or, if available, will be
obtainable on terms that are favorable to TXU Europe Limited.
Since TXU Europe Limited is a holding company, the guarantees will be
effectively subordinated to existing and future liabilities and preference share
capital of TXU Europe Limited's subsidiaries. As of September 30, 1999, there
was an aggregate of (pound)2.2 billion of debt and preference share capital of
TXU Europe Limited's subsidiaries, other than debt securities of finance
subsidiaries that are guaranteed by TXU Europe Limited, that would have been
senior to the guarantees. The financial statements of TXU Europe Limited and TXU
Europe Group included in this prospectus show the aggregate amount of subsidiary
debt and preference share capital as of the date of those statements. This
includes trade payables, guarantees and leases, letters of credit and other
obligations of TXU Europe Limited's subsidiaries. Upon liquidation or
reorganization of a subsidiary of TXU Europe Limited, the claims of that
subsidiary's creditors and holders of preference share capital generally will be
paid before payments can be made on the guarantees or to other creditors of TXU
Europe Limited. Although some debt instruments limit the amount of debt TXU
Europe Limited and its subsidiaries may incur, both TXU Europe Limited and its
subsidiaries retain the ability to incur substantial additional indebtedness and
other obligations that will rank senior to the guarantees. See MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
"Liquidity and Capital Resources -- Financing Arrangements."
13
<PAGE>
TXU EUROPE LIMITED HAS ALREADY INCURRED SUBSTANTIAL INDEBTEDNESS. THIS LEVEL OF
INDEBTEDNESS MAY LIMIT TXU EUROPE LIMITED'S ABILITY TO SERVICE ITS INDEBTEDNESS
AND TO CONDUCT BUSINESS.
As of September 30, 1999, the ratio of TXU Europe Limited's
consolidated net debt to consolidated net debt plus equity as determined in
accordance with US GAAP was approximately 68.5%. See the consolidated financial
statements of TXU Europe Limited and the accompanying notes. The degree to which
TXU Europe Limited and its consolidated subsidiaries may be leveraged in the
future could affect their ability to service their indebtedness, to make capital
investments, to take advantage of business opportunities, to respond to
competitive pressures or to obtain additional financing. In addition, TXU Europe
Limited and some of its subsidiaries have outstanding indebtedness that contains
cross-default provisions. Therefore, a default by TXU Europe Limited or those
subsidiaries on these and other obligations could cause a default under
indebtedness that contains cross-default provisions.
IF TXU EUROPE LIMITED, AS GENERAL PARTNER OF THE PARTNERSHIP, DOES NOT DECLARE
DISTRIBUTIONS ON THE PREFERRED PARTNERSHIP SECURITIES, THE TRUST WILL NOT HAVE
THE FUNDS TO PAY DISTRIBUTIONS ON THE TOPRS.
The trust's ability to pay distributions to the holders of the TOPrS
is dependent upon its receipt of distributions on the Preferred Partnership
Securities. If subsidiaries of TXU Europe Limited defer or fail to make interest
or principal payments on the subsidiary debentures and if TXU Europe Limited
fails to make guarantee payments on the guarantees of the subsidiary debentures,
the partnership will lack the funds necessary to pay distributions on the
Preferred Partnership Securities. If the partnership does not make current
distributions on the Preferred Partnership Securities, either because TXU Europe
Limited, as the general partner, does not declare distributions to be made or
because the partnership lacks sufficient funds, the trust will not have funds
available to make current distributions on the TOPrS. In that event, the Trust
Guarantee will not apply to those distributions until the trust has sufficient
funds available to pay those distributions. Distributions not paid in respect of
the Preferred Partnership Securities on the scheduled payment date will
accumulate and compound quarterly at the rate of 9.75% of the liquidation amount
of $25 per Preferred Partnership Security per annum, and any amounts paid will
then be paid on the TOPrS at the same rate.
TAX CONSEQUENCES OF FAILURE OF DISTRIBUTIONS. Even if the partnership
fails to pay current distributions on the Preferred Partnership Securities, the
holders of the TOPrS will continue to recognize income for US federal income tax
purposes in advance of the receipt of cash and they will not receive the cash
from the trust related to that income if they dispose of their TOPrS prior to
the record date for the date on which distributions of those amounts are made by
the trust.
THE PARTNERSHIP MAY HAVE INSUFFICIENT INCOME OR ASSETS TO PAY DISTRIBUTIONS TO
THE TRUST THAT ARE SUFFICIENT TO PAY DISTRIBUTIONS ON THE TOPRS.
The holders of the TOPrS are subject to the risk that the current or
liquidating distributions expected to be payable on the TOPrS will not match the
rate paid on the securities held by the partnership, including the subsidiary
debentures and any additional securities acquired by the partnership in the
future.
A mismatch could occur if:
o at any time that the partnership is receiving current
payments in respect of the securities held by the
partnership (including the subsidiary debentures), TXU
Europe Limited, as the general partner of the partnership,
in its sole discretion, does not declare distributions on
the Preferred Partnership Securities and the partnership
receives insufficient amounts from its investments to pay
the resulting additional compounded distributions that will
accumulate on any unpaid distributions,
o the partnership reinvests the proceeds received from the
subsidiary debentures upon their redemption or at their
maturities in other subsidiary debentures or eligible debt
securities that do not generate income sufficient to pay
full quarterly distributions in respect of the Preferred
Partnership Securities at a rate of 9.75% per annum, or, if
sufficient to pay those distributions either in full or in
part, the partnership does not declare or make those
distributions, or
o subsidiary debentures cannot be liquidated by the
partnership for an amount sufficient to pay liquidating
distributions in full or, if sufficient to pay those
distributions in full or in part, the partnership does not
declare or make those distributions.
The trust will not have sufficient funds available to pay the holders
of the TOPrS full expected current or liquidating distributions on the TOPrS if
the partnership lacks sufficient funds to make current or liquidating
distributions on the Preferred Partnership Securities in full.
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<PAGE>
ALMOST ALL OF THE PARTNERSHIP'S INITIAL INVESTMENTS WILL BE IN DEBENTURES OF
SUBSIDIARIES OF TXU EUROPE LIMITED.
With the proceeds from the issuance of the TOPrS, the trust will
purchase the Preferred Partnership Securities. The partnership will invest
approximately 99% of its capital, which will consist of the proceeds from the
issuance of the Preferred Partnership Securities and the general partner's
capital contribution, in the subsidiary debentures. If TXU Europe Limited's
subsidiaries default on their obligations under the subsidiary debentures, and
TXU Europe Limited defaults on its obligations under the guarantees of those
debentures, the trust will not be able to pay the expected current or
liquidating distributions on the TOPrS.
IN SOME CASES, THE HOLDERS OF THE TOPRS MAY RECEIVE CASH OR PREFERRED
PARTNERSHIP SECURITIES IN EXCHANGE FOR THE TOPRS. IF THAT HAPPENS, THE HOLDERS
OF THE TOPRS MAY HAVE TO PAY TAXES AND THE VALUE OF THE INVESTMENT IN THE TOPRS
MAY BE REDUCED.
The occurrence of:
o specified adverse tax consequences to the trust or the
partnership, Additional Amounts being payable on the
subsidiary debentures or the TXU Europe Limited subordinated
guarantees or the denial of an interest deduction in the US
or the UK by any issuer of subsidiary debentures on its
subsidiary debentures beneficially held by the partnership,
or
o the trust or the partnership being considered an "investment
company" under the Investment Company Act,
in each case, as a result of a change in law, would constitute a "special
event." If a trust special event occurs, there is a possibility that the TOPrS
will be redeemed for cash prior to the time that the TOPrS could otherwise be
optionally redeemed, or that the holders of the TOPrS will receive Preferred
Partnership Securities in exchange for the TOPrS. See DESCRIPTION OF THE TOPrS
- -- "Trust Special Event Redemption or Distribution" for the definition of trust
special event. Preferred Partnership Securities may not trade at the same value
as the TOPrS. In addition, the receipt of Preferred Partnership Securities may
cause the holders of the TOPrS to incur tax liability in excess of that
initially contemplated by the holders of the TOPrS. There is also the
possibility that the partnership will redeem Preferred Partnership Securities
for cash in the event that a partnership special event occurs. See DESCRIPTION
OF THE PREFERRED PARTNERSHIP SECURITIES -- "Partnership Special Event
Redemption" for the definition of partnership special event.
TAX CONSEQUENCES. Unless the dissolution of the trust occurs as a
result of the trust being subject to US federal income tax with respect to
income on the Preferred Partnership Securities, a distribution of the Preferred
Partnership Securities upon the dissolution of the trust would not be a taxable
event to holders of the TOPrS. If, as a consequence of a trust special event
resulting from the trust becoming subject to US federal income tax with respect
to income on the Preferred Partnership Securities, Preferred Partnership
Securities are distributed to the holders of the TOPrS by the trust, the holders
of the TOPrS would likely recognize gain or loss as if they had exchanged their
TOPrS for the Preferred Partnership Securities in a taxable exchange. Similarly,
the holders of the TOPrS would recognize a gain or loss if, upon an occurrence
of a partnership special event, the trust redeemed the TOPrS for cash.
EXCHANGE ISSUES. Because the holders of the TOPrS may receive
Preferred Partnership Securities upon the occurrence of a special event, you are
also making an investment decision with regard to the Preferred Partnership
Securities and should carefully review all the information regarding the
Preferred Partnership Securities contained herein. Neither TXU Europe Limited,
the trust nor the partnership can make any assurance as to the market prices for
the Preferred Partnership Securities that may be distributed in exchange for
TOPrS if a dissolution of the trust were to occur. Accordingly, the Preferred
Partnership Securities that holders of TOPrS may receive may trade at a discount
to the purchase price of the TOPrS.
HOLDERS OF TOPRS CANNOT CAUSE TXU EUROPE LIMITED, AS GENERAL PARTNER OF THE
PARTNERSHIP, TO DECLARE DISTRIBUTIONS.
If a special representative is appointed to act on behalf of holders
of Preferred Partnership Securities, that special representative's ability to
take action on behalf of the holders of the TOPrS is limited, and it is
uncertain that the holders of the TOPrS would receive a distribution on the
TOPrS even if the special representative took such action. Under no
circumstances will the special representative have authority to cause the
general partner to declare distributions on the Preferred Partnership
Securities. As a result, although the special representative may be able to
enforce the partnership's creditors' rights to accelerate and receive payments
on the subsidiary debentures and the TXU Europe Limited guarantees of the
subsidiary debentures, the partnership would be entitled to reinvest those
payments in additional subsidiary debentures or other eligible debt securities,
subject to satisfying the applicable reinvestment criteria, rather than
declaring and making distributions on the Preferred Partnership Securities.
15
<PAGE>
HOLDERS OF TOPRS WILL HAVE LIMITED VOTING RIGHTS.
Holders of the TOPrS will have limited voting rights and will not be
entitled to vote to appoint, change, or to increase or decrease the number of
administrative trustees. Those voting rights are vested exclusively in the
Control Party as the holder of the control certificate.
TRADING PRICES MAY NOT FULLY REFLECT THE VALUE OF DISTRIBUTIONS DUE ON THE TOPRS
AND MAY BE VOLATILE.
The price at which the TOPrS trade may not fully reflect the value of
the accumulated but unpaid distributions on the TOPrS, which will equal the
accumulated but unpaid distributions on the Preferred Partnership Securities. If
holders of the TOPrS dispose of their TOPrS prior to the record date for
distribution of those amounts by the trust, their adjusted tax basis in the
TOPrS will include accumulated but unpaid distributions on the Preferred
Partnership Securities through the date of disposition, which they will include
in gross income for US federal income tax purposes. To the extent the selling
price is less than the adjusted tax basis of the TOPrS, the holders of those
TOPrS will recognize a capital loss. Subject to limited exceptions, the holders
of the TOPrS cannot apply capital losses to offset ordinary income for US
federal income tax purposes.
In addition, as a result of the option of the general partner not to
declare current distributions on the Preferred Partnership Securities, the
market price of the TOPrS, which represent undivided beneficial ownership
interests in the Preferred Partnership Securities, may be more volatile than
other similar securities where there is no such right not to pay current
distributions.
THERE HAS BEEN NO PRIOR MARKET FOR THE TOPRS.
The TOPrS constitute a new issue of securities with no established
trading market. We have applied to have the TOPrS listed on the NYSE. We cannot
assure that an active market for the TOPrS will develop or be sustained in the
future on the NYSE. Although the underwriters have indicated to TXU Europe
Limited that they intend to make a market in the TOPrS, as permitted by
applicable laws and regulations, they are not obligated to do so and may
discontinue any market-making at any time without notice. Accordingly, we cannot
give any assurances as to the liquidity of, or trading markets for, the TOPrS.
CHANGES IN CURRENCY EXCHANGE RATES MAY AFFECT THE ABILITY OF SUBSIDIARIES OF TXU
EUROPE LIMITED TO MAKE PAYMENTS ON THE SUBSIDIARY DEBENTURES AND TXU EUROPE
LIMITED'S ABILITY TO MAKE PAYMENTS ON THE GUARANTEES.
TXU Europe Limited's and its subsidiaries' revenues will be primarily
received in pounds sterling while the price which will be paid to the trust for
the TOPrS will be paid in US dollars, and the interest and principal payment
obligations on the subsidiary debentures (and the related TXU Europe Limited
guarantees) and the payment obligations on the TOPrS and Preferred Partnership
Securities (and the related TXU Europe Limited guarantees) will be payable in US
dollars. As a result, any change in the currency rate that increases the
effective principal and interest payment obligations on the subsidiary
debentures, upon conversion of pounds sterling-based revenues into US dollars
may have a material adverse effect on TXU Europe Limited and its subsidiaries or
on their ability to make payments on the subsidiary debentures or those
guarantees and, therefore, on the ability of the partnership and the trust to
make payments on the Preferred Partnership Securities and the TOPrS. See
EXCHANGE RATES for information concerning the Noon Buying Rate for pounds
sterling expressed in US dollars.
THERE ARE A NUMBER OF REGULATORY RISKS ASSOCIATED WITH TXU EUROPE GROUP'S
BUSINESSES.
Governmental agencies in the UK are reviewing various elements of the
electricity generation, supply and distribution industry, with a view to
increasing competition in each of these segments of the electricity business.
DISTRIBUTION PRICE REVIEW COULD SUBSTANTIALLY REDUCE REVENUES OF TXU EUROPE
GROUP'S NETWORKS BUSINESS AND COULD LEAD TO A DOWNGRADE IN THE RATINGS OF THE
TOPRS.
TXU Europe Group's networks business, which primarily involves the
distribution of electricity in its UK service territory, accounted for
approximately 48% of TXU Europe Limited's profits before interest, taxes and
exceptional items for the twelve months ended September 30, 1999. This business
is regulated under a governmental license, and electricity distribution pricing
is determined by a distribution price formula established by the regulator.
Application of this formula may or may not allow TXU Europe Group to recoup all
of its costs with respect to this business. The various elements of the formula
and the terms of TXU Europe Group's license are subject to amendment from time
to time. A review of the distribution price formula is scheduled to be completed
by the regulator in April 2000. In his draft proposals for the distribution
price control review which were released in August 1999, adjusted in October
1999 and published in final form on December 2, 1999, the regulator has proposed
a substantial decrease in distribution prices charged by the networks business
in its service territory. The final proposals for Eastern Electricity
incorporated an initial reduction in allowed revenues for regulated units of 28%
from April 1, 2000 with further annual reductions of 3% per year for the next
16
<PAGE>
four years, adjusted for inflation. The allowed revenues will be calculated from
a formula to be provided by the Office of Gas and Electricity Markets in the
near future. However, TXU Europe Limited and TXU Europe Group estimate that the
effect on revenues will be a reduction of about (pound)73 million ($120 million)
for the year ending December 31, 2000 and about (pound)100 million ($165
million) for the year ending December 31, 2001. TXU Europe Limited cannot
predict whether it will be able to offset all or a portion of the revenue
reductions mandated by the distribution price control review or what the
ultimate result of the review will be on TXU Europe Limited's revenues or cash
flow or on the rating of the TOPrS. For further information, see TXU EUROPE
GROUP BUSINESS OVERVIEW -- "UK Regulatory Matters--Networks Regulation --
Distribution Price Regulation."
SUPPLY PRICE RESTRAINTS MAY REDUCE REVENUES OF TXU EUROPE GROUP'S ELECTRICITY
SUPPLY BUSINESS.
Supply charges to residential and small business customers in TXU
Europe Group's electricity distribution area account for a substantial portion
of TXU Europe Group's supply businesses. They are currently regulated by maximum
price restraints. When the regulator determines that an adequate level of
competition has been established, these supply price restraints are expected to
no longer apply. A determination is not expected for at least two years. Until
then, these maximum price restraints could adversely affect TXU Europe Limited's
revenues from these markets. For further information, see TXU EUROPE GROUP
BUSINESS OVERVIEW -- "UK Regulatory Matters--Energy Regulation; Electricity
Supply Price Regulation."
UK REGULATIONS ENCOURAGING FURTHER COMPETITION COULD RESULT IN TXU EUROPE GROUP
LOSING CUSTOMERS OR REDUCING ITS PRICES TO REMAIN COMPETITIVE.
The phasing in of competition for electricity supply to all service
areas, each of which had previously limited supply service to a single
authorized regional electricity company, was completed in May 1999. With the
introduction of full retail competition, it is expected that supply price
restraints will no longer apply to current supply customers after April 1, 2000,
except for a control on prices charged to residential and small business
customers until an adequate level of competition is established. The generation
market and electricity trading arrangements will also be affected by the outcome
of the current regulatory reviews of energy sources and pool arrangements by
governmental agencies. No assurance can be given that TXU Europe Group will
maintain or increase its current market share and margins in each of these
markets as they become more competitive.
OTHER REGULATORY RISKS
Subsidiaries of TXU Europe Limited hold various licenses that subject
their operations to comprehensive regulation. As a result of recent UK
government reviews of the regulation of electric and gas industries, various
reforms are anticipated, which may result in:
o Divestiture of generating plants by large generators like TXU
Europe Group;
o Replacement of the wholesale trading market for electricity in
England and Wales, commonly referred to as the Pool, into which
all electric generation is now sold by generators, with a set of
voluntary markets;
o Separation of the management of the distribution and supply
businesses and/or the legal entities in which those businesses
are held;
o Continuation of the restrictions which limit the construction of
new gas-fired generating plants; and
o Changes encouraging increased competition.
No assurance can be given as to what regulatory reforms may be
implemented, if any, when they might be implemented and how they might affect
TXU Europe Group and TXU Europe Limited. For further information, see INDUSTRY
BACKGROUND and TXU EUROPE GROUP BUSINESS OVERVIEW -- "UK Regulatory Matters."
UK COURTS MIGHT NOT ENFORCE JUDGMENTS RENDERED OUTSIDE OF THE UK, WHICH MAY MAKE
IT DIFFICULT TO COLLECT ON JUDGMENTS RENDERED AGAINST FUNDING AND TXU EUROPE
LIMITED.
Funding is a private unlimited company and TXU Europe Limited is a
private limited company. Each is incorporated under the laws of England and
Wales. Substantially all the assets of Funding and TXU Europe Limited are
located outside the US. Funding and TXU Europe Limited have appointed Thelen
Reid & Priest LLP, New York, New York, as their authorized agent upon which
process may be served in any action arising out of or based upon the subsidiary
debenture indentures, the TOPrS, the Preferred Partnership Securities, the
guarantees, or the deposit agreement that may be instituted in any US Federal or
17
<PAGE>
state court having subject matter jurisdiction in the Borough of Manhattan, The
City of New York, New York, and have consented to the jurisdiction of those
courts in any of those actions. However, it may not be possible for investors to
effect service of process within the US upon Funding or TXU Europe Limited in
connection with any other actions or to enforce against either of them, in
original actions or in actions for enforcement of judgments of US courts, civil
liabilities based upon US securities laws.
PRESENTATION OF CURRENCY, FINANCIAL AND OTHER INFORMATION
TXU Europe Limited publishes its consolidated financial statements in
pounds sterling. In this prospectus, references to "pounds sterling," "GBP,"
"pence" or "(pound)" are to the currency of the UK, references to "euro" or "?"
are to the currency of the European Monetary Union and references to "US
dollars," "US$" or "$" are to the currency of the US. References to "NLG" are to
the national currency unit of The Netherlands (being non-decimal denominations
of the euro). As used in this prospectus, "US GAAP" means US generally accepted
accounting principles and "UK GAAP" means UK generally accepted accounting
principles. References to "MW" are to megawatts, "MWh" are to megawatt hours,
"kW" are to kilowatts, "kWh" are to kilowatt hours, "TWh" are to terawatt hours,
"GW" are to gigawatts, "GWh" are to gigawatt hours, "kV" are to kilovolts and
"LV" are to low volts.
For the convenience of the reader, this prospectus contains
translations of some pounds sterling amounts into US dollars at specified rates,
or, if the rate has not been specified, at the noon buying rate in New York City
for cable transfers in pounds sterling as certified for customs purposes by the
Federal Reserve Bank of New York (Noon Buying Rate) on September 30, 1999 of
$1.65 = (pound)1.00. Funding and TXU Europe Limited do not make any
representation that the pounds sterling amounts have been, could have been or
could be converted into US dollars at the rates indicated or at any other rates.
See EXCHANGE RATES for historical information regarding Noon Buying Rates.
TXU EUROPE LIMITED
Almost all of TXU Europe Limited's operating income is derived from
TXU Europe Group and TXU Europe Group's subsidiaries and almost all of TXU
Europe Limited's consolidated assets are held by TXU Europe Group and TXU Europe
Group's subsidiaries. TXU Europe Limited is a private limited company
incorporated in England and Wales in February 1998 and is an indirect
wholly-owned subsidiary of TXU Corp. TXU Europe Limited owns 90% of the
outstanding ordinary shares of TXU Finance (No. 2) Limited, or TXU Finance. The
remaining 10% of TXU Finance's outstanding ordinary shares are owned by a
wholly-owned US subsidiary of TXU Corp. In May 1998, TXU Acquisitions Limited
(Company No. 3455523), a wholly-owned subsidiary of TXU Finance, gained control
of TEG, the former holding company of TXU Europe Group, after all conditions to
its offer for all the ordinary shares of TEG had been satisfied or waived. In
August 1998, TXU Acquisitions completed the acquisition of TEG. In October 1998
TXU Acquisitions restructured its subsidiaries so that TXU Europe Group is now
owned by another subsidiary of TXU Acquisitions.
TXU EUROPE GROUP PLC
TXU Europe Limited's major business operations are conducted through
the following subsidiaries of TXU Europe Group:
o TXU Europe Energy Trading Limited (formerly Eastern Power and
Energy Trading Limited) (Company No. 3116221), or TXU Europe
Energy Trading, which coordinates and manages for TXU Europe
Group the price and volume risks associated with TXU Europe
Group's generation, electricity and gas retail businesses and
those of third parties;
o Eastern Electricity plc, or Eastern Electricity, one of the
largest retailers of electricity in the UK, and Eastern Energy
Limited (Company No. 3181389), which supplies electricity outside
the authorized area served by Eastern Electricity;
o TXU Europe Power Limited (formerly Eastern Generation Limited)
(Company No. 2353756), or TXU Europe Power, one of the largest
generators of electricity in the UK; and
o Eastern Natural Gas Limited (Company No. 2907433), or Eastern
Natural Gas, one of the largest retail suppliers of natural gas
in the UK.
TXU Europe Group sells electricity and natural gas under the brand
name of Eastern Energy. The operations of TXU Europe Energy Trading and TXU
Europe Power are treated by TXU Europe Limited as one segment for reporting
purposes. The electric and gas supply business is treated as the Energy Retail
18
<PAGE>
segment and the distribution business is treated as the Networks segment for
reporting purposes.
TXU EASTERN FUNDING COMPANY
Funding is a private unlimited company incorporated under the laws of
England and Wales and a wholly-owned indirect subsidiary of TXU Europe Limited.
Funding was organized solely to provide funding for the operations of TXU Europe
Limited and its subsidiaries by issuing debt securities, including the junior
subordinated debentures that will be issued to the partnership, and lending the
proceeds to TXU Europe. Funding's authorized and issued share capital consists
of 200 ordinary shares with a nominal value of (pound)1 per share. Funding
currently has outstanding $1.5 billion ((pound)921 million) of senior notes that
were issued in May 1999. On December 17, 1999, Funding exchanged these senior
notes for new senior notes registered under the Securities Act of 1933. On
February 17, 2000, Funding agreed to issue in the UK (pound)225 million of
senior notes guaranteed on a senior basis by TXU Europe Limited. The proceeds of
this offering will be used to repay corporate debt.
TXU EUROPE CAPITAL I
TXU Europe Capital I is a statutory business trust created under the
Delaware Business Trust Act pursuant to a trust agreement and the filing of a
certificate of trust with the Secretary of State of the State of Delaware on
November 22, 1999; that trust agreement will be amended and restated in its
entirety substantially in the form filed as an exhibit to the registration
statement of which this prospectus forms a part. The trust agreement will be
qualified as an indenture under the Trust Indenture Act of 1939. See DESCRIPTION
OF THE TOPrS. The Control Party will retain administrative and appointment
powers with respect to the trust by virtue of its ownership of the trust's
control certificate. The control certificate will not provide any economic
interest in the trust to the Control Party. The trust will use all the proceeds
derived from the issuance of the TOPrS to purchase the Preferred Partnership
Securities from the partnership and, accordingly, the assets of the trust will
consist solely of the Preferred Partnership Securities. The trust exists for the
exclusive purpose of (i) issuing the control certificate and the TOPrS, (ii)
investing the gross proceeds from the issuance of the TOPrS in the Preferred
Partnership Securities, and (iii) engaging in only those other activities
necessary or incidental to the activities described in (i) and (ii).
Under the trust agreement, there will initially be six trustees for
the trust. Four of the trustees will be individuals who are employees or
officers of or who are affiliated with TXU Business Services Company, a US
affiliate of TXU Europe Limited. These trustees are referred to as
Administrative Trustees. One trustee will be a financial institution that is
unaffiliated with TXU Europe Limited and is the indenture trustee for purposes
of compliance with the provisions of the Trust Indenture Act. This trustee will
be referred to as the Property Trustee. One trustee will be an entity that
maintains its principal place of business in the State of Delaware. This trustee
will be referred to as the Delaware Trustee. Initially, The Bank of New York, a
New York banking corporation, will act as Property Trustee, and its affiliate,
The Bank of New York (Delaware), a Delaware corporation, will act as Delaware
Trustee until, in each case, removed or replaced by the Control Party as the
holder of the control certificate. For purposes of compliance with the Trust
Indenture Act, The Bank of New York will also act as trustee under the Trust
Guarantee, the Partnership Guarantee and the indentures applicable to the
subsidiary debentures. We refer to the Bank of New York as the Trust Guarantee
Trustee when it acts as trustee under the Trust Guarantee and as the Partnership
Guarantee Trustee when it acts as trustee under the Partnership Guarantee.
On behalf of the trust, the Property Trustee will have the power to
exercise all rights, powers and privileges with respect to the Preferred
Partnership Securities under the limited partnership agreement to be entered
into by TXU Europe Limited and the trust as the holder of the Preferred
Partnership Securities. In addition, on behalf of the trust, the Property
Trustee will maintain exclusive control of a segregated non-interest bearing
bank account, or property account, to hold all payments made in respect of the
Preferred Partnership Securities for the benefit of the holders of the TOPrS.
The Trust Guarantee Trustee will hold the Trust Guarantee for the benefit of the
holders of the TOPrS. The trust's business and affairs will be conducted by its
Administrative Trustees. Subject to the rights of the holders of the TOPrS to
appoint a substitute Property Trustee or Delaware Trustee in certain instances,
the Control Party, as the holder of the control certificate, will have the right
to appoint, remove or replace any of the trustees and to increase or decrease
the number of trustees, provided that at least one trustee shall be a Delaware
Trustee, at least one trustee shall be the Property Trustee and at least one
trustee shall be an Administrative Trustee. TXU Europe Limited, as general
partner of the partnership, will provide funds to the trust as needed to pay
obligations of the trust to parties other than holders of TOPrS.
The rights of the holders of the TOPrS, including economic rights,
rights to information and voting rights, are as set forth in the trust agreement
and the Delaware Business Trust Act. See DESCRIPTION OF THE TOPrS. The trust
agreement and the Trust Guarantee also incorporate by reference the terms of the
Trust Indenture Act.
The office of the Delaware Trustee in the State of Delaware is White
Clay Center, Route 273, Newark, Delaware 19711. The principal place of business
of the trust is c/o TXU Business Services Company, Energy Plaza, 1601 Bryan
Street, Dallas, Texas 75201.
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<PAGE>
TXU EUROPE FUNDING I, L.P.
TXU Europe Funding I, L.P. is a limited partnership that was formed
under the Delaware Revised Uniform Limited Partnership Act, on November 22, 1999
for the exclusive purpose of purchasing eligible debt securities of certain
subsidiaries of TXU Europe Limited and other eligible debt securities with the
proceeds from the sale of Preferred Partnership Securities to the trust and a
capital contribution from TXU Europe Limited in exchange for the general partner
interest in the partnership. Under the certificate of limited partnership, and
the limited partnership agreement, as amended, TXU Europe Limited is the sole
general partner of the partnership. Upon the issuance of the Preferred
Partnership Securities, which represent limited partner interests in the
partnership, the trust will be the sole limited partner of the partnership.
Contemporaneously with the issuance of the Preferred Partnership Securities, the
general partner will contribute capital to the partnership in an amount
sufficient to establish its initial capital account at an amount equal to at
least 15% of the total capital of the partnership.
The partnership is managed by the general partner and exists for the
sole purpose of (1) issuing its partnership interests, (2) investing the
proceeds from those issuances in subsidiary debentures and eligible debt
securities and (3) engaging in only those other activities necessary or
incidental to the activities described in (1) and (2). To the extent that
aggregate payments to the partnership on the subsidiary debentures and on
eligible debt securities for each calendar quarter exceed distributions,
including accumulated distributions, paid with respect to the Preferred
Partnership Securities for these calendar quarters, the partnership may at times
have excess funds which, in the general partner's sole discretion, may be
distributed to the general partner in respect of its general partner interest in
the partnership.
For so long as the Preferred Partnership Securities remain
outstanding, the general partner will covenant in the limited partnership
agreement to (i) subject to the limited partnership agreement, remain the sole
general partner of the partnership and to maintain directly 100% ownership of
the general partner's interest in the partnership, (ii) cause the partnership to
remain a limited partnership and not to voluntarily dissolve, liquidate, wind-up
or be terminated, except as permitted by the limited partnership agreement and
(iii) use its commercially reasonable efforts to ensure that the partnership
will not be (A) an "investment company" for purposes of the Investment Company
Act or (B) an association or a publicly traded partnership taxable as a
corporation for US federal income tax purposes or a company for UK taxation
purposes. TXU Europe Limited or the then general partner may assign or transfer
its obligations as general partner to a wholly-owned direct or indirect
subsidiary of TXU Europe Limited provided that (i) the successor entity
expressly accepts the assignment or transfer of the obligations as general
partner under the limited partnership agreement and (ii) prior to the assignment
or transfer, TXU Europe Limited has received an opinion of nationally recognized
independent counsel to the partnership in the US experienced in these matters to
the effect that (A) the partnership will be treated as a partnership (and not a
publicly-traded partnership) for US federal income tax and UK taxation purposes,
(B) the assignment or transfer would not cause the trust to be classified as
other than a grantor trust for US federal income tax purposes or other than as a
transparent entity for UK taxation purposes, (C) following the assignment or
transfer, the successor entity will be in compliance with the Investment Company
Act without registering as an investment company, and (D) the assignment or
transfer will not adversely affect the limited liability of the holders of the
Preferred Partnership Securities.
The rights of the holders of the Preferred Partnership Securities,
including economic rights, rights to information and voting rights, are set
forth in the limited partnership agreement and the Delaware Revised Uniform
Limited Partnership Act. See DESCRIPTION OF THE PREFERRED PARTNERSHIP
SECURITIES.
The limited partnership agreement provides that the general partner
will have liability for the fees and expenses of the partnership, including any
taxes, duties, assessments or governmental charges of whatever nature (other
than withholding taxes) imposed by the US or any other domestic taxing authority
upon the partnership, and will be responsible for all debts and obligations of
the partnership, other than with respect to the Preferred Partnership
Securities. Under Delaware law, assuming a limited partner in a Delaware limited
partnership such as the partnership, for example, a holder of the Preferred
Partnership Securities, does not participate in the control of the business of
the limited partnership, that limited partner will not be personally liable for
the debts, obligations and liabilities of the limited partnership, whether
arising in contract, tort or otherwise, solely by reason of being a limited
partner of the limited partnership, subject to any obligation the limited
partner may have to repay any funds that may have been wrongfully distributed to
it. The partnership's business and affairs will be conducted by the general
partner. The Partnership Guarantee Trustee will hold the Partnership Guarantee
for the benefit of the holders of the Preferred Partnership Securities.
The principal place of activity of the partnership is c/o TXU Business
Services Company, Energy Plaza, 1601 Bryan Street, Dallas, Texas 75201.
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CAPITALIZATION OF TXU EUROPE LIMITED
The following table describes the actual consolidated capitalization
of TXU Europe Limited at September 30, 1999, and the consolidated capitalization
of TXU Europe Limited as adjusted to reflect the issuance and the application of
the net proceeds of the TOPrS (assuming that the over-allotment option is not
exercised), the issuance of (pound)225 million guaranteed notes under Funding's
and TXU Europe Limited's ?2 billion Euro Medium Term Note program and the
application of the proceeds to repay borrowings under the Sterling Credit
Agreement, the exchange of Funding's outstanding senior notes for senior notes
registered under the Securities Act of 1933, the issuance of (pound)77 million
of Norwegian bonds and the application of the net proceeds of (pound)72 million
to repay borrowings under the Sterling Credit Agreement, and the borrowing of
approximately (pound)120 million under the Sterling Credit Agreement for the
acquisition of Savon Voima Oy and other general corporate purposes. The table
reflects the expected application of the proceeds of subsidiary debentures,
other than Funding debentures, to repay long-term debt. However, until TXU
Europe Limited identifies the other issuer or issuers of subsidiary debentures,
it will not know what other debt will be repaid. The table has not been adjusted
to reflect any other future borrowings under the Euro Medium Term Note Program.
This table should be read in conjunction with SUMMARY -- "Selected Financial
Information," MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS and the consolidated financial statements and related
notes of TXU Europe Limited included elsewhere in this prospectus. Except as
disclosed in the "As Adjusted" columns, there have been no material changes in
the capitalization of TXU Europe Limited since September 30, 1999.
Solely for the convenience of the reader, UK pounds sterling amounts
have been translated into US dollars at the Noon Buying Rate on September 30,
1999 of $1.65 = (pound)1. See EXCHANGE RATES.
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------------------------------
Actual As Adjusted
------------------------------ ---------------------------
(pound) $ % (pound) $ %
---------- ------- -------- -------- ------- -------
(millions, except %)
<S> <C> <C> <C> <C> <C> <C>
Long-term debt and other
Obligations, less amounts due
currently:
Notes and bonds:
Guaranteed notes.......... 311 513 5.0 311 513 4.8
Sterling bonds............ 832 1,373 13.2 832 1,373 12.9
Senior notes.............. 921 1,519 14.6 -- --
Exchange senior notes..... -- -- -- 921 1,519 14.3
Guaranteed sterling notes. -- -- -- 225 371 3.5
Other:
Sterling Credit Agreement. 932 1,538 14.7 689 1,137 10.7
Rent factoring loans...... 252 416 4.0 252 416 3.9
Other unsecured loans..... 133 219 2.2 210 346 3.3
Capital leases............ 804 1,327 12.8 804 1,327 12.5
Cross border leases....... 310 512 4.9 310 512 4.8
Repayment of long-term debt by
issuers of subsidiary deben-
tures other than Funding -- -- -- (20) (34) (0.3)
-------- ------- -------- -------- --------- -------
Total long-term debt and other
Obligations, less amounts due
currently................ 4,495 7,417 71.4 4,534 7,481 70.5
------- ------- -------- -------- --------- -------
Minority interest................ 197 325 3.1 197 325 3.1
------- ------- -------- -------- --------- -------
TOPrS ......................... -- -- -- 91 150 1.4
------- ------- -------- -------- --------- -------
Common stock equity.............. 1,607 2,651 25.5 1,607 2,652 25.0
------- ------- -------- -------- --------- -------
Total capitalization..... 6,299 10,393 100.0% 6,429 10,608 100%
======= ======= ======== ======== ========= =======
</TABLE>
At December 31, 1999,(pound)380 million ($627 million) of long-term
debt was due currently and there was(pound)428 million ($706 million) of notes
payable and short-term debt outstanding.
21
<PAGE>
EXCHANGE RATES
The following table lists, for the periods indicated, information
concerning the exchange rates between UK pounds sterling and US dollars based on
the Noon Buying Rate in New York City for cable transfers in pounds sterling as
certified for customs purposes by the Federal Reserve Bank of New York. The
"Average" is the average of the Noon Buying Rates in effect on the last business
day of each month during the relevant period.
<TABLE>
<CAPTION>
PERIOD PERIOD END AVERAGE HIGH LOW
------ ---------- ------- ---- ---
($ PER (POUND)1.00)
Fiscal Year Ended:
<S> <C> <C> <C> <C>
March 31, 1994............................. 1.49 1.50 1.59 1.46
March 31, 1995............................. 1.62 1.56 1.64 1.46
March 31, 1996............................. 1.53 1.56 1.62 1.50
March 31, 1997............................. 1.64 1.60 1.71 1.49
March 31, 1998............................. 1.68 1.65 1.70 1.58
December 31, 1998.......................... 1.66 1.66 1.72 1.61
Twelve months ended March 31, 1999......... 1.61 1.65 1.72 1.60
Nine months ended September 30, 1999....... 1.65 1.61 1.65 1.58
</TABLE>
On February 24, 2000, the Noon Buying Rate was $1.60 = (pound)1.
USE OF PROCEEDS
All of the proceeds from the sale of the TOPrS will be invested by the
trust in the Preferred Partnership Securities. The partnership will use the
funds, together with the capital contribution of TXU Europe Limited, as general
partner, to make investments in the subsidiary debentures and other eligible
debt securities. Funding will lend the proceeds from the sale of its junior
subordinated debentures to TXU Europe Limited. TXU Europe Limited will use the
funds to repay corporate debt, including under the Sterling Credit Agreement,
and for general corporate purposes. Any other subsidiary of TXU Europe Limited
that will issue subsidiary debentures will use the proceeds from the sale of
these debentures to repay corporate debt and for general corporate purposes.
22
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. TXU Europe
Capital I, TXU Europe Funding I, L.P., Funding and TXU Europe Limited have based
these forward-looking statements on their current expectations and projections
about future events and assumptions they believe to be reasonable. These
forward-looking statements are subject to risks, uncertainties and assumptions
about Funding, TXU Europe Limited and TXU Europe Limited's subsidiaries that
could cause the actual results of Funding or TXU Europe Limited to differ
materially from those projected in any forward-looking statement, including,
among other things:
o general economic and business conditions in the UK and in the
service area for Eastern Electricity, formerly Eastern
Electricity's authorized area, which has been opened to
competition;
o unanticipated changes in interest rates, in rates of inflation,
or in foreign exchange rates;
o prevailing governmental, statutory, regulatory or administrative
policies and initiatives affecting TXU Europe Limited, its
subsidiaries or the UK or European electric and gas utility
industries;
o general industry trends;
o competition;
o power costs and availability;
o changes in business strategy, development plans or vendor
relationships;
o availability, terms and deployment of capital and capital market
conditions;
o availability of qualified personnel;
o changes in, or the failure or inability to comply with,
governmental regulations, including, among other things,
environmental regulations;
o changes in tax laws;
o weather conditions and other natural phenomena;
o unanticipated population growth or decline, and changes in market
demand and demographic patterns;
o access to adequate transmission facilities to meet changing
demand;
o pricing and transportation of oil, coal, natural gas and other
commodities;
o unanticipated changes in operating expenses and capital
expenditures;
o the ability of TXU Europe Limited to enter into financial
instruments to hedge various market risks or the inability of the
counterparties to meet their obligations with respect to
financial instruments;
o changes in technology used and services offered by TXU Europe
Group;
o unanticipated problems related to TXU Europe Group's internal Y2K
initiative and potential adverse consequences related to Y2K
non-compliance of third parties; and
o other factors described in this prospectus.
Any forward-looking statements speak only as of the date of this
prospectus. TXU Europe Capital I, TXU Europe Funding I, L.P., Funding and TXU
Europe Limited undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this prospectus might not occur.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The discussion below should be read in conjunction with the
consolidated financial statements and the related notes of TXU Europe Limited,
TXU Europe Group and Overseas appearing elsewhere in this prospectus. As
described under SUMMARY - "Selected Financial Information," for financial
reporting purposes, TXU Europe Group is considered the predecessor company to
TXU Europe Limited.
ACQUISITION OF THE ENERGY GROUP PLC (TEG) BY TXU CORP
On May 19, 1998, TXU Acquisitions, an indirect, wholly-owned
subsidiary of TXU Corp, gained control of TEG after all conditions to its offer
for all of the ordinary shares of TEG, the former holding company of TXU Europe
Group, were satisfied or waived. On August 7, 1998, TXU Acquisitions completed
its acquisition of TEG.
In connection with the offer and immediately before TXU Acquisitions
gained control of TEG, subsidiaries of TEG completed the sale of TEG's former
coal and power trading interests in the US and Australia, referred to as the
Peabody Sale. The adjusted gross consideration for the Peabody Sale was $2.1
billion ((pound)1.3 billion).
ACCOUNTING IMPACTS OF THE ACQUISITION
Purchase accounting adjustments
- -------------------------------
TXU Europe Limited's acquisition of TEG became effective May 19, 1998
and was accounted for as a purchase in accordance with US GAAP. Accordingly, the
results of operations of TXU Europe Group and other subsidiaries of TEG acquired
by TXU Europe Limited have been consolidated into the results of operations of
TXU Europe Limited beginning on that date. The total purchase consideration for
the TEG businesses acquired, which refers to TEG exclusive of the operations
sold in the Peabody Sale, was approximately (pound)4.4 billion. At the date of
the acquisition, TEG had assets of (pound)6.0 billion, including cash of
(pound)2.0 billion, and liabilities of (pound)4.5 billion, including debt of
(pound)2.9 billion. The excess of the purchase consideration plus acquisition
costs over the net fair value of tangible and identifiable intangible assets
acquired and liabilities assumed resulted in goodwill of (pound)3.5 billion,
which is being amortized over 40 years. See Note 1 to TXU Europe Limited's
consolidated financial statements.
Accounting for coal-fired power stations
- ----------------------------------------
TXU Europe Group entered into leases for five power stations in June
and July 1996 for terms of 99 years. Under US GAAP, leases for two of the
stations are accounted for as operating leases, and leases for three of the
stations are accounted for as capital leases. Before the acquisition, the
capital leased assets were being depreciated over 12 years and depreciation
expense totalled (pound)49 million, (pound)59 million and (pound)8 million for
the years ended March 31, 1997 and 1998 and for the period from April 1, 1998
through May 18, 1998, respectively. The fixed operating lease payments were
being expensed on a straight-line basis over 12 years, resulting in expense of
(pound)32 million for the year ended March 31, 1997, (pound)42 million for the
year ended March 31, 1998 and (pound)6 million for the period from April 1, 1998
through May 18, 1998. Twelve years represented management's best estimate of the
remaining useful lives of the power plants. Contingent payments of approximately
(pound)6 per megawatt hour, indexed to inflation, linked to output from these
power stations are payable for up to the first seven years of operation. No
output-linked payments are required after the first seven years of operation.
Before the acquisition by TXU Corp, under US GAAP, these output-linked payments
were charged to expense by TXU Europe Group in the period in which they were
accruable. Output-linked payments charged to expense by TXU Europe Group
totalled (pound)99 million for the year ended March 31, 1997, (pound)152 million
for the year ended March 31, 1998 and (pound)13 million for the period from
April 1, 1998 through May 18, 1998.
At the time of the acquisition of TEG, TXU Europe Limited established
the fair value of the capital leased assets and associated debt, including the
output-linked payments. Additionally, as a result of alternative operating
methodologies to be employed by TXU Corp, the estimated useful lives of these
five power stations were extended to a range of 18 to 22 years from original
lease inception.
After the acquisition, total lease expense for all the coal-fired
power stations for the period from formation through March 31, 1999 was
(pound)94 million.
24
<PAGE>
Accounting for unfavorable gas and electricity purchase contracts
- -----------------------------------------------------------------
In addition, TXU Europe Limited recorded a liability at the time of
the acquisition of TEG of (pound)257 million for unfavorable gas and electricity
purchase contracts. This liability, which is being amortized over the terms of
the unfavorable contracts, is based on the estimated fair market value of these
contracts over the present value of the future cash flows under the contracts at
the applicable discount rates and prices. Although amortization of the liability
for unfavorable contracts will reduce the reported expense related to this item,
it will not impact TXU Europe Limited's actual payments or cash flow
obligations.
OTHER ACQUISITIONS/BUSINESS EXPANSION
On November 5, 1999, TXU Europe Limited formed a joint venture
company, called TXU Nordic Energy, with certain shareholders of Pohjolan Voima
Oy (PVO), Finland's second largest electricity generator. As part of the
transaction, TXU Europe Limited contributed approximately ?300 million ($314
million) for an 81% ownership interest in TXU Nordic Energy. TXU Nordic Energy
acquired class "C" shares of PVO, which entitle it to the output from
approximately 584 MW of PVO's thermal generating capacity and most of a
wholesale trading business owned by the industrial shareholders of PVO. The
acquisition of the interest in PVO resulted in goodwill of approximately
(pound)36 million ($59.4 million), which will be amortized over 20 years. Also
in December 1999, TXU Europe Limited completed a previously announced agreement
to acquire an approximately 40% interest in Savon Voima Oy (SVO), Finland's
seventh largest electricity distributor, for approximately (pound)40 million
($66 million). The agreement includes an option which allows the majority
shareholders of SVO to require TXU Europe Limited to purchase the remaining 60%
interest in SVO at prices that are based upon a multiple of the original
purchase price for the first three years. After three years the purchase price
is based upon a calculation which considers SVO's results of operations, as well
as cash and cash equivalents and long-term debt balances on hand at the date the
option is exercised. The option may be exercised at any time by the majority
shareholders and does not expire.
On December 14, 1999, TXU Europe Group and EDF London Investments plc,
a subsidiary of Electricite de France, entered into an arrangement for the
creation of an equally held joint venture company. Employees of the joint
venturers' subsidiaries, Eastern Electricity and London Electricity plc, will be
employed by the new joint venture company in the management, operation and
maintenance of those subsidiaries' respective electricity distribution networks.
The physical assets, as well as all operating licenses, will continue to be
owned by Eastern Electricity and London Electricity plc, respectively. An
application was made to the European Commission's Merger Task Force for
competition law clearance and on February 8, 2000, the European Commission
announced that it had cleared plans for the creation of the joint venture for
competition law purposes. A separate application for regulatory approval is
being prepared. The joint venture will begin operations once these clearances
are obtained, which may be as early as April 2000. By the time the joint venture
starts operations, it is expected that the combined workforce currently engaged
by Eastern Electricity and London Electricity plc will have been reduced by
approximately 400. It is anticipated that the workforce will be further reduced
by at least a similar number during the joint venture's first 18 months of
operations.
The joint venture's management will be structured on a two-tiered
basis. The Supervisory Board, whose members will be appointed directors of the
joint venture and, with the exception of the Chairman, who will be independent,
will be drawn equally from TXU Europe Group and London Electricity plc and will
be responsible for performing functions such as setting the joint venture's
direction and policy as designated by statute. The Management Board, which will
consist primarily of TXU Europe Group personnel, will be responsible for the
day-to-day management and operations of the joint venture.
By streamlining operations and reducing costs, the joint venture is
expected to help offset the price reductions mandated by the recent distribution
price review by the Office of Gas and Electricity Markets. Primarily as a result
of the creation of the joint venture, TXU Europe Limited is expected to record a
restructuring charge of approximately $50 million ((pound)31 million) in the
first quarter of 2000.
On December 21, 1999, TXU Europe Limited announced it will import
electricity from Russia as part of an arrangement between PVO and Russian
national utility RAO UES (UES). The proportion of electricity allocated to TXU
Europe Limited under the arrangement will be supplied to TXU Nordic Energy. TXU
Nordic Energy is entitled to 190 MW of the 400 MW that will be imported by PVO
from UES. Under the arrangement, which lasts until 2004, UES will sell 667
million kWh to PVO in the first year and up to 2.67 billion kWh each year after
2000. The electricity will be supplied through an electricity complex in Vyborg,
a city on the Russian-Finnish border. TXU Europe Limited's arrangement with PVO
will give it control of about 900 MW of electrical output in the Nordic region.
On January 7, 2000, TXU Europe Limited announced that its subsidiary,
Eastern Natural Gas (Offshore) Limited, raised its stake in the Johnston Gas
Field in the North Sea to 64.2% and successfully applied to become the field's
operator. Gas is extracted from the Johnston Gas Field through a sub-sea
template linked by pipeline to surface installations in the Ravenspurn North
field. TXU Europe Limited will be responsible for the operation and maintenance
of the template and field. The Johnston Gas Field has estimated recoverable
reserves of 198 billion cubic feet with average daily production of 62 million
cubic feet.
25
<PAGE>
RESULTS OF OPERATIONS
The business operations of TXU Europe Group were not significantly
changed as a result of the purchase by TXU Acquisitions. For purposes of the
discussion of operating revenues for the nine months ended September 30, 1999
compared to the nine months ended September 30, 1998, the revenues of TXU Europe
Group for the period from January 1, 1998 through May 18, 1998 have been
combined with the revenues of TXU Europe Limited for the period from May 19,
1998 through September 30, 1998. For purposes of the discussion of operating
revenues for the year ended March 31, 1999 compared to the year ended March 31,
1998, revenues of TXU Europe Group for the period from April 1, 1998 through May
18, 1998 have been combined with the revenues of TXU Europe Limited for the
period from May 19, 1998 through March 31, 1999. None of this combined
information has been audited. The post-acquisition results of TXU Europe Limited
include the results of TXU Europe Group plus purchase accounting adjustment and
financing costs of the acquisition. For a discussion of significant purchase
accounting adjustments, see -- "Introduction--Accounting Impacts of the
Acquisition."
OPERATING RESULTS
Energy
- ------
TXU Europe Group's energy business is comprised of the energy retail
and the energy management and generation segments. Until October 1996, TXU
Europe Group's energy operations were only in the UK, where the increase in
demand for electricity in recent years has been modest. However, TXU Europe
Group managed to increase the profit attributable to its energy operations
significantly by:
o adding related assets, including three power stations leased from
National Power in June 1996 and two power stations leased from
PowerGen in June and July 1996, which increased TXU Europe
Group's generation capacity by almost 6,000 MW;
o successfully expanding electricity and gas sales in markets
opened to competition; and
o developing energy management activities to optimize the portfolio
of physical assets and supply contracts.
Prior to May 1999, TXU Europe Group had a license, or exclusive
franchise, to sell electricity to all customers in its authorized distribution
area that had an annual maximum demand of less than 100kW. Because this
franchise market for electricity sales became fully deregulated in May 1999,
these customers now are referred to as ex-franchise customers. Deregulation of
the franchise market allows TXU Europe Group to compete for ex-franchise
customers outside its authorized distribution area. Other licensed electricity
suppliers also can compete with TXU Europe Group for ex-franchise customers in
TXU Europe Group's authorized distribution area. TXU Europe Group cannot predict
the effect that increased competition due to the deregulation of the franchise
market will have on its results of operations.
The prices that the energy retail business can charge in the
ex-franchise market are subject to a price control formula that sets a maximum
price. The current supply price control formula is under review by the Office of
Gas and Electricity Markets. On October 8, 1999, the Office of Gas and
Electricity Markets issued proposed price adjustments for the electricity supply
businesses. The final report of the Office of Gas and Electricity Markets was
issued at the end of November 1999, and accepted by TXU Europe Group in December
1999. The supply price adjustments become effective April 1, 2000. TXU Europe
Group's directly controlled tariffs will be reduced by an average of 7.1% from
April 1, 2000 as required by the new controls, giving rise to an estimated
reduction in annual revenues of approximately (pound)15 million ($25 million).
In December 1999, following extensive consultation with the industry,
the Director General of Electricity Supply published new proposals for
generation licenses in order to promote fair competition in the generation and
trading of electricity. The proposals seek to ensure that generators with
positions of significant market power who are able to exert an upward influence
on prices in the Pool ensure that their prices closely reflect their costs and
that they do not take unfair advantage of any imperfections in the operation of
the Pool. The Director General has proposed that these restrictions should cease
one year after the introduction of the New Electricity Trading Arrangements or
NETA. TXU Europe Limited has played an active part in these discussions and
accepted the Director General's proposals on February 7, 2000. TXU Europe
Limited does not anticipate that these new proposals will have a material
adverse effect on its revenues. However, five generators rejected the proposals
and the matter has been referred to the UK Competition Commission.
The implementation of the NETA arrangements, scheduled for
introduction on October 1, 2000, is also likely to lead to a number of
modifications to generation, distribution and retail electricity licenses.
26
<PAGE>
Networks
- --------
The networks business primarily consists of TXU Europe Group's
electricity distribution business in the UK. The networks business has been a
predictable source of operating income and cash flow and, historically, the
growth in units of electricity distributed has generally matched increases in
the gross domestic product for the UK. The networks business is highly
regulated. The rates charged by the networks business in the UK are regulated by
a distribution price control formula. This formula is subject to periodic review
and adjustment. Two distribution price control reviews by the Office of
Electricity Regulation covering England, Wales and Scotland in 1994 and 1995
established the current distribution price control formula. Based on the current
distribution price control formula, future increases in profit by the networks
operations will depend upon unit growth and productivity improvements, which
there can be no assurance TXU Europe Group will achieve. In his draft proposals
for the distribution price control review which were released in August 1999,
adjusted in October 1999 and published in final form on December 2, 1999, the
regulator proposed a substantial decrease in distribution prices charged by the
networks business in its service territory. The final proposals for Eastern
Electricity incorporated an initial reduction in allowed revenues for regulated
units of 28% from April 1, 2000 with further annual reductions of 3% per year
for the next four years, adjusted for inflation. The allowed revenues will be
calculated from a formula to be provided by the Office of Gas and Electricity
Markets in the near future. However, TXU Europe Limited and TXU Europe Group
estimate that the effect on revenues will be a reduction of about (pound)73
million ($120 million) for the year ending December 31, 2000 and about
(pound)100 million ($165 million) for the year ending December 31, 2001.
TXU Europe Group's retail sales and units distributed through the
network were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
-------------------------------------- -----------------------
1997 1998 1999 1998 1999
--------- ---------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Retail sales (units sold):
Electricity (GWh)............. 32,546 35,920 37,859 26,770 27,665
Gas (millions of therms)...... 1,266 1,262 1,352 854 869
Network sales
(GWh distributed)............. 31,550 31,776 32,700 23,260 24,309
</TABLE>
The following tables set out the revenues by segment, total operating
income and net interest expense of TXU Europe Group and TXU Europe Limited for
the periods indicated:
<TABLE>
<CAPTION>
TXU EUROPE GROUP AND TXU EUROPE
TXU EUROPE GROUP TXU EUROPE LIMITED LIMITED
----------------------- --------------------------- --------------
NINE MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
-------------------------------------- -----------------------------
1997 1998 1999 1998 1999
--------- ---------- ---------- --------- ---------------
((POUND) MILLION)
<S> <C> <C> <C> <C> <C>
Revenues:
Energy:
Energy retail......... 2,158 2,151 2,298 1,084 1,197
Energy management and
generation............ 952 1,337 1,487 1,084 1,167
Networks.................... 420 414 427 308 317
Other....................... 44 69 35 26 5
Intra-group sales........... (590) (496) (484) - -
--------- --------- --------- -------- ---------------
2,984 3,475 3,763 2,502 2,686
--------- --------- --------- -------- ---------------
</TABLE>
<TABLE>
<CAPTION>
TXU EUROPE GROUP TXU EUROPE LIMITED
---------------------------------------------------------- ----------------------
YEAR ENDED MARCH 31,
------------------------------- APRIL 1, 1998 THROUGH FORMATION THROUGH
1997 1998 MAY 18, 1998 MARCH 31, 1999
--------------- -------------- ------------------------ ----------------------
((POUND) MILLION)
<S> <C> <C> <C> <C>
Operating income...... 298 267 (11) 484
Net interest expense.. 88 126 16 278
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
TXU EUROPE GROUP TXU EUROPE LIMITED
----------------------------- -----------------------------------------
JANUARY 1, 1998 THROUGH FORMATION THROUGH NINE MONTHS ENDED
MAY 18, 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
----------------------------- ------------------- --------------------
((POUND) MILLION)
<S> <C> <C> <C>
Operating income......................... 91 53 354
Net interest expense..................... 41 128 213
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues
- --------
Energy retail - Revenues in the energy retail operation increased by
approximately 10% from (pound)1.1 billion for the nine months ended September
30, 1998 to (pound)1.2 billion for the nine months ended September 30, 1999. The
volumes of gas and electricity sold and the unit sales prices primarily
determine the revenues. The increase in revenue arises primarily from additional
revenues in the gas residential market of (pound)93 million as a result of this
market being fully opened to competition.
Energy management and generation - Revenues in the energy management
and generation operations increased by approximately 8% from (pound)1.1 billion
for the nine months ended September 30, 1998 to (pound)1.2 billion for the nine
months ended September 30, 1999. This increase was principally attributable to
increased operating volumes in the gas portfolio which resulted in approximately
(pound)263 million in revenue, partially offset by lower revenues in the
electricity portfolio of approximately (pound)108 million, due to lower
time-weighted pool purchase prices and reduced volumes. In addition, there was a
loss of (pound)18 million of revenue in the 1999 period due to a fire at a
coal-fired power station which occurred in October 1998.
Networks - Revenues in the networks business increased by
approximately 3% from (pound)308 million in the nine months ended September 30,
1998 to (pound)317 million in the nine months ended September 30, 1999. This
increase was primarily due to an increase of 4.5% in gigawatt-hours (GWh)
distributed and an increase in regulated prices of approximately 1% from April
1999.
Other - Other revenues were (pound)5 million in the nine months ended
September 30, 1999 compared with (pound)26 million in the nine months ended
September 30, 1998. This decrease can be attributed to the sale of the
telecommunications business in December 1998 which contributed (pound)9 million
to revenues and the modular building business operated by Rollalong Limited in
February 1999, which resulted in a net decrease of (pound)11 million.
Operating income
- ----------------
Operating income of TXU Europe Limited for the nine months ended
September 30, 1999 of (pound)354 million consisted of (pound)2,686 million of
operating revenues offset by costs and expenses of (pound)2,332 million. Costs
and expenses included (pound)1,162 million for purchased power, (pound)602
million for gas purchased for resale, (pound)385 million for operation and
maintenance expense, (pound)64 million for amortization of goodwill and
(pound)119 million for depreciation and other amortization.
Operating income of TXU Europe Limited for the period from formation
through September 30, 1998 was (pound)53 million and consisted of (pound)939
million of operating revenues offset by costs and expenses of (pound)886
million. These results include the operations of TXU Europe Limited from May 19,
1998. Costs and expenses included (pound)420 million for purchased power,
(pound)154 million for gas purchased for resale, (pound)228 million for
operation and maintenance expense, (pound)53 million for depreciation and other
amortization and (pound)31 million for amortization of goodwill.
Operating income of TXU Europe Limited for the period from January 1,
1998 through May 18, 1998 was (pound)91 million and consisted of (pound)1,563
million of operating revenues offset by costs and expenses of (pound)1,472
million. Costs and expenses included (pound)743 million for purchased power,
(pound)281 million for gas purchased for resale, (pound)375 million for
operation and maintenance expense and (pound)73 million for depreciation and
amortization.
Net interest expense
- --------------------
Net interest expense of TXU Europe Limited for the nine months ended
September 30, 1999 of (pound)213 million included interest expense of (pound)259
million offset by interest income of (pound)46 million on surplus cash balances.
Interest expense included (pound)48 million in respect of sterling denominated
Eurobonds and (pound)38 million in respect of the rent factoring financing
arrangement for three power stations under capital lease, as well as payments of
(pound)39 million under the Sterling Credit Agreement, (pound)21 million under
the senior notes and (pound)18 million on the note payable to TXU.
28
<PAGE>
Net interest expense of TXU Europe Limited for the period from
formation through September 30, 1998 of (pound)128 million included interest
expense of (pound)174 million offset by interest income of (pound)46 million on
surplus cash balances. Interest expense included payments of (pound)53 million
under the Sterling Credit Agreement, (pound)24 million in respect of
sterling-denominated Eurobonds, (pound)23 million in respect of the rent
factoring financing arrangement as well as (pound)19 million on the note payable
to TXU.
Net interest expense of TXU Europe Limited for the period from January
1, 1998 through May 18, 1998 of (pound)41 million included interest expense of
(pound)76 million offset by interest income of (pound)35 million on surplus cash
balances.
Total tax expense
- -----------------
Total tax expense of TXU Europe Limited for the nine months ended
September 30, 1999 was (pound)68 million. Total tax benefit of TXU Europe
Limited for the period from formation through September 30, 1998 was (pound)19
million. Total tax expense of TXU Europe Limited for the period from January 1,
1998 through May 18, 1998 was (pound)35 million. The effective tax rate in all
periods is affected by non-deductible expenses related to capital leases and
amortization of goodwill. The 1998 periods also reflected a tax benefit
associated with a 1% reduction in the statutory tax rate and included income
which was taxed at rates less than the statutory rate.
YEAR ENDED MARCH 31, 1999 COMPARED WITH YEAR ENDED MARCH 31, 1998
Revenues
- --------
Energy retail - Revenues in the energy retail operation increased by
approximately 7% from (pound)2.2 billion for the year ended March 31, 1998 to
(pound)2.3 billion for the year ended March 31, 1999. The revenues are primarily
determined by the volumes of gas and electricity sold and the unit sales prices.
The increase in revenue is a result of higher prices in gas retail, 5.4% higher
volumes in electricity retail primarily in the industrial and commercial markets
and 7.1% higher volumes in gas retail primarily in the domestic market.
Energy management and generation - Revenues in the energy management
and generation operations increased by approximately 11% from (pound)1.3 billion
for the year ended March 31, 1998 to (pound)1.5 billion for the year ended March
31, 1999. This increase was attributable to a significant increase in generation
output, including a full year's output from the King's Lynn power station which
became fully operational in December 1997 and resulted in additional revenue of
(pound)30 million, partially offset by reduced output from a coal-fired power
station that was out of service for four months of the year due to a fire in
October 1998, resulting in reduced revenues by approximately (pound)33 million.
Networks - Revenues in the networks business increased by
approximately 3% from (pound)414 million in the year ended March 31, 1998 to
(pound)427 million in the year ended March 31, 1999. This increase was primarily
the result of an increase of 2.9% in the GWh distributed.
Other - Other revenues decreased by approximately 49% from (pound)69
million in the year ended March 31, 1998 to (pound)35 million in the year ended
March 31, 1999. This decrease can be attributed primarily to the sale of TXU
Europe Group's contracting business in December 1997, which had revenues of
(pound)47 million for the period prior to sale. This was offset by increased
revenues of (pound)6 million in the telecommunications business. The
telecommunications business was sold in December 1998.
Operating income
- ----------------
Operating income of TXU Europe Limited for the period from formation
through March 31, 1999 consisted of (pound)3,338 million of operating revenues
offset by costs and expenses of (pound)2,854 million. Costs and expenses
included (pound)1,480 million for purchased power, (pound)646 million for gas
purchased for resale, (pound)526 million for operation and maintenance expense
and (pound)202 million for depreciation and amortization. Included in operating
income is a net decrease in operating expenses as a result of purchase
accounting adjustments of (pound)125 million offset by goodwill amortization of
(pound)72 million.
Operating income of TXU Europe Group for the year ended March 31, 1998
consisted of (pound)3,475 million of operating revenues offset by costs and
expenses of (pound)3,208 million. Costs and expenses included (pound)1,703
million for purchased power, (pound)514 million for gas purchased for resale,
(pound)806 million for operation and maintenance expense and (pound)185 million
for depreciation and amortization.
Operating income of TXU Europe Group for the period from April 1, 1998
through May 18, 1998 consisted of (pound)425 million of operating revenues
offset by costs and expenses of (pound)436 million. Costs and expenses included
(pound)202 million for purchased power, (pound)85 million for gas purchased for
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resale, (pound)123 million for operation and maintenance and (pound)26 million
for depreciation and amortization.
Net interest expense
- --------------------
Interest income of TXU Europe Limited for the period from formation
through March 31, 1999 was (pound)78 million and interest expense for the same
period was (pound)356 million including interest expense of (pound)89 million
relating to the Sterling Credit Agreement and (pound)44 million on the note
payable to TXU Corp.
Interest income of TXU Europe Group for the year ended March 31, 1998
was(pound)76 million and interest expense for the same period was(pound)202
million.
Interest income of TXU Europe Group for the period from April 1, 1998
through May 18, 1998 was(pound)12 million and interest expense for the same
period was(pound)28 million.
Total tax expense
- -----------------
The tax expense of TXU Europe Limited for the period from formation
through March 31, 1999 was (pound)106 million. The tax expense for TXU Europe
Group for the year ended March 31, 1998 was (pound)189 million, including a
windfall tax charge of (pound)112 million (see -- "Windfall Tax" below). The tax
benefit of TXU Europe Group for the period from April 1, 1998 through May 18,
1998 was (pound)5 million.
YEAR ENDED MARCH 31, 1998 COMPARED WITH YEAR ENDED MARCH 31, 1997
Revenues
- --------
Energy retail - Overall revenues from the energy retail business
decreased approximately 0.3% from(pound)2,158 million for the year ended March
31, 1997 to(pound)2,151 million for the year ended March 31, 1998.
In the part of the electricity retail market which was open to
competition (customers with an annual maximum demand over 100 kW - principally
industrial and commercial customers), revenues increased by (pound)70 million to
(pound)0.7 billion. The increase in revenues in the competitive market of
(pound)70 million was offset by lower revenues in the price regulated part of
the electricity retail market which was not open to competition (customers with
an annual maximum demand under 100 kW - principally residential and small
business customers) in which sales volumes decreased by 3.3% to 18,642 GWh
arising mainly from weather effects. Revenues in the price regulated market
decreased by (pound)74 million, or 6%, to (pound)1.2 billion reflecting the
effect of the supply price control regulatory formula.
In the gas retail market, volumes and revenues remained stable at
approximately 1.3 billion therms and (pound)0.2 billion, respectively, for each
period. There was, however, a substantial increase in the number of customers
signed up with future contract start dates as the remaining areas of the UK gas
retail market were opened up to competition.
Energy management and generation - Revenues of (pound)1,337 million
from the energy management and generation operations for the year ended March
31, 1998 increased approximately 40% from (pound)952 million for the year ended
March 31, 1997. Of the increase, (pound)267 million was attributable to the
inclusion for a full year of the additional output provided by the five power
stations leased in June and July 1996 and an increase in the power station
output levels during the year. There was also additional revenue of (pound)30
million during the commissioning period of the King's Lynn gas-fired power
station.
Networks - Networks revenues of (pound)414 million for the year ended
March 31, 1998 decreased approximately 1.4% from (pound)420 million for the year
ended March 31, 1997. Revenues from TXU Europe Group's core regulated
electricity distribution business, which are determined by the distribution
price control formula, remained broadly stable since the allowed increase
referable to the Retail Price Index was offset by the required, regulated price
reduction factor of 3%. Units distributed through the network increased by 0.7%
from 31,550 GWh to 31,776 GWh.
Other - Revenues in the other segment increased from the year ended
March 31, 1997 to the year ended March 31, 1998 as a result of increased
revenues of(pound)3 million from the telecommunications business.
Operating income
- ----------------
Operating income decreased approximately 10% from(pound)298 million
for the year ended March 31, 1997 to(pound)267 million for the year ended March
31, 1998.
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Operating income for energy retail operations decreased substantially
as a result of higher gross profit in gas of (pound)10 million and in
electricity of (pound)2 million, partially offset by (pound)40 million of
increased costs associated with adding a substantial customer base in TXU Europe
Group's retail gas business, including costs of acquiring customers which are
expensed as incurred. During this period, operating income from the retail
electricity business remained stable in the price regulated franchise market and
increased slightly in the competitive market from higher gross margins.
Operating income from the energy management and generation business remained
stable at (pound)178 million in the year ended March 31, 1997 and (pound)180
million in the year ended March 31, 1998. The operating income in the networks
business increased by (pound)24 million to (pound)189 million due to cost
savings in TXU Europe Group's core electricity distribution business. The losses
in the other segment were reduced from the year ended March 31, 1997 to the year
ended March 31, 1998 because in the year ended March 31, 1997 there were charges
of (pound)19 million in this segment related to exposures on the overall energy
portfolio.
Net interest expense
- --------------------
Net interest expense increased by approximately (pound)38 million from
(pound)88 million in the year ended March 31, 1997 to (pound)126 million in the
year ended March 31, 1998. The increase arose partly from interest capitalized
in the year ended March 31, 1997 of (pound)11 million relating to the
construction period of the King's Lynn gas-fired power station. In addition,
some funds were placed in a tax efficient scheme in the year ended March 31,
1998 resulting in dividends receivable of approximately (pound)4 million in
place of interest on cash deposits. The remaining increase is a result of
interest expenses of (pound)23 million on higher net borrowings.
Total tax expense
- -----------------
Total tax expense decreased by (pound)115 million from (pound)304
million in the year ended March 31, 1997 to (pound)189 million in the year ended
March 31, 1998. The decrease is a result of a large deferred tax charge in
connection with the five coal-fired power station leases and the related rent
factoring transaction in the year ended March 31, 1997. See -- "Financing
Arrangements" below. The decrease was offset by the windfall tax charge in the
year ended March 31, 1998 referred to below under -- "Windfall Tax."
LIQUIDITY AND CAPITAL RESOURCES
PERIOD FROM JANUARY 1, 1998 THROUGH MAY 18, 1998 OF TXU EUROPE GROUP
AND PERIOD FROM FORMATION THROUGH SEPTEMBER 30, 1998 AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 OF TXU EUROPE LIMITED.
Net cash generated by operating activities of TXU Europe Group was
(pound)154 million for the period from January 1, 1998 to May 18, 1998. Net cash
generated by operating activities of TXU Europe Limited was (pound)12 million
for the period from formation through September 30, 1998 and (pound)447 million
for the nine months ended September 30, 1999. Cash provided by changes in
operating assets and liabilities of TXU Europe Group was (pound)109 million for
the period from January 1, 1998 through May 18, 1998. Cash provided by changes
in operating assets and liabilities of TXU Europe Limited for the period from
formation through September 30, 1998 and for the nine months ended September 30,
1999 was (pound)53 million and (pound)216 million, respectively. Cash flows from
operations before changes in operating assets and liabilities of TXU Europe
Group were (pound)45 million for the period from January 1, 1998 to May 18, 1998
and for TXU Europe Limited were (pound)231 million for the nine months ended
September 30, 1999. Cash flows used from operations before changes in operating
assets and liabilities were (pound)41 million for the period from formation to
September 30, 1998.
Cash used in investing activities of TXU Europe Group was (pound)139
million for the period from January 1 to May 18, 1998 and for TXU Europe Limited
was (pound)1,569 million for the period from formation to September 30, 1998 and
(pound)347 million for the nine months ended September 30, 1999. The amount for
TXU Europe Limited for the period from formation through September 30, 1998
includes (pound)1,432 million representing the net cash paid to acquire TEG.
Capital expenditures were (pound)112 million for the period from January 1 to
May 18, 1998, (pound)117 million for the period from formation to September 30,
1998 and (pound)286 million for the nine months ended September 30, 1999, which
included (pound)88 million for the acquisition of gas assets. The year to date
1999 period also included $61 million for investments primarily in other
European assets.
TXU Europe Group received government consent to build a 215 MW
combined heat and power plant for which there is a commitment of (pound)117
million, most of which falls due in 2001. In addition, in July and September
1999, TXU Europe Group received government consent to modify the Drakelow and
Rugeley power stations to enable those power stations to be fueled by gas in
addition to coal, or by a combination of gas and coal. Estimated capital
expenditures on environmental control facilities are (pound)43 million in 2000,
(pound)50 million in 2001, (pound)40 million in 2002, and (pound)35 million in
2003.
Cash provided by financing activities of TXU Europe Group for the
period from January 1, 1998 through May 18, 1998 was (pound)27 million. Cash
provided by financing activities of TXU Europe Limited for the period from
formation through September 30, 1998 was (pound)3,427 million including common
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stock issued to parent of (pound)1,467 million and borrowings under the
acquisition facility of (pound)1,656 million. In the nine months ended September
30, 1999, cash used for financing activities by TXU Europe Limited was
(pound)206 million. This included borrowings of (pound)2.0 billion in lower rate
long-term debt which was used in part to refinance most of the borrowings
related to the acquisition of TEG. Also impacting 1999 financing activities was
the securitization of receivables described under -- "Financing Arrangements"
below.
YEARS ENDED MARCH 31, 1997 AND 1998 AND PERIOD FROM APRIL 1 TO MAY 18,
1998 OF TXU EUROPE GROUP AND PERIOD FROM FORMATION THROUGH MARCH 31, 1999 OF TXU
EUROPE LIMITED.
Net cash generated by operating activities of TXU Europe Group for the
years ended March 31, 1997 and 1998 was (pound)292 million and (pound)341
million, respectively. Net cash generated by operating activities of TXU Europe
Group was (pound)74 million for the period from April 1, 1998 through May 18,
1998. Net cash generated by operating activities of TXU Europe Limited was
(pound)44 million for the period from formation through March 31, 1999. Cash
provided by (used by) changes in operating assets and liabilities was
(pound)(23) million, (pound)223 million and (pound)(244) million for the years
ended 1997, 1998 and 1999, respectively. The variances arise based upon changes
in working capital requirements. Cash flows from operations before changes in
operating assets and liabilities were (pound)315 million, (pound)118 million and
(pound)362 million for the years ended 1997, 1998 and 1999, respectively. In
1997 net deferred tax liabilities associated with leasing transactions were
established, resulting in a non-cash expense of (pound)251 million. There were
no transactions of this magnitude in 1998 or 1999. The increase in 1999 in
comparison to 1998 reflects net income which is (pound)143 million higher than
that recognized in 1998 as well as an increase in depreciation and amortization
expense, which are non-cash items.
In the year ended March 31, 1997, cash used for financing activities
of TXU Europe Group was (pound)316 million. This included the net effect of the
receipt of (pound)1.1 billion from commercial banks as a part of the
rent-factoring agreement less the (pound)408 million which was set aside in
investments as cash collateral for the future intra-group rental payments
assigned. Further details are set out below under -- "Financing Arrangements."
Also impacting 1997 cash flows was the retirement of (pound)468 million of
long-term debt, the repayment of (pound)389 million of bank debt and the payment
of (pound)140 million of dividends on common stock.
In the year ended March 31, 1998, cash provided by financing
activities of TXU Europe Group was (pound)121 million. In that year, long-term
debt of (pound)240 million was raised and a further (pound)300 million was
raised through a financing of receivables under a debt securitization program.
In addition, in that same year, retirements of long-term debt totalled
(pound)215 million and a dividend of (pound)200 million was paid.
In the period from formation through March 31, 1999, cash provided by
financing activities was (pound)2.2 billion. There were drawings under the
acquisition facilities of (pound)2.1 billion, which were later rearranged as
described further below under -- "Financing Arrangements." There was also an
issue of common stock of TXU Europe Limited to subsidiaries of TXU Corp of
(pound)1.5 billion. These funds together provided a portion of the financing for
the acquisition of TEG. Approximately (pound)1.3 billion of borrowings under the
Credit Facilities Agreement were repaid during the period using the proceeds of
the sale of TEG's former coal and power trading interests. Part of the
acquisition of TEG was financed by the issue of common stock of TXU Corp to TEG
shareholders. A subsidiary of TXU Europe Limited acquired the TXU Corp common
stock used for this purpose by issuing a term note to TXU Corp for (pound)882
million, (pound)200 million of which was later repaid in cash in the period. TXU
Acquisitions also issued (pound)85 million of loan notes to TEG shareholders.
Another subsidiary of TXU Corp provided the remainder of the acquisition
financing. There were also additional net borrowings of approximately (pound)98
million in the period.
Cash used in investing activities of TXU Europe Group for the years
ended March 31, 1997 and 1998 and the period from April 1, 1998 through May 18,
1998 was (pound)229 million, (pound)234 million and (pound)78 million,
respectively. Cash used in investing activities of TXU Europe Limited for the
period from formation through March 31, 1999 was (pound)1.9 billion. The amount
for TXU Europe Limited includes (pound)1.4 billion representing the net cash
paid to acquire TEG. The capital expenditures of TXU Europe Group were
(pound)204 million, (pound)254 million and (pound)281 million for the years
ended March 31, 1997, 1998 and 1999, respectively. The increases primarily
relate to the increased level of expenditures on the distribution network and in
1998, on the development of the telecommunications business, which was sold in
December 1998. In addition, in the year ended March 31, 1997, TXU Europe Group
invested (pound)29.5 million in acquiring an 11.6% interest in Severomoravska
Energetica a.s., a distribution company in the Czech Republic, and (pound)19.9
million in acquiring a 52.8% interest in Teplarny Brno a.s., a district heating
company in the Czech Republic. In the year ended March 31, 1998 further
investments totalling (pound)9.9 million were made to increase TXU Europe
Group's interest in these two companies. In the period from formation through
March 31, 1999, a subsidiary of TXU Europe Limited also acquired the offtake
generated from water rights in hydroelectric power facilities in Norway for
(pound)124 million and spent (pound)36 million to increase its interest in
Hidroelectrica del Cantabrico, a Spanish energy company, to 5%.
FINANCING ARRANGEMENTS
At December 31, 1998, TXU Europe Limited, TXU Finance, TXU
Acquisitions and TEG had a joint sterling-denominated line of credit with a
group of banking institutions under a credit facility agreement (Sterling Credit
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Agreement). Chase Manhattan plc, Lehman Brothers International (Europe) and
Merrill Lynch Capital Corporation are the lead arrangers of the bank group. The
Sterling Credit Agreement had an acquisition facility and a revolving credit
facility. Eastern Electricity also has a separate revolving credit facility,
terminating March 2, 2003, for short-term borrowings of up to (pound)250 million
to be used for Eastern Electricity's general corporate purposes. Borrowings
under the acquisition facility provided financing to acquire TEG and pay
acquisition related expenses. The revolving credit facility provided for
short-term borrowings. At December 31, 1998, borrowings totalled (pound)750
million under the acquisition facility and a total of (pound)231 million under
the two revolving credit facilities. Under the terms of the Sterling Credit
Agreement, one half of the borrowings under the facilities were required to be
swapped from floating rate to fixed rate and, accordingly, swaps with a notional
amount of (pound)800 million were entered into. On January 2, 1999 TXU Europe
Limited's ability to borrow additional amounts under the acquisition facility
terminated.
The Sterling Credit Agreement was amended in March 1999. The amended
Sterling Credit Agreement provides for borrowings up to (pound)1.275 billion and
has two facilities: a (pound)750 million term facility which will terminate on
March 2, 2003 and a (pound)525 million revolving credit facility which has a
(pound)200 million 364-day tranche (Tranche A) and a (pound)325 million tranche
which terminates March 2, 2003 (Tranche B). Under the Sterling Credit Agreement,
TXU Finance must maintain a ratio of earnings before interest, taxes,
depreciation and amortization to net interest cost, each as calculated under the
Sterling Credit Agreement, of at least 2:1. In addition, TXU Europe Limited's
consolidated debt must not exceed 70% of consolidated capitalization, each as
calculated under the Sterling Credit Agreement. All of these financial ratios
under the Sterling Credit Agreement are determined in accordance with UK GAAP.
TXU Europe Limited is in compliance with these ratios. TXU Europe Limited and
TXU Finance currently are the only permitted borrowers under the amended
Sterling Credit Agreement. So long as no default under the Sterling Credit
Agreement has occurred and is continuing, any subsidiary or holding company of
TXU Europe Group which also is a wholly-owned subsidiary of TXU Finance and is
incorporated under the laws of England and Wales, except Eastern Electricity,
may be designated as an additional borrower under Tranche A or Tranche B by
agreeing to be bound by the terms of the Sterling Credit Agreement and by giving
notice to the banks. The amended Sterling Credit Agreement allows for borrowings
at various interest rates based on the prevailing rates in effect in the
countries in which the borrowings originate. As of September 30, 1999,
(pound)750 million of borrowings were outstanding under the term facility at an
interest rate of 5.98%, and approximately (pound)182 million under Tranche B, at
a weighted average interest rate of 5.59% ((pound)49 million in Spanish pesetas
at 3.34%, (pound)128 million in Norwegian Krona at 6.54% and (pound)5 million in
Euro's at 3.34%). On May 18, 1999, $198 million in letters of credit issued
under Tranche B of the revolving credit facility matured and was not renewed.
On October 5, 1999, Eastern Norge Svartisen AS, a subsidiary of TXU
Europe Limited, issued (pound)77 million in Norwegian bonds due October 5, 2029,
at a fixed rate of 7.25%. The net proceeds were used to pay down a portion of
the Tranche B borrowings which had been used to finance asset purchases in
Norway. On November 5, 1999, approximately ?300 million ((pound)190 million) was
borrowed on the Tranche B facility. The net proceeds were used to finance the
acquisition of the interest in TXU Nordic Energy, the PVO joint venture. On
December 3, 1999, TXU Europe Limited borrowed ?306 ((pound)190) million under a
short-term facility with Toronto-Dominion Bank and used the net proceeds to
repay the (pound)190 million which was borrowed under the Tranche B facility.
The borrowing matures on March 3, 2000, and the facility expires on June 3,
2000. TXU Europe Limited is currently negotiating with potential lenders to
refinance the ?306 million loan on a long-term basis in Finnish currency.
Additional borrowings were made in December 1999 under the Tranche B facility to
finance the acquisition of SVO (approximately (pound)40 million) and to fund the
exit termination fee from a disadvantageous contract ((pound)76 million). The
amount of the exit termination fee was within the amounts TXU Europe Limited had
previously reserved against.
The interest rate on Eastern Electricity's revolving credit facility
is based on LIBOR plus 0.5%. As of September 30, 1999, there were no borrowings
outstanding under Eastern Electricity's revolving credit facility.
As of September 30, 1999, Eastern Electricity had issued long-term,
fixed rate bonds in the aggregate outstanding principal amount of (pound)750
million, and Overseas had issued notes in the aggregate principal amount of
US$500 million which are guaranteed by TEG and TXU Europe Limited.
Eastern Merchant Properties Limited, a subsidiary of TXU Europe
Limited, has leased the five coal-fired power stations operated by TXU Europe
Group for 99 year terms commencing in 1996. Eastern Merchant Properties has
sub-leased those power stations to Eastern Merchant Generation Limited, another
subsidiary of TXU Europe Limited, for a five year term ending in 2001. Eastern
Merchant Properties has assigned the intra-group rental payments receivable from
Eastern Merchant Generation under the subleases to a group of banks, for which
Barclays Bank plc is the agent, in return for (pound)1,097 million. TXU Europe
Group and TXU Europe Power Limited have guaranteed the payment to those banks of
the assigned payments, or in some cases, the net present value of remaining
payments upon transfer by a bank of the right to receive future payments. The
guarantee requires:
o That TXU Europe Group maintain a consolidated tangible net worth,
as calculated under the guarantee, of not less than(pound)1
billion;
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o That TXU Europe Group's consolidated net borrowings do not exceed
200% of its consolidated tangible net worth, each as calculated
under the guarantee; and
o That the ratio of TXU Europe Group's consolidated profit before
interest and taxes to its interest costs, each as calculated
under the guarantee, is in excess of 2:1.
As of September 30, 1999, TXU Europe Group was in compliance with these
covenants.
The (pound)1,097 million described above was borrowed on October 28,
1996. (pound)408 million of the proceeds was used as collateral for obligations
to another group of banks in respect of the funding of the payment of a portion
of the fixed payments due under the leases of the West Burton, Rugeley B and
Ironbridge power stations.
TXU Europe Group has facilities with Citibank N.A. to provide
financing through trade accounts receivable whereby Eastern Electricity may sell
up to (pound)300 million of its electricity receivables and, beginning June 11,
1999, TXU Finance may borrow up to an aggregate of (pound)275 million, which for
US GAAP purposes is treated as being collateralized by additional receivables of
Eastern Electricity, through a short-term note issue arrangement. The program
has an overall program limit of (pound)550 million.
Consistent with US GAAP, through March 31, 1999, the electricity
receivable financings were in the form of short-term loans collateralized by
Eastern Electricity's trade accounts receivable. Subsequent to March 31, 1999,
the program was restructured so that a portion of the receivables are sold
outright rather than being used to collateralize short-term borrowings. Eastern
Electricity continually sells additional receivables to replace those collected.
At September 30, 1999, accounts receivable of Eastern Electricity were reduced
by (pound)207 million to reflect the sales of the receivables under the new
program. An additional (pound)93 million of receivables is treated for US GAAP
purposes as collateral for short-term loans. The borrowings by Eastern
Electricity bear interest at an annual rate based on commercial paper rates plus
0.225%, which was 5.3% at September 30, 1999.
On May 13, 1999, Funding issued $1.5 billion ((pound)921 million) of
senior notes which are guaranteed by TXU Europe Limited in three series: $350
million ((pound)215 million) at 6.15% due May 15, 2002, $650 million ((pound)399
million) at 6.45% due May 15, 2005, and $500 million ((pound)307 million) at
6.75% due May 15, 2009. The senior notes were sold pursuant to Rule 144A and
Regulation S under the Securities Act of 1933. The proceeds of this issuance
were used as follows: (pound)680 million to repay the note payable to TXU Corp,
(pound)55 million to reduce borrowings under the Sterling Credit Agreement and
(pound)186 million for general corporate purposes. Shortly thereafter, TXU
Europe Limited entered into various interest rate and currency swaps that in
effect changed the interest rate on the borrowings from fixed to variable based
on LIBOR and fixed the principal amount to be repaid in sterling. On October 14,
1999, TXU Europe Limited entered into additional swaps that in effect changed
the interest rate on the borrowings to a fixed rate payable in sterling. On
December 17, 1999, Funding exchanged the senior notes for new senior notes
registered under the Securities Act of 1933.
On December 15, 1999 Funding and TXU Europe Limited commenced a ?2
billion Euro Medium Term Note (EMTN) program. Under the EMTN program, Funding
may from time to time issue notes on a continuing basis to one or more dealers
in a principal outstanding amount not exceeding ?2,000,000,000. The EMTN program
was arranged by Deutsche Bank AG London. The notes may be denominated in any
currency, will bear interest either at fixed or variable rates and will have
maturities, in each case as may be agreed between Funding and the relevant
dealer. The payment of all amounts payable in respect of the notes will be
guaranteed by TXU Europe Limited. On February 17, 2000, Funding agreed to issue
under the EMTN program, (pound)225 million of 7.25% EMTNs due March 8, 2030,
guaranteed on a senior basis by TXU Europe Limited. On the same day, TXU Europe
Limited entered into an interest rate swap that converts the interest rate on
the new EMTNs to a variable rate based on LIBOR for the first five years. The
effective interest rate after the swap was 5.862%. No other notes have been
issued under the EMTN program.
CUSTOMER ACQUISITION COSTS
Beginning in the year ended March 31, 1998, TXU Europe Group has paid
commissions to agents who assist TXU Europe Group in acquiring customers in the
newly deregulated gas market. Those costs of acquiring customers are charged to
expense when incurred, although revenues from the acquired customer base are
expected to be received over several years. Total charges for the years ended
March 31, 1997, 1998 and 1999 were zero, (pound)41 million and (pound)25
million, respectively, and for the nine months ended September 30, 1999 were
(pound)7 million. TXU Europe Group expects that it will continue to incur
similar costs in connection with its effort to acquire natural gas customers for
the foreseeable future, although to a much lesser degree. TXU Europe Group is in
the process of revising its strategy for gaining electricity customers in
deregulated electricity franchise markets and it is not known at this time if
these types of costs will be incurred in connection with those efforts.
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In June 1999, TXU Europe Group announced details of a program to
restructure the energy retailing business in order to be more cost effective in
the competitive energy markets. This program will result in the closure of two
principal offices with the loss of 300 permanent and 200 temporary positions and
a cost of approximately (pound)8.6 million. TXU Europe Group also intends to
seek new ways to access the energy markets and to form more partnerships with
the objective of reducing costs, improving access to customers and capitalizing
on emerging new markets like the internet.
WINDFALL TAX
For the year ended March 31, 1998, a windfall tax was levied on TXU
Europe Group according to a formula contained in the UK Finance (No. 2) Act
1997. The liability for the tax was assessed at (pound)112 million of which half
was paid on December 1, 1997 and the balance was paid on December 1, 1998. The
windfall tax was included in the tax provision for the year ended March 31,
1998.
CURRENCY RISKS; ABSENCE OF HEDGING TRANSACTIONS
TXU Europe Limited's and its subsidiaries' revenues will be primarily
received in pounds sterling while the price which will be paid to the trust for
the TOPrS will be paid in US dollars, and the interest and principal payment
obligations on the subsidiary debentures (and the related TXU Europe Limited
guarantees) and the payment obligations on the TOPrS and Preferred Partnership
Securities (and the related TXU Europe Limited guarantees) will be payable in US
dollars. As a result, any change in the currency rate that increases the
effective principal and interest payment obligations on the subsidiary
debentures, upon conversion of pounds sterling-based revenues into US dollars
may have a material adverse effect on TXU Europe Limited and its subsidiaries or
on their ability to make payments on the subsidiary debentures or those
guarantees and, therefore, on the ability of the partnership and the trust to
make payments on the Preferred Partnership Securities and the TOPrS. See
EXCHANGE RATES for information concerning the Noon Buying Rate for pounds
sterling expressed in US dollars.
EUROPEAN MONETARY UNION (EMU)
Most of TXU Europe Group's income and expenditures are denominated in
pounds sterling or in the currencies of other countries which either are not
eligible or have not joined the first stage of the EMU. TXU Europe Limited
therefore does not expect the new currency of countries which participate in the
EMU to have a material impact on those operations for so long as the UK
continues to remain outside the EMU. TXU Europe Limited has prepared its
accounting systems to be able to deal with the receipt of payments in Euros
effective from January 1, 1999.
EFFECT OF INFLATION
Because of the relatively low level of inflation experienced in the
UK, inflation did not have a material impact on results of operations for the
periods presented.
CHANGES IN ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of Financial
Accounting Standards Board Statement No. 133," which defers the implementation
of Statement of Financial Accounting Standards No. 133 to fiscal years beginning
after June 15, 2000. Statement of Financial Accounting Standards No. 133
establishes accounting and reporting standards for derivative financial
instruments, including derivative instruments embedded in other contracts, and
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. While TXU Europe Limited has not yet determined
the effects adopting this standard will have on the consolidated financial
statements, those effects could be material.
The Emerging Issues Task Force, or EITF, has issued No. 98-10,
"Accounting for Energy Trading and Risk Management Activities," which is
effective for fiscal years beginning after December 15, 1998. EITF 98-10
requires that contracts for energy commodities which are entered into under
trading activities should be marked to market with the gains and losses shown
net in the income statement. TXU Europe Limited adopted EITF 98-10 effective
January 1, 1999 for the fiscal year ending December 31, 1999. Since TXU Europe
Limited is not involved in substantial trading activities, EITF 98-10 has not
had a material impact on the consolidated financial statements upon adoption.
Beginning in December 1999, TXU Europe Energy Trading began limited trading
activities.
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YEAR 2000 ISSUES
BACKGROUND
A thorough and detailed program was undertaken throughout the TXU Corp
system (including TXU Europe Limited) to address Year 2000 (Y2K) computer
issues. The UK effort was begun by TXU Europe Group in August 1996. The focus
was on information technology (IT) mainframe-based application systems, IT
related hardware, operating systems and desktop software, embedded systems such
as process controls for energy production and delivery and business-unit-owned
applications. Applications and equipment in each of these categories were
inventoried and categorized based on criticality to TXU Europe Group's business
operations. Assessments of potential impact due to Y2K issues were completed in
1999. Remediation and testing work in each of these areas were completed by
December 31, 1999. A further upgrade to the Eastern Electricity billing system
was performed on January 20, 2000 to ensure that all mainframe billing systems
would function correctly on February 29, 2000.
COSTS
The total costs associated with TXU Europe Limited's Y2K efforts are
currently estimated to be approximately (pound)12 million ($20 million). These
costs reflect new, incremental costs and the reallocation of resources in
pre-existing maintenance budgets. These costs are being expensed as incurred.
Amounts expended through December 31, 1999 totalled approximately (pound)10
million ($16.5 million), with an estimated (pound)2 million ($3.3 million)
expected to be spent during 2000. There can be no assurance that these estimates
will not change as a result of the discovery of unexpected need for additional
remediation work.
RESULTS
The results of the Y2K program are now documented. During the rollover
to 2000, none of TXU Europe Limited's customers experienced service
interruptions due to computer hardware, software or embedded chips. A few minor
interruptions occurred with internal systems, but these were considered to be no
more than normal system issues.
CHANGE IN CERTIFYING ACCOUNTANT OF TXU EUROPE LIMITED
On August 6, 1999, based upon the recommendation of its Audit
Committee, the Board of Directors of TXU Europe Limited voted to appoint
Deloitte & Touche as the principal accountants for TXU Europe Limited and its
subsidiaries for the year ended December 31, 1999. TXU Europe Limited chose not
to continue the engagement of PricewaterhouseCoopers, its former principal
accountants. The decision by TXU Europe Limited to change principal accountants
was made in order to align the principal accountants of TXU Europe Limited with
those of TXU Corp. Deloitte & Touche LLP have been the principal accountants for
TXU Corp and its predecessors since 1945.
No report of PricewaterhouseCoopers on TXU Europe Limited's financial
statements, including the period from formation, February 5, 1998, through
December 31, 1998, contained any adverse opinion or disclaimer of opinion, nor
was any report qualified in any manner.
During the period from formation through December 31, 1998 and the
period from January 1, 1999 to August 6, 1999, there were no disagreements with
PricewaterhouseCoopers on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure. During this
period, there were no "reportable events" as that term is defined in Item
304(a)(1)(v) of Regulation S-K of the Securities Act.
TXU Europe Limited requested and received from PricewaterhouseCoopers
a letter dated August 9, 1999 addressed to the SEC stating that it agreed with
the above statements for the period from formation through December 31, 1998 and
the period from January 1, 1999 to August 6, 1999.
On August 6, 1999, TXU Europe Limited engaged Deloitte & Touche as its
principal accountants to audit the financial statements for the year ending
December 31, 1999. TXU Europe Limited has not consulted Deloitte & Touche
regarding any of the matters or events listed in Item 304(a)(2)(i) and (ii) of
Regulation S-K of the Securities Act. TXU Corp had routine discussions with
Deloitte & Touche LLP concerning the application of accounting principles and
other matters primarily relating to the application of purchase accounting
principles to the consolidated financial statements of TXU Corp. TXU Corp and
Deloitte & Touche LLP do not believe that these discussions constitute
consultations within the context of Item 304(a)(2) of Regulation S-K.
36
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK MANAGEMENT
TXU Europe Limited is exposed to a number of different market risks
including changes in gas and electricity prices, interest rates and foreign
currency exchange rates. TXU Europe Limited has developed a control framework of
policies and procedures to monitor and manage the exposures arising from
volatility in these markets. To implement these policies and procedures, TXU
Europe Limited enters into various derivative instruments for hedging purposes.
Both the energy management and the treasury operations make use of those
instruments, but only well understood derivative instruments are authorized for
use.
INTEREST RATE RISK
TXU Europe Limited's exposure to interest rate risk is managed by
maintaining a balance of fixed and floating rate borrowings and deposits.
Interest rate swaps and forward rate agreements are used from time to time to
adjust the proportion of fixed rate exposure within the specified limits.
The table below provides information concerning TXU Europe Limited's
financial instruments as of March 31, 1999 that are sensitive to changes in
interest rates, which include debt obligations by principal amount and interest
rate swaps. For debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. TXU Europe
Limited has entered into interest rate swaps under which it has agreed to
exchange the difference between fixed-rate and variable-rate interest amounts
calculated with reference to specified notional principal amounts. The contracts
require settlement of net interest receivable at specified intervals which
generally coincide with the dates on which interest is payable on the underlying
debt, primarily semi-annually. When differences exist between the swap
settlement dates and the dates on which interest is payable on the underlying
debt, the gap exposure, or basis risk, is managed by means of forward rate
agreements. These forward rate agreements are not expected to have a material
effect on TXU Europe Limited's financial position, results of operations or cash
flows. None of the interest rate swaps or forward rate agreements were entered
into for trading purposes. For interest rate swaps, the table presents notional
amounts and weighted average interest rates by expected, or contractual,
maturity dates. Weighted average variable rates are based on rates in effect at
the reporting date.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
-----------------------------------------------------
THERE MARCH 31, 1999
2000 2001 2002 2003 2004 AFTER TOTAL FAIR VALUE
--------- -------- ------- -------- ------- -------- ------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt (including Current
maturities):
Fixed Rate ((pound)m)........ 225.1 923.8 127.9 361.9 1,160.1 2,798.8 2,874.2
Average interest rate....... 7.35% 6.87% 7.35% 8.38% 8.20% 7.61%
Variable Rate ((pound)m).... 1,004.0 75.6 1,079.6 1,079.6
Average interest rate....... 6.33% 5.42% 6.27%
Interest Rate Swaps:
Fixed to Variable ((pound)m). 100.0 100.0 15.2
Average pay rate............ 4.75%
Average Receive rate........ 8.38%
Variable to Fixed ((pound)m). 15.8 400.0 432.0 847.8 (57.4)
Average pay rate............ 12.91% 6.71% 6.45%
Average receive rate........ 8.02% 5.63% 5.76%
</TABLE>
Forward rate agreements totalling (pound)355 million for a maximum
duration of approximately one year to swap floating rate deposits into fixed
rates were outstanding at March 31, 1999 with a weighted average interest rate
of approximately 6.66%. The market value of these forward rate agreements was
not materially different from the notional value.
The market risk information of TXU Europe Limited as of September 30,
1999 is not significantly different from the March 31, 1999 information
presented above, except for changes in interest rate risk relating to new issues
of long-term debt as described in the notes to the unaudited condensed
37
<PAGE>
consolidated financial statements of TXU Europe Limited for the nine months
ended September 30, 1999 presented elsewhere in this prospectus.
ENERGY RISK MANAGEMENT
Management of the market risks associated with the portfolio of
physical generation assets, upstream gas assets and gas and electricity sales
and derivative contracts is critical to the success of TXU Europe Group and
therefore comprehensive risk management processes, policies and procedures have
been established to monitor and control these market risks.
The energy retail business contracts to supply electricity to
customers at fixed prices and buys output from the electricity Pool to meet the
demand of these customers. Since the price of electricity purchased from the
Pool can be volatile, TXU Europe Group is exposed to the risk arising from the
differences between the fixed price at which it sells electricity to customers
and the variable prices at which it buys electricity from the Pool. TXU Europe
Group's generation business provides a physical hedge to this risk as it is
exposed to Pool price fluctuations from selling electricity into the Pool. TXU
Europe Group's overall exposure to those risks is managed by the energy
management business which maintains energy price exposures to within a limit set
by the Board of Directors of TXU Europe Group. The energy management business
enters into derivatives to hedge the portfolio. The derivatives used are
contracts for differences and electricity forward agreements. Contracts for
differences are bilaterally negotiated contracts which fix the price of
electricity for an agreed quantity and duration by reference to an agreed strike
price, which is the price specified in the contract for differences. Electricity
forward agreements are similar in principle to contracts for differences but are
on standard terms and tend to be for smaller quantities and shorter durations.
The hypothetical loss in fair value of TXU Europe Group's contracts for
differences and electricity forward agreements in existence at March 31, 1999
entered into for non-trading purposes arising from a 10% adverse movement in
future electricity prices is estimated at (pound)52 million. This loss is
calculated by modeling the contracts against an internal forecast of Pool prices
using discounted cash flow techniques. The fair value of outstanding contracts
for differences and electricity forward agreements at March 31, 1999 was
(pound)48 million, calculated as the difference between the expected value of
the contracts for differences and electricity forward agreements, based on their
known strike price and known value and the current market value, based on an
estimate of forward prices for the contract for difference or electricity
forward agreement term.
TXU Europe Group also sells fixed price gas contracts to customers and
supplies the customer through a portfolio of gas purchase contracts and other
wholesale contracts. TXU Europe Group's overall net exposure to the gas spot
market is also managed within a limit set by the Board of Directors of TXU
Europe Group using natural gas futures and swaps, as appropriate, to hedge the
exposures. There were no gas swaps outstanding at September 30, 1999.
FOREIGN CURRENCY
TXU Europe Limited manages its exposure to foreign currency rates
principally by matching foreign currency denominated assets with borrowings in
the same currency. Currency swaps and options are also used where appropriate to
hedge any residual exposures. In addition, some imports of capital equipment and
fuel are denominated in foreign currencies and the sterling cost of these is
fixed by means of forward contracts as soon as TXU Europe Limited's contractual
commitment is firm. The US$ option contracts outstanding at December 31, 1998
all matured in the period to March 31, 1999. The principal foreign currency
hedges outstanding at March 31, 1999 were as follows:
US$/GBP swaps in respect of the semi-annual interest payments on, but
not the principal amount of, the $500 million of guaranteed notes previously
issued to swap from US$ to GBP as follows:
Annual March 31, 1999
Period Amount Rate Fair Value
------ ------ ---- ---------------
Annually to 2017 $14.8 million 1.61 (pound)(5.7) million
Annually to 2027 $22.5 million 1.62 (pound)(15.6) million
38
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INDUSTRY BACKGROUND
GENERAL
Traditionally, the electric industry in the UK, including
distribution, transmission and generation, has been highly regulated. Throughout
England and Wales, electricity power stations, together with the transmission
and distribution systems, constitute a single integrated network. Privatization
of the UK electricity industry has opened the market to new participants. Each
participant must be licensed to generate, transmit or supply electricity. Almost
all electricity generated in England and Wales must be sold to and purchased
from the wholesale trading market for electricity, commonly known as the Pool.
Prices for electricity are set by the Pool for each half hour based on bids of
generators and a complex set of calculations that matches supply and demand.
The gas industry in Great Britain has been privatized and competition
among suppliers is encouraged by deregulation of the supply of gas, first to
larger customers and, more recently, to smaller customers including residential
users. Most of the gas transmission and distribution network in Great Britain is
owned and operated by BG plc, which is required to provide fair access to its
network to all shippers of gas. Charges to shippers of gas are based on the
amount of pipeline capacity reserved and the number of points of entry and exit
to and from the national network.
THE ELECTRICITY INDUSTRY IN ENGLAND AND WALES
Almost all electricity generated at power stations in England and
Wales is delivered through the high voltage transmission system owned and
operated by The National Grid Company. It is then transformed for delivery on to
the local distribution networks owned and operated by holders of public
electricity supply licenses like Eastern Electricity.
During the five years ended March 31, 1998, demand for electricity in
England and Wales rose by approximately eight percent. The National Grid Seven
Year Statement published in April 1998 states that demand is expected to rise by
approximately seven percent during the five years ended March 31, 2003.
"Energy Trends," the energy statistical bulletin issued by the UK
Department of Trade and Industry, reports that electricity produced by the UK
generating industry, including imports from Electricite de France, in the year
ended December 31, 1991, totalled approximately 300 TWh, of which approximately
66 percent was produced by coal-fired power stations and 21 percent by nuclear
power stations. Thirteen percent was output from pumped storage facilities - a
type of hydroelectric generating facility that uses generating capacity to pump
water from a lower reservoir to an upper reservoir during periods of low demand
for electricity and uses the flow of water from the upper to the lower reservoir
to generate electricity during periods of high demand, from oil fired power
stations and from interconnectors, which are electrical connectors between the
electrical facilities of two electric systems permitting a flow of energy
between the systems. During that time there was no significant production from
combined cycle gas turbine power stations. The bulletin indicates that in the
year ended December 31, 1997, including imports from Electricite de France, the
percentage of total electricity generated by coal-fired power stations had
declined to approximately 34 percent and the output from pumped storage, oil,
gas (other than combined cycle gas turbine power stations) and interconnectors
had declined to 12 percent while the percentage generated by nuclear power
stations had increased to 27 percent and combined cycle gas turbine power
stations accounted for 27 percent. Combined cycle gas turbine power stations are
a type of generating facility which combines a gas-powered combustion turbine
with a heat recovery boiler and a steam turbine. The heat recovery boiler uses
excess heat from the combustion turbine to produce steam to power the steam
turbine. This type of facility increases output and improves efficiency compared
to a facility that uses only a combustion turbine. Reasons for the development
of combined cycle gas turbine generating capacity since 1991 include the
availability of large volumes of natural gas, developments in technology and the
privatization of the UK electricity industry, which has allowed new entrants to
participate in the generation market.
In December 1997, the UK government announced a review of energy
sources for power generation, including fuel diversity, sustainable development
and the role of coal. The government's conclusions were published in an October
1998 policy statement. The government's policy for issuing consents for the
construction of new generating stations, as set out in the October 1998 policy
statement, is that gas-powered generation would normally be inconsistent with
the government's energy policy, unless the project has other benefits, such as
combined heat and power projects which produce both power and usable heat and
have environmental or transmission system benefits.
THE POOL
The Pool was established in 1990 for bulk trading of electricity in
England and Wales between generators and suppliers. The Pool reflects two
principal characteristics of the physical generation and supply of electricity
from a particular generator to a particular supplier. First, it is not possible
39
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to trace electricity from a particular generator to a particular supplier.
Second, it is not practicable to store electricity in significant quantities.
These characteristics create the need for a constant matching of supply and
demand.
All electricity generated in England and Wales, other than electricity
generated by small generators connected directly to the local distribution
networks rather than National Grid, must be sold to the Pool. In turn,
electricity suppliers generally must buy electricity from the Pool for resale to
their customers. Even groups which are both generators and licensed suppliers,
like TXU Europe Group, in most circumstances, must act through the Pool to sell
all the electricity they generate and to purchase all electricity they sell to
customers.
The Pool is operated under the Pooling and Settlement Agreement, which
is currently under review by the UK government. The Pooling and Settlement
Agreement governs the constitution and operation of the Pool and the calculation
of payments due to and from generators and suppliers of electricity. The UK
government and all licensed generators and suppliers of electricity in England
and Wales are parties to the Pooling and Settlement Agreement. The Pool also
provides centralized settlement of accounts and clearing.
Generators sell electricity to the Pool at a price for each unit of
electricity generated. Also, generators receive availability payments when they
declare themselves to be available but are not called upon to run. Suppliers buy
electricity through the Pool at a price which reflects these components and
which may also include additional amounts payable to National Grid.
Prices for electricity are set by the Pool daily for each half hour of
the following day based on the bids of the generators and a complex set of
calculations that matches supply and demand and takes account of system
security. Generators make individual bids into the Pool once each day, stating
the price and volume at which they are prepared to generate at any point during
the following day. National Grid ranks the generating units in an order known as
the "merit order," primarily according to the price offered. National Grid then
schedules the generating units to operate according to this merit order, calling
into service the least expensive generating units first and continuing to call
generating units into service until enough are operating to meet demand. Factors
which may constrain National Grid's ability to order stations into operation in
strict observance of the merit order include the constraints of transmission
systems and the technical operating characteristics of some generating units.
The price paid to all generators which are called to run is set primarily by
reference to the highest bid price of all the generators selected to run in that
half hour. A computerized settlement system is used to calculate prices and to
process metered, operational and other data and to carry out the other
procedures necessary to calculate the payments due under the Pool trading
arrangements. The settlement system is administered on a day to day basis by
Energy Settlements and Information Services Limited, a subsidiary of National
Grid, as settlement system administrator. Pool prices for the purchase of power
can vary significantly from day to day and during each day.
In order to reduce their exposure to fluctuations in Pool prices,
generators and suppliers enter into financial hedging contracts with each other.
These contracts are in the form of contracts for differences and electricity
forward agreements. Contracts for differences and electricity forward agreements
in effect fix the price that a supplier pays and a generator receives for
electricity. They therefore are used to reduce the price risk that would
otherwise be associated with the sale and purchase of electricity through the
Pool.
ELECTRICITY SUPPLY MARKETS IN ENGLAND AND WALES
The regulatory framework in England and Wales differs for consumers
with maximum annual demands over and under 100 kW. The under 100 kW market,
comprising the former regional supply monopolies or franchises of the twelve
regional electricity companies, has recently been opened to competition. It is
sometimes referred to as the "ex-franchise" market. This market itself contains
two subdivisions. The first consists of all residential customers and small
businesses using up to 12,000 kWh/year. It is called the designated market. The
remainder of the ex-franchise market consists of smaller businesses with annual
maximum demands under 100 kW that use more than 12,000 kWh/year. The over 100 kW
market consists of all customers with an annual maximum demand of 100 kW or
more.
Until September 1998, residential and small business customers in all
service areas could buy electricity only from the regional electricity company
authorized to supply service in the area where the customers were located.
However, competition has been fully introduced and customers are now able to buy
electricity from any licensed supplier. Ex-franchise customers are usually
supplied with electricity in accordance with published tariffs. A price control
formula set out in the supplier's public electricity supply license limits
prices charged to customers in the designated market. These prices are regulated
by the Director General of Electricity Supply as described below under TXU
EUROPE GROUP BUSINESS OVERVIEW -- "UK Regulatory Matters; Energy Regulation;
Electricity Supply Price Regulation." A formula determines the maximum prices
which any public electricity supply license holder is permitted to charge. A
separate price control formula described below under TXU EUROPE GROUP BUSINESS
OVERVIEW -- "UK Regulatory Matters; Networks Regulation; Distribution Price
Regulation" determines the maximum distribution revenue which a public
electricity supply license holder may earn from charges made to its own
40
<PAGE>
electricity supply business and other electricity suppliers for use of its
distribution network. These formulas are in effect until March 31, 2000.
To be able to supply electricity, a supplier must either have a second
tier supply license issued under the Electricity Act 1989 of Great Britain
described below under TXU EUROPE GROUP BUSINESS OVERVIEW -- "UK Regulatory
Matters; Networks Regulation; Distribution Price Regulation" or hold a public
electricity supply license for the authorized area where its customers are
located. The license holder must demonstrate that it has adequate systems and
processes in place to fulfill its obligations. Customers in the over 100 kW
market are charged under the terms of commercial contracts negotiated with their
supplier, which may provide for fixed or variable prices. Variable prices
normally reflect expected fluctuations in the price paid by suppliers for the
purchase of electricity from the Pool. Customers in the under 100kW market who
choose to be supplied by a second tier supplier are charged under the terms of
standard published contracts.
All suppliers use the national transmission system, for which they pay
published transmission charges, and the distribution system of the local public
electricity supply license holder, for which they pay published distribution
charges, to secure delivery of electricity to their customers.
Electricity supply and distribution businesses in England and Wales
are subject to price controls. Since the implementation of the initial price
controls in 1990, there have been two reviews of the supply price control,
effective for the periods from April 1, 1994 to March 31, 1998 and from April 1,
1998 to March 31, 2000. These reviews have resulted in reduced supply and
distribution prices, but because related costs have also been reduced, the
effect on TXU Europe Group has not been material. On August 12, 1999, the Office
of Gas and Electricity Markets issued draft proposals, updated on October 8,
1999, and published in final form on December 2, 1999, proposing a range of
substantial net revenue reductions for the distribution businesses of all
regional electricity companies in the UK. The final proposals for Eastern
Electricity incorporated an initial reduction in allowed revenues for regulated
units of 28% from April 1, 2000 with further annual reductions of 3% per year
for the next four years, adjusted for inflation. The allowed revenues will be
calculated from a formula to be provided by the Office of Gas and Electricity
Markets in the near future. However, TXU Europe Limited and TXU Europe Group
estimate that the effect on revenue will be a reduction of about (pound)73
million ($120 million) for the year ending December 31, 2000 and of about
(pound)100 million ($165 million) for the year ending December 31, 2001. On
October 8, 1999, the Office of Gas and Electricity Markets issued proposed price
adjustments for the electricity supply businesses. The final report of the
Office of Gas and Electricity Markets was issued at the end of November 1999,
and accepted by TXU Europe Group in December 1999, and the supply price
adjustments become effective April 1, 2000. TXU Europe Group's directly
controlled tariffs will be reduced by an average of 7.1% from April 1, 2000 as
required by the new controls, giving rise to an estimated reduction in annual
revenues of approximately (pound)15 million ($25 million). See TXU EUROPE GROUP
BUSINESS OVERVIEW-- "Energy Regulation--Electricity Supply Price Regulation" and
"Networks Regulation--Distribution Price Regulation."
With the consent of the public electricity supply license holders, the
Director General of Electricity Supply has modified the public electricity
supply licenses to require that the public electricity supply license holders
support the introduction of competition for ex-franchise supply customers by
offering services to competing suppliers. These services include registration,
data collection and aggregation, emergency reporting and meter operation. The
public electricity supply license holders may be required to provide meters to
customers who pay in advance for their electricity, usually customers with
outstanding obligations to the public electricity supply license holder. The
public electricity supply license holders are also required to provide,
collectively, consumption and other customer data and a data transfer service to
facilitate customer transfers to other providers in the open electricity market.
The regional electricity companies also have contributed to a program
by the Pool to adopt settlement arrangements for the competitive market in 1998.
The costs of this program will be recovered from charges to be made to suppliers
by the Pool over a five year period. There is a cap above which the regional
electricity companies will only partially recover these costs. TXU Europe
Group's share of the costs beyond this cap is not expected to be material.
REGULATION OF THE ELECTRICITY SUPPLY INDUSTRY UNDER THE ELECTRICITY ACT
The Electricity Act created the institutional framework under which
the industry is currently regulated, including the office of the Director
General of Electricity Supply, who is appointed by the UK Secretary of State for
Trade and Industry. The government is currently consulting on legislation to
make significant amendments to the Electricity Act to reflect proposed changes
in the regulatory and legal framework of the industry. The government appointed
Callum McCarthy, a former banker, as the Director General of Gas Supply
beginning November 1, 1998. He assumed the duties of the Director General of
Electricity Supply beginning January 1, 1999. The Office of Gas Supply merged
with that of the Office of Electricity Regulation covering England, Wales and
Scotland. Since June 17, 1999, the merged office has been known as the Office of
Gas and Electricity Markets.
The Director General of Electricity Supply's functions under the
Electricity Act include:
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o Granting licenses to generate, transmit or supply electricity, a
function which he exercises under a general authority from the UK
Secretary of State for Trade and Industry;
o Proposing modifications to licenses and, in case of
non-acceptance of those proposals by licensees, making license
modification referrals to the Monopolies and Mergers Commission;
o Enforcing compliance with license conditions;
o Advising the UK Secretary of State for Trade and Industry in
respect of the setting of each public electricity supply license
holder's non-fossil fuel obligation, which fixes the requirement
for the licensee to purchase electricity from non-fossil sources;
o Calculating the rate of the levy to reimburse generators and
regional electricity companies for the extra costs involved in
non-fossil fuel plant generation and collecting this fossil fuel
levy;
o Determining disputes between electricity licensees and customers;
and
o Setting standards of performance for electricity licensees.
The term "supply" as used in the context of the Electricity Act covers
both distribution and supply activities.
The Director General of Electricity Supply exercises concurrently with
the Director General of Fair Trading functions relating to monopoly situations
under the UK Fair Trading Act 1973 and functions relating to courses of conduct
which have, or might have, the effect of restricting, distorting or preventing
competition in the generation, transmission or supply of electricity in
contravention of the UK Competition Act 1980. The new Competition Act which
becomes effective March 1, 2000 will replace some provisions of the UK Fair
Trading Act 1973 and the UK Competition Act 1980. The new Competition Act
conforms to fair trade laws being enacted throughout the EU, including the
introduction of stricter enforcement and investigative powers.
Subject to these duties, the UK Secretary of State for Trade and
Industry and the Director General of Electricity Supply are further required to
exercise their functions in the manner which each considers is best calculated:
o To protect the interests of consumers of electricity supplied by
licensed suppliers in terms of price, continuity of supply and
the quality of electricity supply services;
o To promote efficiency and economy on the part of licensed
electricity suppliers and the efficient use of electricity
supplied to consumers;
o To promote research and development by persons authorized by
license to generate, transmit or supply electricity;
o To protect the public from the dangers arising from the
generation, transmission or supply of electricity; and
o To secure the establishment and maintenance of machinery for
promoting the health and safety of workers in the electricity
industry.
The UK Secretary of State for Trade and Industry and the Director
General of Electricity Supply also have a duty to take into account the effect
on the physical environment of activities connected with the generation,
transmission or supply of electricity.
In performing their duties to protect the interests of consumers in
respect of prices and other terms of supply, the UK Secretary of State for Trade
and Industry and the Director General of Electricity Supply are required to take
into account in particular the interests of consumers in rural areas. In
performing their duties to protect the interests of consumers in respect of the
quality of electricity supply services, they are required to take into account
in particular the interests of those who are disabled or of pensionable age.
The Electricity Act requires the Director General of Electricity
Supply and the UK Secretary of State for Trade and Industry to carry out their
functions in the manner each considers is best calculated to ensure that all
reasonable demands for electricity will be satisfied, that license holders will
be able to finance their licensed activities and that will promote competition
in the generation and supply of electricity.
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GOVERNMENT REVIEW OF UTILITY REGULATION
On June 30, 1997, the UK government announced its intention to conduct
a comprehensive review of the regulatory framework governing the electricity
distribution and supply businesses in England and Wales, as well as the
regulatory framework applicable to providers of water and telecommunications
services. The review culminated in a March 1998 policy statement which sets
forth a number of proposals of the UK government designed to re-examine utility
regulation in the UK. Among the main proposals contained in that policy
statement, some of which would require implementing legislation, are:
o The retention of the current distribution price control formula
as the basis for price regulation;
o Increased transparency and consistency of regulations;
o The separate licensing of the distribution and supply businesses
of the regional electricity companies; and
o Amendment of the statutory duties of utility regulators to
provide a new primary duty to exercise their functions in the
manner best calculated to protect the interests of the consumers
in the short and long term wherever possible, through promoting
competition and adopting price regulation to distinguish between
income earned through companies' own efforts and income which
results from other factors.
On May 13, 1998, the Director General of Electricity Supply issued a
consultation paper on the separation of distribution and supply businesses for
regional electricity companies and the future treatment of metering and meter
reading. The material proposals and recommendations set out in the consultation
paper are the following:
o Full separation of the management of the supply and distribution
business was recommended and consideration of appropriate interim
arrangements for separate companies that will make up the
distribution and supply activities, each acting independently of
the other. Measures should be introduced to ensure that each
public electricity supply license holder's supply subsidiary
operates at arm's length from the distribution subsidiary. These
measures would include separate contracts between the supply and
distribution businesses to avoid the sharing of facilities
between the businesses. Separate management teams would be
required for the two businesses and corporate headquarters
activities would be minimized.
o The distribution company should be responsible for the
maintenance and operation of the network and have a statutory
duty to develop and maintain an efficient, coordinated and
economical system of electricity distribution and to facilitate
competition in generation and supply. It should connect any
customer to the network on reasonable terms and provide "last
resort" meter reading service for any supplier not wishing to
provide the service itself.
o All suppliers should be placed on the same legislative footing,
and tariff supply should be replaced by supply under contract.
License conditions would be introduced to protect customers and
competitors against dominant suppliers.
o Metering services should be open to competition, and arrangements
for transmission in Scotland should be brought into line with
those in England and Wales.
In October 1998, the Department of Trade and Industry published a
consultation paper setting out its views, following consultation on a number of
issues relating to the reform of regulatory structure in the gas and electricity
markets. It intends to consult on issues arising from responses in the fall of
1999. The October 1998 consultation paper sets out the government's view that
separate ownership of distribution and supply companies was inappropriate, but
that the two businesses should be held in separate subsidiary companies.
In November 1998, the Director General of Electricity Supply set out
further proposals on business separation. These proposals concentrate on the
goal of full operational separation of integrated support activities for the
distribution and supply businesses. He also appointed consultants to advise him
in drawing up a separation compliance plan. These were followed on May 19, 1999
by a further document of the Office of Electricity Regulation covering England,
Wales and Scotland that stressed the need to move rapidly towards operational
separation and proposed that work begin immediately on company specific
compliance plans. The Office of Electricity Regulation covering England, Wales
and Scotland also proposed the appointment of a senior level compliance manager
within each regional electricity company.
On January 21, 2000, the UK Government published proposals for further
utility legislation, which are expected to progressively take effect beginning
in fall 2000. In particular, the Government intends to: merge the existing gas
and electricity regulatory offices and to create a single body, to be known as
43
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the Gas and Electricity Markets Authority (Authority), which will be headed by a
Chairman and two other members appointed by the Secretary of State, rather than
a single Director General; to provide that the Authority shall have the
principal objective to protect the interests of consumers wherever possible by
promoting effective competition; to create new and separate licensing structures
for (low voltage) electricity networks (distribution), electricity retail
(supply) and electricity generation; to create a new Gas and Electricity
Consumers Council to provide advice to and represent the views of consumers; to
provide that the UK Secretary of State has a reserve power to take action if he
feels that a disadvantaged group of customers is being treated less favorably
with respect to rates; to enable the Secretary of State to issue statutory
guidance on social and environmental matters, to which the Authority shall refer
in carrying out its duties; to give the Authority the power to fine companies
for breach of electricity license obligations (a power which already exists in
respect of gas license obligations); to require companies which are subject to
price regulation to prepare a statement describing the arrangements for and the
level of remuneration of Directors; to allow the Secretary of State to introduce
new license conditions in electricity generation, distribution and retail
licenses relating to the New Electricity Trading Arrangements proposed to be
introduced from October 1, 2000; and to provide that the standard conditions of
electricity licenses can be changed without the consent of each individual
licensee, where a certain majority of licensees has consented to the change (an
arrangement which already exists in gas).
The Director General of Electric Supply is also reviewing the
operations of the Pool with a view to promoting alternative trading
arrangements.
TXU Europe Limited and TXU Europe Group cannot predict the results of
any of these reviews, whether proposals recommended in the consultation paper or
the recently published utility legislation proposals will be implemented or the
ultimate effects on TXU Europe Group or TXU Europe Limited.
THE GAS INDUSTRY IN THE UK
Natural gas is used for a wide range of residential and small business
and industrial purposes and also for gas-fired electricity generating stations.
Total consumption of natural gas in the UK in 1997 was equal to approximately 54
million tons of oil which equated to approximately 407 million barrels of oil.
Production of natural gas in the UK in 1997 was equal to approximately 87
million tons of oil which equated to approximately 656 million barrels of oil.
From the nationalization of the gas industry in Great Britain in 1948
until 1986, when British Gas plc was privatized, the supply of piped gas to
customers was a monopoly. Simultaneously with the privatization of British Gas
plc, steps were taken to develop greater competition within the industry,
initially by deregulating the supply of gas to the contract market. The contract
market is made up of customers that use more than 25,000 therms per year (1,000
tons of oil equivalent is equal to 0.3968 therms). Within the contract market
there are "interruptible" customers, whose supply can be interrupted in periods
of exceptional demand, and "firm" customers to whom supply is guaranteed.
Competition has been extended to all consumers, including residential
and small business customers.
British Gas plc divided itself into two separate companies, Centrica
plc and BG plc. Centrica plc is a shipper and supplier of gas, while almost all
of the UK gas transmission and distribution network is owned and operated by BG
plc.
Participants in the gas industry are required to hold licenses granted
by the Director General of Gas Supply. These are:
o A "public gas transporter's license," which permits the licensee
to carry gas through pipelines to any premises or to a pipeline
system operated by another public gas transporter;
o A "gas supplier's license," which is required to supply gas to
customers; and
o A "gas shipper's license," which allows the licensee to arrange
with a public gas transporter to introduce, convey or take gas
out of the transporter's pipeline system.
In addition, the exploration for and production of gas in the North
Sea is subject to license by the Department of Trade and Industry.
BG plc is required to provide fair access to its network to all
shippers of gas, who pay charges determined by the amount of capacity they have
reserved on the system's entry and exit points and commodity charges based on
the amount of gas actually transmitted.
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Shippers and suppliers obtain natural gas directly from offshore
fields, in which they may own equity interests, from wholesalers, or from both.
There are various types of contracts for the purchase of gas, but most of these
currently relate directly to physical volumes to be delivered into the UK gas
supply network. Many of these include "take or pay" obligations, under which the
buyer agrees to pay for a minimum quantity of gas in a year, although the amount
it takes in any specific time period can vary according to its need. Gas can be
purchased for delivery from one day to several years ahead.
Shippers in the gas industry have financial incentives to ensure that
they have sufficient gas, within limited tolerances, to meet the needs of their
suppliers and customers on a daily basis. Failure to do so could result in
additional costs being incurred. Fluctuations in demand are met by altering the
quantity of gas taken from fields, by adjusting wholesale purchase contracts and
the use of storage. Demand may also be limited by interrupting supplies to
interruptible customers. Any excess or shortfall in supply has to be sold to, or
bought from, the network operator at prices determined each day under an agreed
pricing formula.
TXU EUROPE GROUP BUSINESS OVERVIEW
GENERAL
TXU Europe Group, which is an indirect subsidiary of TXU Europe
Limited, is the holding company for a group of companies engaged in a variety of
energy businesses in Europe. The management of these businesses is coordinated
to give TXU Europe Group access to many energy markets, to provide TXU Europe
Group's customers access to a range of energy products and to enable TXU Europe
Group to respond efficiently to changes in demand for and prices of energy
throughout Europe. TXU Europe Group's principal business operations are
electricity networks and energy businesses in the UK.
The networks business is the largest distributor of electricity in
England and Wales, with over 3 million customers in a service area covering
approximately 20,300 square kilometers in the east of England and parts of north
London.
TXU Europe Group's energy business is made up of:
o TXU Europe Energy Trading (formerly Eastern Power and Energy
Trading), which coordinates and manages for TXU Europe Group and
other parties the price and volume risks associated with
generation and electricity and gas retail businesses;
o Energy Retail, TXU Europe Group's electricity and gas supply
operations, which is one of the largest retailers of electricity
in the UK, with approximately 3.1 million electricity customers
of Eastern Electricity and Eastern Energy Limited and
approximately 775,000 customers of Eastern Natural Gas as of
December 31, 1999; and
o TXU Europe Power (formerly Eastern Generation), one of the
largest generators of electricity in the UK, which currently
owns, operates or has an interest in ten power stations
representing approximately 9.4% of the UK's total generating
capacity as of December 31, 1999.
TXU Europe Group also has interests in other parts of Europe,
including Scandinavia, Germany, the Czech Republic, The Netherlands, Poland and
Spain, and in four natural gas producing fields in the North Sea.
The electric operations of TXU Europe Group are highly seasonal with a
very substantial proportion of its profits earned in the winter months. The
purchase price for electricity in each half hour varies according to total
demand, the amount of generation capacity available but not needed and the
prices bid by generators. Consequently, the purchase price tends to be highest
during mid-week afternoons in winter, when demand is highest, or in late autumn,
when a significant number of power stations undergo scheduled maintenance.
Purchase prices are generally lowest during summer months. Seasonal variations
in results are likely to continue under revised trading arrangements that are
due to be introduced during 2000.
The energy retail, energy management and generation and networks
segments, the primary operating segments of TXU Europe Group, contributed 61%,
39% and 11%, respectively, of TXU Europe Group's revenues, before eliminating
sales among TXU Europe Group subsidiaries, during the last fiscal year. For
financial information by operating segment for the years ended March 31, 1997
and 1998, and for the period from April 1, 1998 through May 18, 1998, see Note
15 to the Consolidated Financial Statements of TXU Europe Group plc and
Subsidiaries included elsewhere in this prospectus. For financial information by
operating segment for the periods from formation on February 5, 1998 through
December 31, 1998 and from formation through March 31, 1999, see Note 17 to the
Consolidated Financial Statements of TXU Europe Limited and Subsidiaries
included elsewhere in this prospectus. That information has been prepared and
presented in accordance with Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information."
45
<PAGE>
TXU EUROPE GROUP'S FLEXIBLE ENERGY PORTFOLIO CONCEPT
TXU Europe Group began as a regional electricity company, operating
what is now the largest electric networks and supply business in the UK. As the
UK energy market has become increasingly competitive, TXU Europe Group has been
a pioneer in the development of the flexible energy portfolio concept in the UK.
The growth in TXU Europe Group's electric generation and gas production assets
has provided the opportunity to hedge TXU Europe Group's retail electricity and
natural gas contracts and commitments to customers. TXU Europe Energy Trading
now has a substantial portfolio of positions in physical assets and contracts
with which it can supply electricity and gas to TXU Europe Group and other
industry participants. The physical positions are a natural hedge to the risks
associated with TXU Europe Group's retail operations. To the extent TXU Europe
Group is naturally hedged, TXU Europe Group can avoid the expenses of entering
into alternative hedging arrangements. However, the physical positions are not
an exact match with TXU Europe Energy Trading's supply commitments to the
customers. Therefore TXU Europe Energy Trading manages the remaining exposure
through contracts by adjusting the balance of supply and demand in TXU Europe
Group's portfolio, by varying power station and gas field output, by contracting
with counterparties and by adjusting trading prices to the retail operations.
Some of these arrangements are described under "Portfolio Management/Energy
Trading" below.
Overall, TXU Europe Energy Trading integrates all aspects of TXU
Europe Group's energy business. It coordinates TXU Europe Group's energy
operations, taking into account anticipated demand and the availability to TXU
Europe Group of electricity and natural gas from all sources, including
generation, gas production, and contracted supplies.
In carrying out these duties, TXU Europe Energy Trading:
o Offers TXU Europe Group's and others' retail operations a range
of prices for electricity and gas on which the energy retailers
may base prices for the supply of that energy to end customers;
o Bids into the Pool both price and volume for TXU Europe Group's
generation, taking account of anticipated retail demand and the
overall contractual position;
o Manages purchases from the Pool for TXU Europe Group and others;
o Manages TXU Europe Group's contracts for differences and
electricity forward agreements; and
o Matches TXU Europe Group's gas assets and purchase contracts,
including access to gas storage, with anticipated demand,
including demand from TXU Europe Group's gas-fired generating
plants, and buys and sells gas in the event of an excess or
shortfall.
Finally, TXU Europe Group is also forming various business alliances
with European power companies and expects to implement a similar strategy in
other parts of continental Europe as markets there open to competition.
STRATEGY FOR TXU EUROPE GROUP'S ENERGY BUSINESS
TXU Europe Group's strategy for the energy business is to increase TXU
Europe Group's UK market share in the retail sale of gas and electricity by
strengthening its existing positions in those markets. TXU Europe Group believes
that substantial economic and marketing benefits are derived from operating its
natural gas and electricity retailing business as a single unit. Competitive
markets provide opportunities for TXU Europe Group to expand its retail base
through superior marketing and a focus on service to customers. As the retail
base grows, TXU Europe Group's overall energy portfolio will be adapted to
manage the associated price and volume risks. Providing similar development and
management of portfolios to third parties that are other energy providers gives
TXU Europe Group additional opportunities to develop its customer base.
TXU Europe Group also plans additional growth in continental Europe.
TXU Europe Group expects competition to increase in European markets. As
opportunities arise, TXU Europe Group intends to expand its current European
presence by developing its European energy business similarly to what it has
done in the UK. This could be by direct acquisition or contractual arrangements.
As appropriate, TXU Europe Group aims to establish positions through interests
in physical assets or through contracts and trading. It expects to develop
distribution and retail customer bases through direct marketing and alliances,
or joint ventures, with businesses with existing customer bases. These steps
will enable TXU Europe Group to operate profitably in these markets by taking
advantage of price, weather, the timing of demands on the system or other
differentials between connected European markets, as it does in the UK.
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TXU EUROPE POWER
TXU Europe Power is one of the largest generators of electricity in
the UK. Its share of total UK generating capacity is approximately 9.4%. It
currently owns, operates or has an interest in ten power stations in the UK. TXU
Europe Power also has a controlling interest in Nedalo (UK) Limited, the largest
supplier of small electrical combined heat and power plants, which are those
with less than 1.5 MW, in the UK.
UK GENERATION FACILITIES
TXU Europe Group's current portfolio of power stations is
predominately a mix of combined cycle gas turbine and coal-fired stations. It
represents both plants which run throughout most of the year and plants which
run only during periods of high demand. TXU Europe Group's portfolio of power
stations provides flexibility in managing the price and volume risks of its
energy contracts and has enabled TXU Europe Group to diversify its fuel supply
risk.
Information on TXU Europe Group's interests in power stations in the
UK is set out in the following table and discussed further below. In all cases
installed generating capacity is equal to registered generating capacity except
for Peterborough and King's Lynn, which have registered generating capacities of
405 MW and 380 MW, respectively, but installed generating capacities, as shown
below, of 360 MW and 340 MW, respectively.
- --------------------------------------------------------------------------------
Installed
Capacity Date of earliest
Plant Type MW commissioning
- --------------------------------------------------------------------------------
West Burton Coal-fired 2,012 1967
Rugeley B Coal-fired 1,046 1972
Drakelow C Coal-fired 976 1965
Ironbridge Coal-fired 970 1970
High Marnham Coal-fired 945 1959
Peterborough Combined cycle gas turbine 360 1993
King's Lynn Combined cycle gas turbine 340 1997
Barking Combined cycle gas turbine 135(1) 1995
London-Citigen Combined heat and power 31 1992
Grimsby-MIC(2) Combined heat and power 15 1995
--------
Total 6,830
========
(1) Represents TXU Europe Group's approximately 13.5% interest in a 1,000
MW plant.
(2) Located on the property of a customer.
West Burton, Rugeley B and Ironbridge. In June 1996, TXU Europe Group
-------------------------------------
assumed operational and commercial control, through a combination of lease and
outright purchase from National Power, of all of the assets and a portion of the
liabilities of the West Burton, Rugeley B and Ironbridge power stations. TXU
Europe Group holds a 99-year lease over the land, buildings and plant at each of
those power stations and has the right to purchase the freehold land after 50
years. Under the leases, TXU Europe Group was committed to make fixed payments
totalling (pound)737.5 million, of which (pound)337.5 million was paid at
commencement of the leases. The balance, together with interest at 7.75%, is
payable in 2001. Further payments of approximately (pound)6 per MWh, indexed to
inflation and linked to output levels from these stations, are also payable to
National Power through 2004. National Power has agreed in principle with the
Department of Trade and Industry to modify the payment terms to reduce TXU
Europe Group's output-linked payments by (pound)1.50 per MWh for four months of
the year. The specific terms of the modification are not yet agreed. The new
terms will not otherwise change TXU Europe Group's obligations under the leases.
The National Power leases have been characterized as capital leases under US
GAAP.
Drakelow C and High Marnham. TXU Europe Group has leased the land,
---------------------------
buildings and plant at the Drakelow C and High Marnham power stations from
PowerGen for 99 years, under agreements entered into in July 1996. PowerGen is
responsible for decommissioning costs if TXU Europe Group decides to close these
stations during the term of the leases. TXU Europe Group is committed to fixed
payments totalling (pound)230 million, subject to minor adjustments if aggregate
capacity is reduced. The payments, together with interest, are to be made in
installments, over eight years beginning in 1996. As with the National Power
leases, further output-related payments of approximately (pound)6 per MWh,
indexed to inflation, are payable to PowerGen for the first five years of
operation by TXU Europe Group. On November 25, 1998, the UK Secretary of State
for Trade and Industry confirmed that, as a condition for allowing PowerGen to
acquire East Midlands Electricity plc, he would require that the output-related
elements of these lease arrangements be terminated 15 months early. The
output-related payments to PowerGen will now terminate in March 2000.
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Peterborough. The power station at Peterborough was developed and
------------
built as a joint venture between TXU Europe Group and Hawker Siddeley Power
(Peterborough) Limited between 1990 and 1993. TXU Europe Group acquired Hawker
Siddeley's interest in September 1994. TXU Europe Energy Trading has secured
contracts with natural gas suppliers to meet the station's natural gas
requirements. The Peterborough plant is operated and maintained on behalf of TXU
Europe Group by a third party contractor under a seven year contract which
commenced in 1993.
King's Lynn. The 340 MW combined cycle gas turbine power station at
-----------
King's Lynn was constructed for TXU Europe Group under a contract which required
the contractor to provide a functioning power plant. The station began
commercial generation in December 1997 and is operated and maintained by TXU
Europe Group. TXU Europe Energy Trading has secured contracts with natural gas
suppliers to meet the station's natural gas requirements.
Barking. TXU Europe Group has an interest of approximately 13.5% in a
-------
1,000 MW combined cycle gas turbine power station at Barking which was
constructed as a joint venture between TXU Europe Group and a number of other
companies and which became operational in 1995.
London-Citigen and Grimsby-MIC. In December 1998, Eastern Generation
------------------------------
acquired from BG plc two combined heat and power plants: a 15 MW combined heat
and power plant based on the Millennium Inorganic Chemicals site at Grimsby and
a 31 MW district heating and chilling plant, Citigen, in London.
Nedalo. TXU Europe Group owns 75% of Nedalo, which provides to
------
customers small scale combined heat and power equipment that can produce up to
1.5 electrical MW per single unit. Separate units can be grouped together. When
grouped together, the units can have a total output equal to the sum of the
outputs for the individual units. Approximately 70 MW of small scale combined
heat and power equipment is expected to be installed in the UK in 1999, and
Nedalo has approximately 70% of this market.
NON-UK GENERATION FACILITIES
Czech Republic. TXU Europe Group originally invested Czech korunas
--------------
with a value of (pound)27.8 million in an interest of 83.7% in Teplarny Brno, a
district heating and generation company based in Brno, the second largest city
in the Czech Republic. Based on the Czech korunas/pound sterling exchange rate
at December 31, 1999, the value of TXU Europe's investment was (pound)22.2
million. Teplarny Brno owns oil and gas-fired plants that are capable of
generating approximately 1,000 MW of energy in the form of steam and hot water.
This is sold principally to industrial and residential customers. It also owns a
169 kilometer pipeline network for distributing heat to customers' premises.
Teplarny Brno also has an electricity generation capacity of approximately 97
MW. The output is sold to the regional electricity company. A combined cycle gas
turbine plant is currently undergoing final commissioning and will provide 86 MW
of additional heat capacity and 95 MW of additional electricity generating
capacity. This plant, which has a contract value of approximately (pound)31.6
million, is now commissioned on gas.
Poland. TXU Europe Group has acquired 49% of Zamosc Energy Company, a
------
joint venture with the Polish regional distribution company, Zamejska Korporacja
Energetyczna SA, which was established to develop power plants in southeast
Poland. A 125 MW combined cycle gas turbine project is being developed at
Jaraslaw. The project is expected to cost approximately US$100 million
((pound)61 million), but the financing has not yet been closed.
Finland. On November 5, 1999, TXU Europe Group formed a joint venture
-------
company, called TXU Nordic Energy, with certain shareholders of PVO, Finland's
second largest electricity generator. As part of the transaction, TXU Europe
Limited contributed approximately (Euro)300 million ($314 million) for an 81%
ownership interest in TXU Nordic Energy. TXU Nordic Energy acquired class "C"
shares of PVO, which entitle TXU Nordic Energy to the output from approximately
584 MW of PVO's thermal generating capacity and most of a wholesale trading
business owned by the industrial shareholders of PVO. The formation of the joint
venture is a part of TXU Europe Group's strategy to build a European energy
portfolio by working in partnership with other companies.
OTHER PROJECTS
In December 1997, the UK government stopped granting consents for the
construction of new gas-fired power stations pending adoption of the stricter
consents policy announced in an October 1998 policy statement on Energy Sources
for Power Generation. This policy has delayed the construction of some projects
by TXU Europe Group and its competitors. However, in December 1998, TXU Europe
Group received government consent to build a 215 MW combined heat and power
plant to provide heat and power to Shotton Paper on Deeside. The power station
will be built by ABB Alsthom for approximately (pound)80 million ($132 million)
with completion due in 2001. In addition, in July and September 1999, TXU Europe
Group received government consent to modify the Drakelow and Rugeley power
stations to enable those power stations to be fueled by gas in addition to coal,
or by a combination of gas and coal.
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TXU Europe Group continues to consider other new generation projects
and in April 1999 it announced that a one MW wind turbine in Northern Ireland
had successfully completed tests and had begun generating electricity.
The UK government imposes an obligation on electricity suppliers to
purchase a portion of their requirements from renewable energy sources under the
non-fossil fuel obligation levy scheme. Renewable energy sources are those that
are not currently consumed faster than they are replenished. Renewable energy
sources include solar and wind power. As of December 31, 1999, TXU Europe Group
had entered into development agreements in the UK for 110 MW installed capacity
of on-shore wind projects under power purchase contracts that are awaiting
planning consents from local authorities. An agreement outlining the main terms
has been signed with joint developers for up to 100 MW of on-shore wind power in
Portugal and 75 MW of electricity to be produced from forest waste with a
further 12 MW from small hydro schemes in the UK. Additional opportunities for
renewable energy projects and large and small scale combined heat and power
plants are being actively considered, together with other conventional
generating projects.
COMPETITION IN GENERATION
TXU Europe Group is one of the largest generators in the UK, with a
share of approximately 9.4% of the UK's total generation capacity registered as
of December 31, 1999.
TXU Europe Group's mix of generating plants enables it to operate in
the sectors of the market for both plants that run throughout most of the year
and plants that run only during periods of high demand, and to spread its fuel
risks.
The generation market will be affected by the outcome of the review of
energy sources by the UK government and the regulatory review of electricity
trading arrangements.
The UK government has initiated a program of reform in the electricity
market. The program involves:
o Reform of the electricity trading arrangements in England and
Wales;
o Seeking practical opportunities for divestment of assets by major
coal-fired generators;
o Moving forward with competition in electricity supply for all
customers;
o Separating supply and distribution in electricity markets;
o Revising its policy relating to the construction of new gas-fired
generation facilities;
o Continuing to press for open energy markets in Europe.
One of the results of this program is that the major coal-fired
generators, National Power and PowerGen, are in the process of divesting
generating plants. AES Corp. acquired the 4,000 MW Drax coal-fired station from
National Power and Edison Mission Energy acquired two 2,000 MW coal-fired
stations at Ferrybridge and Fiddlers Ferry from PowerGen. In addition,
construction of new gas-fired generating facilities is likely to increase
competition in the generation market. TXU Europe Group cannot predict the impact
these reforms will have on its financial position, results of operations or cash
flows.
ENERGY RETAILING
TXU Europe Group has integrated its electricity and gas retailing
operations into a single energy business.
The electricity retailing business involves the sale to customers of
electricity that is purchased from the Pool. Pool price risk is managed on
behalf of the retail business by TXU Europe Energy Trading. The energy business
is charged a regulated price by transmission and distribution companies,
including Eastern Electricity, for the physical delivery of electricity.
Eastern Electricity supplies electricity to customers in all sectors
of the market and is one of the largest retailers of electricity in England and
Wales. Eastern's service area, which covers approximately 20,300 square
kilometers in the east of England and parts of north London, was one of four
areas in the first group to be fully opened for competition. At December 31,
1999, Eastern Electricity supplied electricity to approximately 2.7 million
customers, including approximately 2.5 million residential customers and
approximately 162,000 small businesses. Industrial and commercial customers
accounted for approximately 45% of Eastern Electricity's retail sales revenues.
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Eastern Natural Gas is one of the largest suppliers of natural gas in
the UK. At December 31, 1999 TXU Europe Group's market share by volume was
estimated at approximately 3.9% of gas delivered to the competitive market,
which is the industrial and commercial market. At December 31, 1999, it was
supplying approximately 775,000 customers in the UK, ranging from residential
households to large industrial companies.
In November 1998, TXU Europe Group announced a gas retailing joint
venture in Holland with Energie Noord West and an electricity trading and retail
joint venture with Lunds Energi in Sweden.
In June 1999, TXU Europe Group announced details of a program to
restructure the energy retailing business in order to be more cost effective in
the competitive energy markets. This program will result in the closure of two
principal offices with the loss of 300 permanent and 200 temporary positions and
a cost of approximately (pound)8.6 million. TXU Europe Group also intends to
seek new ways to access the energy markets and to form more partnerships with
the objective of reducing costs, improving access to customers and capitalizing
on emerging new markets like the internet.
COMPETITION IN ELECTRICITY RETAILING
TXU Europe Group is an active participant in the competitive UK
electricity market. The competitive market is made up of customers with maximum
annual demand of more than 100 kW. It typically includes large commercial and
industrial users. As of December 31, 1999, this market consisted of over 51,000
sites. TXU Europe Group estimates that this represents a market size of
approximately (pound)6 billion per year based upon electricity prices at that
date. In addition, TXU Europe Group estimates that more than 85% of these sites
are outside its authorized area, and that over 60% of its electricity sales to
the competitive market are to customers outside its authorized area. TXU Europe
Group had more than 13% of this market in the year ending March 31, 1999. TXU
Europe Group competes in the competitive market for customers with maximum
annual demand of more than 100kW on the basis of the quality of its customer
service and by competitive pricing. The largest suppliers in this market over
the same period were PowerGen and National Power. In December 1999, TXU Europe
Group's volume in this market decreased as a result of a policy to accept
business only on profitable terms. Although this may reduce market share, it
will have a positive effect on profits.
Competition has been fully introduced for customers in all areas of
Great Britain. New entrants to the competitive market have been limited to
British Gas Trading Limited, Independent Energy and a small number of other
companies. TXU Europe Group competes nationally for residential and small
business customers and, by December 31, 1999, it was supplying 174,400 customers
outside its traditional service area and had agreed contracts with a further
19,000 residential customers. At the same date, approximately 446,000 customers
in TXU Europe Group's service area had transferred to other suppliers.
There is no assurance whether or not competition among suppliers of
electricity will adversely affect TXU Europe Group.
COMPETITION IN GAS SUPPLY BUSINESS
As a result of UK government action in recent years, the UK retail gas
supply market is open to competition. TXU Europe Group's main competitors are
Centrica plc and the gas marketing arms of some major oil companies. Further
competition is provided by a number of other electricity companies and smaller
gas suppliers which are independent of the major oil companies and which each
have a minor presence in the market.
TXU Europe Group intends to maintain a significant share of this
market through high-quality customer service and competitive pricing.
PORTFOLIO MANAGEMENT/ENERGY TRADING
Typically, holders of public electricity supply licenses issued under
the Electricity Act in connection with supply and distribution within an
authorized area in Great Britain are exposed to risk, as they are obliged to
supply electricity to their customers at stable prices but have to purchase
almost all the electricity necessary to supply those customers from the Pool at
prices that are constantly changing. The ownership of generating assets provides
a natural hedge against these risks; the use of financial instruments like
contracts for differences provide another hedging alternative.
A contract for differences is an agreement between two parties calling
for payments between the parties of amounts equal to the product of:
o The difference in each settlement period between the Pool price
and the price, known as the strike price, specified in the
contract for differences and
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o The amount of electricity provided for in that settlement period,
which is usually expressed in MW of demand.
Each settlement period is one-half hour. Contracts for differences effectively
fix the prices a supplier pays and a generator receives for electricity. If the
Pool price is lower than the price specified in the contract for differences for
the settlement period, the supplier pays the generator; and if the Pool price is
higher, the generator pays the supplier. In this way, contracts for differences
reduce the financial risk otherwise associated with the sale and purchase of
electricity through the Pool.
TXU Europe Energy Trading coordinates TXU Europe Group's activities in
managing risk. It provides support to TXU Europe Group's energy retail
activities, taking into account its energy purchases and sales and its contract
portfolios, including TXU Europe Group's generating assets and natural gas
production interests. TXU Europe Energy Trading is responsible for setting the
level of bids into the Pool for the output of each of TXU Europe Group's
generating stations, other than Barking and the combined heat and power plants.
TXU Europe Energy Trading uses this method to coordinate the operation of TXU
Europe Group's generating stations with TXU Europe Group's fuel contract
position and its retail and wholesale energy sales portfolios to TXU Europe
Group's best advantage. It also coordinates the operation of TXU Europe Group's
generating stations, taking into consideration the relative prices in the energy
markets. TXU Europe Energy Trading also earns revenue by providing risk
management services to other energy retailers to assist in managing their
Pool/market price risk.
TXU Europe Energy Trading manages TXU Europe Group's financial
exposure to fluctuations in electricity prices by:
o Managing its portfolio of contracts for differences;
o Bidding both price and volume for TXU Europe Group's generation
output, other than for the Barking plant and the combined heat
and power plants, into the Pool for each half hour of the day;
and
o Deciding with the electricity retailing division of TXU Europe
Group on the volume and pricing of sales in the competitive and
ex-franchise markets.
The overall electricity position for each half hour of the day is
monitored by TXU Europe Energy Trading with the goal of optimizing electricity
purchases and sales positions through the use of generation facilities, long and
short-term retail sales contracts and appropriate financial instruments. The
overall gas position is monitored in a similar way with additional opportunities
presented through the operation of gas-fired power stations, storage facilities
and the use of gas assets which are the source of electricity. Together, the
overall electricity and gas positions are managed by reference to risk exposure
limits that are monitored by a risk management team within TXU Europe Group. The
risk management team verifies that the trading instruments employed have been
approved for use by TXU Europe Energy Trading and carries out credit checks on
current and proposed counterparties. TXU Europe Group's ability to manage that
risk in the future will depend, in part, on the terms of its supply contracts,
the continuation of an adequate market for hedging instruments and the
performance of its generating and gas assets which are the source of
electricity.
In order to help meet the expected needs of its natural gas wholesale
and retail customers, including TXU Europe Group's power stations, TXU Europe
Group has entered into a variety of gas purchase contracts. As of December 31,
1999, the commitments under long-term purchase contracts amounted to an
estimated (pound)1.1 billion, covering periods of up to 15 years. Firm sales
commitments, including estimated power station usage, at the same date amounted
to an estimated (pound)3.0 billion, covering periods up to 17 years.
TXU Europe Energy Trading also purchases coal, oil and natural gas for
TXU Europe Group's UK power stations and has equity interests in four natural
gas-producing fields in the North Sea. In July 1999, TXU Europe Group
significantly expanded its North Sea gas interests through the purchase of all
of BHP Petroleum's assets in the Southern North Sea for approximately (pound)102
million. At December 31, 1999, the carrying value of these assets was (pound)89
million. In December 1998, TXU Europe Group also agreed to purchase Monument
Oil's share of the Johnston field in the Southern North Sea for almost (pound)20
million. The acquisition of Monument Oil's assets was completed in December
1999. Further acquisitions in December 1999 increased TXU Europe Group's
interest in the Johnston field to 64.2%.
The energy management business also trades on the Nord Pool, the
electricity trading market in Scandinavia, and has recently acquired access to
up to 140 MW of hydro output in Norway for 55 years, for which TXU Europe Group
has paid an upfront fee of up to (pound)124 million. This agreement also
provides for TXU Europe Group to acquire an additional 47MW of hydropower in
Norway. In Spain, TXU Europe Group has acquired a 5% minority shareholding in
Hidroelectrica del Cantabrico, S.A. It has created a 50/50 joint venture trading
company with Hidroelectrica del Cantabrico, S.A., Synergia Trading S.A.,
covering the Iberian peninsula.
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In September 1999, the energy management business established an
office in Geneva, Switzerland, which will coordinate European energy management
and development projects.
NETWORKS
ELECTRICITY DISTRIBUTION
TXU Europe Group's electricity networks business consists of the
ownership, management and operation of the electricity distribution network
within TXU Europe Group's authorized area. TXU Europe Group receives electricity
in England and Wales from National Grid. TXU Europe Group then distributes
electricity to end users connected to TXU Europe Group's power lines.
Almost all electricity customers in TXU Europe Group's authorized
area, whether franchise or competitive, are connected to and dependent upon TXU
Europe Group's distribution system. TXU Europe Group distributes approximately
32 TWh of electricity annually to over three million customers, representing
more than seven million people. The distribution by TXU Europe Group of
electricity in its authorized area is regulated by its public electricity supply
license, which, other than in exceptional circumstances, is due to remain in
effect until at least 2025.
PHYSICAL DISTRIBUTION SYSTEM
TXU Europe Group receives electricity from National Grid at 21 supply
points within its authorized area and three points in the authorized areas of
neighboring regional electricity companies. Most of this electricity is received
at 132kV. It is then distributed to customers through TXU Europe Group's system
of approximately 35,200 kilometers of overhead lines, 54,600 kilometers of
underground cable and numerous transformers and circuit breakers, through a
series of interconnected networks operating at successively lower voltages. TXU
Europe Group also receives electricity directly from generating stations located
in its authorized area and, from time to time, from customers' own generating
plants and connections with neighboring regional electricity companies.
At March 31, 1999, the latest date such information is available, TXU
Europe Group's electricity distribution system network, excluding service
connections to consumers, included overhead lines and underground cables at the
operating voltage levels indicated in the table below:
OVERHEAD LINES UNDERGROUND CABLES
OPERATING VOLTAGE (CIRCUIT KILOMETERS) (CIRCUIT KILOMETERS)
----------------- -------------------- --------------------
132kV................ 2,365 220
33kV................. 3,883 2,450
25kV................. 0 23
11kV................. 19,377 16,625
6.6kV................ 0 29
3kV.................. 0 21
LV................... 9,533 35,221
------ ------
Total.............. 35,158 54,589
====== ======
In addition to the circuits referred to above, TXU Europe Group's
distribution facilities also include:
AGGREGATE CAPACITY
TRANSFORMERS NUMBER (MEGA VOLT AMPERES)
------------ ------ -------------------
132kV................ 230 13,306
33kV................. 869 10,360
11kV................. 61,406 14,719
------ ------
Total.............. 62,505 38,385
====== ======
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AGGREGATE CAPACITY
SUBSTATION NUMBER (MEGA VOLT AMPERES)
---------- ------ -------------------
132kV................ 99 13,306
33kV................. 437 10,360
11kV................. 61,828 14,719
------ ------
Total.............. 62,364 38,385
====== ======
CUSTOMERS
Most of the revenue from use of the distribution system is from TXU
Europe Group's electricity retail operations. The rest is derived from holders
of second tier supply licenses in respect of the delivery of electricity to
their customers located in TXU Europe Group's authorized area.
The following table set out details of TXU Europe Group's customers
and electricity units distributed:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-------------------------------------------------
1997 1998 1999
--------------- -------------- -----------
NUMBERS OF CUSTOMERS CONNECTED AT YEAR END
- -------------------------------------------
<S> <C> <C> <C>
Residential............................. 2,868,090 2,891,970 2,957,943
Commercial, Industrial and Other........ 254,245 263,502 268,208
---------- --------- ---------
Total................................... 3,122,335 3,155,472 3,226,151
========== ========= =========
ELECTRICITY DISTRIBUTED (GWH)
- -----------------------------
Residential............................. 13,390 12,946 13,786
Commercial, Industrial and Other........ 18,160 18,830 18,914
---------- ---------- ---------
Total................................... 31,550 31,776 32,700
========== ========== ==========
</TABLE>
SYSTEM PERFORMANCE
The performance of all UK distribution networks is monitored and
publicly reported upon annually by the Office of Gas and Electricity Markets.
The four key statistics employed are: security (customer interruptions per 100
connected customers); availability (customer minutes lost per connected
customer); reliability (main faults per 100km network) and quality of service (%
supply restorations achieved within 3 hours). During 1998/99, TXU Europe Group
achieved the highest performance of all public electricity supply license
holders for reliability, the second highest performance for quality of service,
the third highest performance for availability, and the fourth highest
performance for security. For this particular regulatory year, TXU Europe Group
achieved its highest ever overall quality of supply performance and was the only
public electricity supply license holder to achieve a "top four" position in
each of the above key measures. During 1999, the Office of Gas and Electricity
Markets undertook analysis to compare the quality of supply performance of all
public electricity supply license holders using a hybrid measure of
incorporating degree of improvement as well as absolute performance. On this
basis, the Office of Gas and Electricity Markets ranked Eastern Electricity 2nd
overall for security and 4th for availability and performance.
DISTRIBUTION CHARGES AND PRICE CONTROL
The distribution charges levied by subsidiaries of TXU Europe Group
and the other regional electricity companies consist of charges for use of the
system and charges for other services outside the scope of the price control,
including connection charges. Distribution and supply charges are regulated by
conditions in TXU Europe Group's public electricity supply license, which sets
out a formula for determining the maximum average charge per unit of electricity
distributed in any financial year. Sales of TXU Europe Group's electricity
network business consist primarily of charges for the use of its distribution
system, most of which are levied on TXU Europe Group's electricity retail
business, being the largest supplier from the network, and are passed through to
its customers. Most of the charges for the use of the distribution system are
subject to distribution price controls. See "UK Regulatory Matters--Networks
Regulation-- Distribution Price Regulation" below.
COMPETITION IN THE ELECTRICITY NETWORKS BUSINESS
At present, TXU Europe Group experiences little competition in the
operation of its electricity distribution system. In limited circumstances, some
customers may establish or increase capacity for their own generation by
becoming directly connected to National Grid or by establishing their own
generating capacity; they then avoid charges for the use of the distribution
system. TXU Europe Group does not currently consider this a significant threat
to its electricity networks business.
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STRATEGY FOR THE ELECTRICITY NETWORKS BUSINESS
In support of TXU Europe Group's European integrated energy business
concept, the electricity networks business may evaluate growth opportunities
that enhance value. TXU Europe Group is also examining opportunities to manage
major third-party networks.
On December 14, 1999, TXU Europe Group and EDF London Investments plc,
a subsidiary of Electricite de France, entered into an arrangement for the
creation of an equally held joint venture company. Employees of the joint
venturers' subsidiaries, Eastern Electricity and London Electricity plc, will be
employed by the new joint venture company in the management, operation and
maintenance of those subsidiaries' respective electricity distribution networks.
The physical assets, as well as all operating licenses, will continue to be
owned by Eastern Electricity and London Electricity plc, respectively. An
application was made to the European Commission's Merger Task Force for
competition law clearance and on February 8, 2000, the European Commission
announced that it had cleared plans for the creation of the joint venture for
competition law purposes. A separate application for regulatory clearance is
being prepared. The joint venture will begin operations once these clearances
are obtained, which may be as early as April 2000. By the time the joint venture
starts operations, it is expected that the combined workforce will have been
reduced by approximately 400. It is anticipated that the workforce currently
engaged by Eastern Energy and London Electricity plc, will be further reduced by
at least a similar number during the joint venture's first 18 months of
operations. Primarily as a result of the creation of this joint venture, TXU
Europe Limited is expected to record a restructuring charge of approximately $50
million ((pound)31 million) in the first quarter of 2000.
By streamlining operations and reducing costs, the joint venture is
expected to help offset the price reductions mandated by the recent distribution
price review by the Office of Gas and Electricity Markets.
On December 21, 1999, TXU Europe Limited announced it will import
electricity from Russia as part of a deal between PVO and Russian national
utility RAO UES (UES). The proportion of electricity allocated to TXU Europe
Limited under the deal will be supplied to TXU Nordic Energy. TXU Europe Limited
views the deal as another step towards growing a strong business in the Nordic
region and in developing its pan-European energy portfolio. TXU Nordic Energy is
entitled to 190 MW of the 400 MW that will be imported by PVO from UES. Under
the deal, which lasts until 2004, UES will sell 667 million kWh to PVO in the
first year and up to 2.67 billion kWh each year after 2000. The electricity will
be supplied through an electricity complex in Vyborg, a city on the
Russian-Finnish border. TXU Europe Limited's deal with PVO will give it control
of about 900 MW of electrical output in the Nordic region.
CZECH REPUBLIC
In October 1996, TXU Europe Group acquired an 11.6% minority interest
in Severomoravska Energetika a.s., a Czech electricity distribution and supply
company, as part of its plan to develop interests in companies that would
further its integrated energy strategy overseas. This interest was increased to
16.3% in March 1998.
FINLAND
TXU Europe Group announced in May 1999 that it had agreed to make an
investment in Savon Voima Oy, a regional electricity distributor in central
Finland. The investment was a purchase of approximately 40% of Savon Voima Oy's
share capital for a purchase price of approximately (pound)40 million ($66
million). Savon Voima Oy is currently owned by 29 local municipalities. There
are put options exercisable by the municipalities which if exercised would
automatically give TXU Europe Group a controlling stake. The purchase is part of
TXU Europe Group's overall strategy to manage a flexible Scandinavian energy
portfolio and to develop TXU Europe Group's Scandinavian businesses working with
local partners. The parties signed the agreement for this investment in October
1999, and following the satisfaction of certain conditions precedent, the
purchase of this investment was completed in December, 1999.
OTHER ACTIVITIES
In December 1998, TXU Europe Group sold its wholly-owned subsidiary,
Eastern Group Telecoms Limited, to NTL Incorporated for (pound)91 million. TXU
Europe Group's current strategic plan does not focus on telecommunications
activities.
EMPLOYEES
At December 31, 1999, TXU Europe Group had approximately 5,700
full-time employees. It is anticipated that there will be workforce reductions
in connection with Eastern Electricity's joint venture with EDF London
Investments plc. For further information, see -- "Strategy for Electricity
Networks Business" above.
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TXU Europe Group recognizes trade unions for collective bargaining
purposes, and approximately 54% of employees of TXU Europe Group's businesses
are union members. Union membership existed at TXU Europe Group when it was
privatized. However, the new companies set up by TXU Europe Group after
privatization have no obligations to recognize trade unions. TXU Eastern Natural
Gas and TXU Europe Energy Trading do not recognize trade unions, and most
workers in these businesses are employed under individual contracts. There have
been no industrial disputes or work stoppages at TXU Europe Group during the
period following its privatization in 1990.
UK REGULATORY MATTERS
The electricity industry in the UK, including TXU Europe Group, is
subject to regulation under, among other things, the Electricity Act and UK and
EU environmental legislation described below. TXU Europe Group is also subject
to existing UK and EU legislation on competition and regulation in its gas
business. TXU Europe Group has all of the necessary franchises, licenses and
certificates required to enable it to conduct its businesses. In addition, part
of any profit on disposal of assets vested in TXU Europe Group at the time of
its privatization is subject to recovery by the UK Secretary of State for Trade
and Industry until March 31, 2000.
TXU Europe Group expects proposals with respect to utility regulation
to be part of legislation that will be introduced in 2000. The implementation of
utility regulation could result in significant changes to the existing
regulatory regime. There can be no assurance regarding the potential impact of
regulatory changes, if any, on TXU Europe Group.
ENERGY REGULATION
GENERATION
Unless covered by an exemption, all electricity generators operating a
power station in the UK are required to have generation licenses. The conditions
attached to a generation license in the UK require the holder, among other
things, to be a member of the Pool and to submit the output of the power
station's generating units or turbines for central dispatch. Failure to comply
with any of the generation license conditions may subject the licensee to a
variety of sanctions, including enforcement orders by the Director General of
Electricity Supply and license revocation if an enforcement order is not
complied with.
The UK Secretary of State for Trade and Industry has power under the
Electricity Act to require generators operating power stations with a capacity
of not less than 50 MW to maintain stocks of fuel and other materials at power
stations. The UK Secretary of State for Trade and Industry has recently
completed a review of the level of fuel stocks held by generators in 1997. No
increase was required, but Pool rules were changed as of December 1997 to
penalize gas power plants that reduce output during times of insufficient plant
margins. TXU Europe Group does not anticipate that these changes will have a
material adverse effect on its results of operations.
In the UK each public electricity supply license limits the amount of
generation capacity in which each regional electricity company may hold an
interest without the prior consent of the Director General of Electricity
Supply. These "own-generation" limits currently restrict the participation by a
regional electricity company and its affiliates in generation to a level of
approximately 15% of the simultaneous maximum electricity demand in that
regional electricity company's authorized area at the time of privatization. TXU
Europe Group's limit is 1,000 MW. The Director General of Electricity Supply
stated in January 1996 that he would be prepared to consider a regional
electricity company's request to increase its own-generation capacity on the
condition that it accept explicit restrictions on the contracts it signs with
its own supply business. At a minimum, a regional electricity company would be
prohibited from entering into contracts to provide the additional own-generation
output to its franchise market. Following public consultation, the Director
General of Electricity Supply set out the basis on which consents for regional
electricity companies to acquire new generation capacity would be allowed. The
specific consent of the Director General of Electricity Supply to the leasing by
TXU Europe Group of approximately 6,000 MW of generating capacity from National
Power and PowerGen was later confirmed by the Office of Electricity Regulation
covering England, Wales and Scotland and is not subject to the above-noted
supply business restrictions. TXU Europe Group received government consent to
build a combined heat and power plant at Shotton in December 1998 and the
acquisition of additional generation capacity at Dowlais has been approved in
principle by the Director General of Electricity Supply.
In December 1999, following extensive consultation with the industry,
the Director General of Electricity Supply published new proposals for
generation licenses in order to promote fair competition in the generation and
trading of electricity. The proposals seek to ensure that generators with
positions of significant market power who are able to exert an upward influence
on prices in the Pool ensure that their prices closely reflect their costs and
that they do not take unfair advantage of any imperfections in the operation of
the Pool. The Director General has proposed that these restrictions should cease
one year after the introduction of the NETA arrangements. TXU Europe Limited has
played an active part in these discussions and accepted the Director General's
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proposals on February 7, 2000. TXU Europe Limited does not anticipate that these
new proposals will have a material adverse effect on its revenues. However, five
generators rejected the proposals and the matter has been referred to the UK
Competition Commission.
The implementation of the NETA arrangements, scheduled for
introduction on October 1, 2000, is also likely to lead to a number of
modifications to generation, distribution and retail electricity licenses.
ELECTRICITY RETAILING
Subject to specific exceptions, retail suppliers of electricity in the
ex-franchise market in the UK are required either to have a public electricity
supply license for an authorized area or to obtain a second tier supply license.
Public electricity supply license holders are required under the Electricity Act
to provide a supply of electricity upon request to any premises in their
authorized area, except in specified circumstances. Each public electricity
supply license holder is subject to various obligations under its public
electricity supply license. These include prohibitions on cross-subsidies among
its various regulated businesses and discrimination in respect of the supply of
customers. Each public electricity supply license holder is also required to
offer open access to its distribution network on non-discriminatory terms. This
obligation includes a requirement not to discriminate between its own supply
business and other users of its distribution system. Public electricity supply
license holders are subject to separate controls on the tariffs to ex-franchise
customers and in respect of distribution charges. The Office of Gas and
Electricity Markets is reviewing the distribution and supply price controls.
A supplier of electricity to the competitive market in the UK must
have, subject to specific exemptions, a second tier supply license or a public
electricity supply license for the service area in which customers are supplied.
ELECTRICITY SUPPLY PRICE REGULATION
Supply charges in the ex-franchise market are regulated by a maximum
price control that applies to each tariff in the residential and small business
customer market and effectively provides customers with price guarantees. On
April 1, 1998, TXU Europe Group's tariffs were reduced by 8.9%, before
adjustments for inflation. As provided in the formula, TXU Europe Group's
tariffs were reduced by a further 3%, before adjustments for inflation,
beginning April 1, 1999. There are no other changes in place for retail tariffs.
On October 8, 1999, the Office of Gas and Electricity Markets issued proposed
price adjustments for the electricity supply businesses. The final report of
Office of Gas and Electricity Markets was issued at the end of November 1999,
and accepted by TXU Europe Group in December 1999. The supply price adjustments
become effective April 1, 2000. TXU Europe Group's directly controlled tariffs
will be reduced by an average of 7.1% from April 1, 2000 as required by the new
controls, giving rise to an estimated reduction in annual revenues of
approximately (pound)15 million ($25 million).
As the ex-franchise market is opened to competition, supply price
restraints are no longer expected to be applicable to current franchise market
supply customers. However, the Director General of Electricity Supply has
indicated in his supply price restraint proposals published in October 1997,
that beginning April 1, 1998, price regulation would be put in place for supply
to all designated (residential and small business) customers whose annual
consumption is below 12,000 kWh within TXU Europe Group's authorized area, and
will remain in place until an adequate level of competition is established, and,
at least, until March 31, 2000.
GAS
The natural gas supply activities of TXU Europe Group are principally
regulated by the Director General of Gas Supply under the UK Gas Act 1986, as
amended by the UK Gas Act 1995 and by the conditions of TXU Europe Group's gas
licenses granted by the Director General of Gas Supply. Eastern Natural Gas
currently holds a gas supplier's license. TXU Europe Group's natural gas supply
business is not subject to price regulation. Subsidiaries of TXU Europe Group
currently hold a gas shipper's license and a public gas transporter's license.
ENERGY TRADING
TXU Europe Energy Trading is permitted by the Financial Services
Authority under the Financial Services Act 1986 to deal in contracts for
differences, including futures and options. A subsidiary of TXU Europe Energy
Trading is a joint holder of production licenses relating to its equity
interests in four North Sea natural gas fields.
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NETWORKS REGULATION
DISTRIBUTION PRICE REGULATION
A formula determines the maximum average price per unit of electricity
distributed, in pence per kilowatt hour, that a regional electricity company is
entitled to charge. This price, when multiplied by the expected number of units
to be distributed, determines the expected distribution revenues of the regional
electricity company for the relevant year. The current Distribution Price
Control Formula, P x (1+(RPI-Xd)), is based on the following:
o P is the previous year's maximum average price per unit of
electricity distributed. Because the maximum average price in any
year is based in part on the maximum average price in the
preceding year, a price reduction in any given year has an
ongoing effect on the maximum average price for all later years.
o RPI is a measure of inflation, and equals the percentage change
in the UK Retail Price Index between the six-month period of July
to December of the two previous years. Because RPI is based on a
weighted average of the prices of goods and services purchased by
a typical household, which bear little resemblance to the inputs
contributing to TXU Europe Group's business costs, the RPI
calculation may not accurately reflect price changes affecting
TXU Europe Group.
o The Xd factor is established by the Director General of
Electricity Supply each five years. It is based on an estimate of
expected efficiency gains during the next five years.
The formula permits regional electricity companies to retain part of their
additional revenues due to increased distribution of units and allows for a
pound sterling for pound sterling increase in operating profit for efficient
operations and reduction of expenses within a review period. In relation to the
next Distribution Price Control Formula review, scheduled to be implemented in
April 2000, the Director General of Electricity Supply may reduce any increase
in operating profit to the extent he determines it not to be a function of
efficiency savings and/or, if genuine efficiency savings have been made, he
determines that customers should benefit through lower prices in the future.
On August 12, 1999 the Office of Gas and Electricity Markets issued a
draft report, updated on October 8, 1999 and published in final form on December
2, 1999, proposing a range of substantial revenue reductions for the
distribution businesses of all regional electricity companies in the UK. The
final proposals for Eastern Electricity incorporated an initial reduction in
allowed revenues for regulated units of 28% from April 1, 2000 with further
annual reductions of 3% for the next four years. The allowed income will be
calculated from a formula to be provided by the Office of Gas and Electricity
Markets at a later date. However, TXU Europe Limited and TXU Europe Group
estimate that the effect on revenues will be a reduction of (pound)73 million
($120 million) in the year ending December 31, 2000 and of about (pound)100
million ($165 million) in the year ending December 31, 2001.
Distribution costs vary according to the voltage at which consumers
are connected and the level of use of the distribution system at the time units
are distributed. Changes in the mix of units distributed at different voltage
levels and between peak and off-peak periods are reflected in the calculation of
the maximum average permitted charge per unit distributed by reference to a
"basket" of distribution categories.
Electricity distributed to extra high voltage premises is excluded
from the Distribution Price Control Formula, as are charges for specific
additional services including connection charges. Connection charges must be set
at a level which enables the licensee to recover no more than the appropriate
proportion of the costs incurred and no more than a reasonable rate of return on
the capital represented by those costs. Any dispute over connection charges may
be determined by the Director General of Electricity Supply. In addition, income
received in respect of exit charges related to National Grid that are incurred
by a regional electricity company and received through system charges is not
subject to distribution price control.
The Director General of Electricity Supply may propose amendments to
the Distribution Price Control Formula or any other terms of the license. In the
cases where a public electricity supply license holder is not willing to accept
modifications to the license conditions put forward by the Director General of
Electricity Supply, the normal process would be for the Director General of
Electricity Supply to refer the matter to Monopolies and Mergers Commission or,
after March 1, 2000, or its replacement, the Competition Commission for a
determination of whether continued operation without the proposed license
modifications is in the public interest.
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ENVIRONMENTAL REGULATIONS AND EMISSIONS
TXU Europe Group's businesses are subject to numerous regulatory
requirements with respect to the protection of the environment. The electricity
generation industry in the UK is subject to a framework of national and EU
environmental laws which regulate the construction, operation and
decommissioning of generating stations. Under these laws, each generating
station operated by TXU Europe Group is required to have an authorization which
regulates its releases into the environment and seeks to minimize pollution of
the environment taken as a whole, having regard to the best available techniques
not entailing excessive cost. These authorizations are issued by the Environment
Agency which has the responsibility for regulating the impact of TXU Europe
Group's generating stations on the environment. The principal laws which have
environmental implications for TXU Europe Group are the Electricity Act, the
Environmental Protection Act 1990 and the UK Environment Act 1995.
The Electricity Act requires TXU Europe Group to consider the
preservation of natural beauty and the conservation of natural and man-made
features of particular interest when it formulates proposals for development of
power stations with a capacity in excess of 50 MW or installation of overhead
power lines. Environmental assessments are required to be carried out in some
cases, including overhead line constructions at high voltages and generating
station developments. TXU Europe Group has produced Environmental Policy
Statements and Electricity Act Schedule 9 Statements which explain the manner in
which it complies with its environmental obligations.
Possible adverse health effects of electro-magnetic fields from
various sources, including transmission and distribution lines, have been the
subject of extensive worldwide scientific research. Over eighty independent and
authoritative scientific review bodies have concluded that the scientific
evidence to date does not establish that electro-magnetic fields cause adverse
human health effects. Even with no health effects established, it is possible
that the passage of legislation and changing regulatory standards could require
measures to mitigate electro-magnetic fields. These changes could result in
increased capital and operational costs. In addition, it is always possible for
lawsuits to be brought by plaintiffs alleging damages caused by electro-magnetic
fields. The National Radiological Protection Board is the body in the UK with
the statutory responsibility for advising on electro-magnetic fields. TXU Europe
Group fully complies with the guidance of the National Radiological Protection
Board.
TXU Europe Group has approximately 680 and 192 kilometers of
underground cables insulated with an oil-filled wrap which operate at 33kV and
132kV, respectively. This type of cable is in common use by utilities in the UK
and parts of continental Europe. These cables generally supply substantial
amounts of electricity to large substations in urban areas and to large
customers. Most of TXU Europe Group's cables are between 30 and 50 years old.
TXU Europe Group operates these cables in accordance with the Environment
Agency's Operating Code for Fluid-Filled Cables, monitoring and repairing both
gradual and substantial leaks that arise through age deterioration and damage by
a third party. TXU Europe Group has a program to reduce oil leakage and minimize
the possibility of pollution to watercourses and ground water. This involves
establishing a more effective standard procedure for dealing with cable leaks
and implementation of an effective monitoring system. TXU Europe Group also has
a plan for gradual replacement and refurbishment of these cables with more
modern solid cables in the future. TXU Europe Group believes that its existing
monitoring systems and planned replacement and refurbishment program effectively
minimize the risk of major environmental incidents or additional replacement
expenditures. TXU Europe Group could incur significant expenditures if it were
required to replace its fluid-filled cables, other than in the ordinary course
of business, pursuant to new or existing legislation; however, TXU Europe Group
is not aware of any plans of any governmental authority to impose that kind of
requirement.
The principal EU Directive affecting atmosphere emissions to the
environment currently in force is the Large Combustion Plants Directive. The
Large Combustion Plants Directive required the UK to reduce from 1980 levels its
sulfur dioxide (SO2) emissions from its existing plants by 60% by 2003 and
nitrogen oxides (NOx) emissions by 30% by 1998. The Large Combustion Plant
National Plan is the mechanism by which the Large Combustion Plants Directive
has been implemented in the UK and sets annual targets for reductions in
emissions for the electricity industry. Discussions are under way in the EU
regarding an update of the Large Combustion Plants Directive which will
introduce tighter emission controls as well as national limits for 2010. The UK
government has recently made a review of energy sources and electricity trading
arrangements and has made proposals regarding new limits for SO2 emissions to
apply in the period to 2005. The government is expected to propose tighter
controls on NOx emissions in the near future. TXU Europe Group is examining the
economic and practical implications of fitting a flue gas desulphurization plant
to its West Burton station to reduce the sulphur output of the plant; the flue
would operate beginning in autumn 2003.
At a local level, the UK's Air Quality Strategy provides set targets
for 2005 and places a duty on local authorities to review air quality with a
view to setting up action plans for management in places where targets are
unlikely to be met. When adverse meteorological conditions occur, some
generating stations might have to introduce measures to comply with these
targets, which could include installation of costly equipment or reduction of
the operating level of the stations.
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<PAGE>
In December 1997, the Conference of the Parties of the United Nations
Framework Convention on Climate Change adopted the Kyoto Protocol which
specifies targets and timetables to reduce greenhouse gas emissions. The UK is a
signatory to the Kyoto Protocol and this involves a 12% reduction in carbon
dioxide emissions by 2010 if the Protocol is ratified. TXU Europe Group is
unable to predict what impact the implementation of the Kyoto Protocol will have
on it, although the UK government is proposing to introduce a tax on the
business use of energy in order to reduce energy consumption.
TXU Europe Group believes that it is currently in compliance with, has
taken, and intends to continue to take, measures to comply, in all material
respects, with the applicable law and government regulations for the protection
of the environment. There are no material legal or administrative proceedings
pending against TXU Europe Group with respect to any environmental matter.
Estimated capital expenditure on environmental control facilities
is(pound)43 million in 2000,(pound)50 million in 2001,(pound)40 million in 2002,
and(pound)35 million in 2003.
FOSSIL FUEL LEVY
All the regional electricity companies are obliged to obtain a
specified amount of generating capacity from renewable, or non-fossil fuel,
sources. Because electricity generated from renewable energy sources is
generally more expensive than electricity from fossil fuel plants, a non-fossil
fuel obligation levy has been instituted to reimburse the generators and the
regional electricity companies for the extra costs involved. The Director
General of Electricity Supply sets the rate of the non-fossil fuel obligation
levy annually. The current non-fossil fuel obligation levy is 0.9% of the value
of sales of electricity made in England and Wales and 0.8% of the value of sales
of electricity made in Scotland.
UK AND EU FAIR COMPETITION LAW
TXU Europe Group is subject to the fair competition, or antitrust,
rules of both the UK and the EU.
The UK Fair Trading Act 1973 and the UK Competition Act 1980 both
regulate the activities of companies with market power. The UK Resale Price Act
1976 regulates resale prices and the UK Restrictive Trade Practices Act 1976
regulates price fixing agreement. UK competition law is in the process of reform
in accordance with the UK Competition Act 1998 which will become effective on
March 1, 2000. In broad terms, the UK Competition Act 1998 conforms to fair
trade laws at the EU level. It prohibits anti-competitive agreements and abuse
of dominant market position and introduces stricter enforcement and
investigative powers.
The Treaty of Rome contains provisions which prohibit anti-competitive
agreements and practices, including the abuse of a dominant position within the
EU or a substantial part of it. Penalties for violation of these provisions
include fines, third party damages and making infringing contractual provisions
unenforceable.
EU Directive 93/36 was implemented by the UK in December 1996 and
covers service contracts as well as supply and work contracts. Those contracts
that exceed the relevant financial thresholds have to be advertised in the
Official Journal of the European Communities. Disappointed suppliers and
contractors who believe they have suffered harm from a company's failure to
implement the correct procedures in awarding a contract are able to institute
proceedings in the English High Court. The European Commission also has a role
for ensuring compliance with EU procurement regulations.
PROPERTIES
The principal properties owned or occupied by TXU Europe Limited's
continuing businesses are as follows (other than its distribution properties):
<TABLE>
<CAPTION>
SITE AREA
(ACRES
EXCEPT THE
ADELPHI,
SUFFOLK
TERM OF HOUSE AND
PROPERTY OWNER/LEASEHOLDER INTEREST LEASE PRINCIPAL USE FISON HOUSE)
- -------------------------------- ---------------------- ----------- ---------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
The Adelphi, London TXU Europe Group plc Leasehold 15 years Offices 14,905 sq.
ft.
Bedford Eastern Electricity Freehold -- Offices and Depot 5.0
Carterhatch Lane, Enfield Eastern Electricity Freehold -- Offices and Depot 4.0
Milton, Cambridge Eastern Electricity Freehold -- Offices and Depot 22.0
Rayleigh Eastern Electricity Freehold -- Offices and Depot 8.0
59
<PAGE>
SITE AREA
(ACRES
EXCEPT THE
ADELPHI,
SUFFOLK
TERM OF HOUSE AND
PROPERTY OWNER/LEASEHOLDER INTEREST LEASE PRINCIPAL USE FISON HOUSE)
- -------------------------------- ---------------------- ----------- ---------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Wherstead Park, Wherstead, Ipswich Eastern Electricity Freehold -- Offices 17.0
Russell House Eastern Electricity Freehold -- Offices and Depot 1.7
Suffolk House Eastern Electricity Leasehold 6 years Offices 44,000 sq.
ft.
Fison House Eastern Electricity Leasehold 6 years Offices 24,000 sq.
ft.
Constantine House Eastern Electricity Leasehold 6 years Offices and Depot 2.8
King's Lynn Power Station Anglian Power Freehold -- Power station 16.1
Generators Limited
Peterborough Power Station TXU Europe Power Freehold -- Power station 18.1
Drakelow C Power Station Eastern Merchant Leasehold 99 years Power station 177.0
Properties Limited
High Marnham Power Station Eastern Merchant Leasehold 99 years Power station 178.4
Properties Limited
Ironbridge Power Station Eastern Merchant Leasehold 99 years Power station 212.7
Properties Limited
Rugeley B Power Station Eastern Merchant Leasehold 99 years Power station 299.0
Properties Limited
West Burton Power Station Eastern Merchant Leasehold 99 years Power station 511.5
Properties Limited
</TABLE>
For information concerning TXU Europe Group's generating stations, see
- -- "Generation" above. For information concerning TXU Europe Group's
distribution properties, see TXU EUROPE GROUP BUSINESS OVERVIEW -- "Networks --
Physical Distribution System" above
LEGAL PROCEEDINGS
TXU Europe Limited is not involved in any legal or arbitration
proceedings which management believes will have a material adverse effect upon
TXU Europe Limited's business or financial position.
On May 19, 1998 a complaint was filed in the High Court of Justice in
London, Chancery Division, Patents Court, by Optimum Solutions Limited against
National Grid, Yorkshire Electricity Group plc, Eastern Electricity and Logica
Plc. Yorkshire Electricity and Eastern Electricity are both members of the Pool.
Optimum Solutions Limited alleges breach of confidence in respect of information
supplied in the context of the development of the trading arrangements for the
1998 liberalization of electricity supply in England and Wales, or Trading
Arrangements. Optimum Solutions Limited requests an unspecified amount of
damages relating to breach of contract, an unspecified amount of equitable
compensation for misuse of the confidential information and return of material
alleged to contain confidential information. It is alleged that the Pool has
made use of the confidential information in the development of the Trading
Arrangements and that Eastern Electricity made use of it in using the systems
developed by the Pool for trading purposes. The action against Eastern
Electricity is being strenuously defended.
In February 1997, the official government representative of pensioners
in the UK, the Pensions Ombudsman, made final determinations against National
Grid and its group trustees with respect to complaints by two pensioners in
National Grid's section of the Electricity Supply Pension Scheme relating to the
use of the pension fund surplus resulting from the March 31, 1992 actuarial
valuation of the National Grid section to meet costs arising from the payment of
pensions of early retirement upon reorganization or downsizing. These
determinations were set aside by the High Court on June 10, 1997, and the
arrangements made by National Grid and its group trustees in dealing with the
surplus were confirmed. The two pensioners appealed this decision to the Court
of Appeal, and judgment has now been received. The judgment endorsed the
Pensions Ombudsman's determination that the corporation was not entitled to
unilaterally deal with any surplus. National Grid has made a further, and final,
appeal to the House of Lords, although the appeal is not likely to be heard
until the fall of 2000. If a similar claim were to be made against TXU Europe
Group in relation to its use of actuarial surplus in its section of the
Electricity Supply Pension Scheme, it would vigorously defend the action,
ultimately through the courts. However, if a determination were finally to be
made against it and upheld in the courts, TXU Europe Group could have a
potential liability to repay to its section of the Electricity Supply Pension
Scheme an amount estimated by TXU Europe Group to be up to (pound)45 million,
exclusive of any future applicable interest charges.
60
<PAGE>
On January 25, 1999, the Hindustan Development Corporation issued
proceedings in the Arbitral Tribunal in Delhi, India against TEG claiming
damages of US$413 million for breach of contract following the termination of a
Joint Development Agreement dated March 20, 1997 relating to the construction,
development and operation of a lignite based thermal power plant at Barsingsar,
Rajasthan. TXU Europe Limited is vigorously defending this claim.
In November 1998, five complaints were filed in the High Court of
Justice in London, Queens Bench Division, Commercial Court, against subsidiaries
of TXU Europe Group by five of their former sales agencies. The agencies claim a
total (pound)104 million arising from the summary termination for the claimed
fundamental breach of their respective contracts in April 1998. The five
agencies are claiming damages for failure to give reasonable notice and for
compensation under the UK Commercial Agents Regulations 1994. These actions are
all being defended strenuously, and counterclaims have been filed. TXU Europe
Group cannot predict the outcome of these claims and counterclaims.
SECURITY OWNERSHIP
TXU Europe Limited is wholly-owned indirectly by TXU Corp. Funding is
wholly-owned indirectly by TXU Europe Limited. The following table shows the
number of shares of common stock of TXU Corp owned by the current directors of
TXU Europe Limited and Funding as of September 30, 1999.
The number of shares under "Phantom Stock Plans" represents share
units held in individual accounts in phantom stock plans of TXU Corp and TXU
Europe Group. Although the plans allow the units to be paid only in the form of
cash, investments in the units create essentially the same investment stake in
the performance of the common stock of TXU Corp as do investments in actual
shares of common stock.
NUMBER OF SHARES
---------------------------------------------
BENEFICIALLY
NAME OWNED PHANTOM STOCK PLANS TOTAL
---- ----- ------------------- -----
Erle Nye 121,173 71,511 192,684
H. Jarrell Gibbs 35,098 29,907 65,005
Michael J. McNally 49,445 22,682 72,127
Robert A. Wooldridge 1,952 0 1,952
Philip G. Turberville 7,096 9,355 16,451
Paul C. Marsh 5,068 5,479 10,547
Derek C. Bonham 3,000 0 3,000
Directors of Funding and TXU Europe
Limited as a group (7 persons) 228,832 138,934 361,766
The named individuals have sole voting and investment power for the
shares of common stock reported as beneficially owned. Ownership of that common
stock by each individual director and for all directors as a group constituted
less than 1% of the outstanding shares of TXU Corp.
MANAGEMENT OF TXU EASTERN FUNDING COMPANY
MANAGEMENT OF FUNDING
The following table lists information with respect to the management
of Funding:
NAME AGE POSITION
---- --- --------
Erle Nye 62 Director
H. Jarrell Gibbs 61 Director
Michael J. McNally 45 Director
Robert A. Wooldridge 61 Director
Philip G. Turberville 48 Director
Paul C. Marsh 41 Director
Erle Nye has been a director of Funding since February 1999. He has
served as a director and Chairman of the Board and Chief Executive of TXU Corp
since May 1997 and of TXU Gas Company since August 1997. He has also been a
director and Chairman of the Board and Chief Executive of TXU Electric Company
for more than the last five years. Mr. Nye is also a director of TXU Europe
61
<PAGE>
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 Funding since February
1999. He is Vice Chairman of TXU Corp and a director and Vice Chairman of the
Board of TXU Gas Company. Before that, Mr. Gibbs was the President of TXU
Electric Company and Vice President and Principal Financial Officer of TXU Corp.
Mr. Gibbs is also a director of TXU Europe Group and of TXU Europe Limited.
Michael J. McNally has served as a director of Funding since February
1999. He is the Executive Vice President and Chief Financial Officer of TXU
Corp. Before that, Mr. McNally was President of the Transmission Division of TXU
Electric Company; Executive Vice President of TXU Electric Company; Principal of
Enron Development Corporation; Managing Director of Industrial Services of Enron
Capital and Trade Resources; and President of Houston Pipe Line Company and
Enron Gas Liquids, Inc. Mr. McNally is also a director of TXU Electric Company,
TXU Gas Company and TXU Europe Limited.
Robert A. Wooldridge has been a director of Funding since February
1999. Mr. Wooldridge is a partner in the law firm Worsham, Forsythe & Wooldridge
L.L.P. in Dallas, Texas which provides legal services to TXU Europe Limited and
Funding, as well as TXU Corp and other subsidiaries of TXU Corp. Mr. Wooldridge
is also a director of TXU Gas Company and TXU Europe Limited.
Philip G. Turberville has served as a director of Funding since August
1999. Mr. Turberville has served as a director and the Chairman of the Board and
Chief Executive Officer of TXU Europe Group since January 4, 1999. Before that,
Mr. Turberville was President of the Europe Oil Products division of The Royal
Dutch Shell Group, where he had worked in a variety of roles providing him with
extensive international experience since 1976. Mr. Turberville is also a
director of TXU Europe Limited and TXU Europe Group.
Paul C. Marsh has served as a director of Funding since August 1999.
He has been with TXU Europe Group since October 1992 and has served as Finance
Director of TXU Europe Group since February 24, 1997. Before that, Mr. Marsh
worked in Ernst & Young's Corporate Advisory Services Division. Before that, Mr.
Marsh served as Finance Director in two medium sized private sales and trading
groups. Mr. Marsh is also a director of TXU Europe Limited and TXU Europe Group.
There is no family relationship between any of the above-named
directors. Funding has no executive officers other than its directors.
DIRECTOR COMPENSATION OF FUNDING
Mr. Wooldridge does not receive compensation for his services as a
director of Funding. The remaining directors of Funding listed above have
received, and will continue to receive, compensation in respect of services
performed by those persons as directors of Funding from their primary employer
which is either TXU Corp or another subsidiary of TXU Corp. These directors
receive no cash or non-cash compensation beyond that which they would otherwise
receive from TXU Corp or a TXU Corp subsidiary for the services performed by
them for those companies.
MANAGEMENT OF TXU EUROPE LIMITED
MANAGEMENT OF TXU EUROPE LIMITED
The following table lists information with respect to the management
of TXU Europe Limited:
NAME AGE POSITION
---- --- --------
Erle Nye 62 Director
H. Jarrell Gibbs 61 Director
Michael J. McNally 45 Director
Robert A. Wooldridge 61 Director
Philip G. Turberville 48 Director
Paul C. Marsh 41 Director
Derek C. Bonham 56 Director
62
<PAGE>
Erle Nye has been a director of TXU Europe Limited since February
1998. He has served as a director and Chairman of the Board and Chief Executive
of TXU Corp since May 1997 and of TXU Gas Company since August 1997. He has also
been a director and Chairman of the Board and Chief Executive of TXU Electric
Company for more than the last five years. Mr. Nye is also a director of
Funding. In addition, Mr. Nye was President of TXU Corp from February 1987
through May 1995 and President and Chief Executive of TXU Corp from May 1995
through May 1997.
H. Jarrell Gibbs has served as a director of TXU Europe Limited since
February 1998. He is Vice Chairman of TXU Corp and a director and Vice Chairman
of the Board of TXU Gas Company. Before that, Mr. Gibbs was the President of TXU
Electric Company and Vice President and Principal Financial Officer of TXU Corp.
Mr. Gibbs is also a director of TXU Europe Group and of Funding.
Michael J. McNally has served as a director of TXU Europe Limited
since February 1998. He is the Executive Vice President and Chief Financial
Officer of TXU Corp. Before that, Mr. McNally was President of the Transmission
Division of TXU Electric Company; Executive Vice President of TXU Electric
Company; Principal of Enron Development Corporation; Managing Director of
Industrial Services of Enron Capital and Trade Resources; and President of
Houston Pipe Line Company and Enron Gas Liquids, Inc. Mr. McNally is also a
director of TXU Electric Company, TXU Gas Company and Funding.
Robert A. Wooldridge has been a director of TXU Europe Limited since
February 1998. Mr. Wooldridge is a partner in the law firm Worsham, Forsythe &
Wooldridge L.L.P. in Dallas, Texas, which provides legal services to TXU Europe
Limited and Funding, as well as TXU Corp and other subsidiaries of TXU Corp. Mr.
Wooldridge is also a director of TXU Gas Company and Funding.
Philip G. Turberville has served as a director of TXU Europe Limited
since May 1999. Mr. Turberville has served as a director and the Chairman of the
Board and Chief Executive Officer of TXU Europe Group since January 4, 1999.
Before that, Mr. Turberville was President of the Europe Oil Products division
of The Royal Dutch Shell Group, where he had worked in a variety of roles
providing him with extensive international experience since 1976. Mr.
Turberville is also a director of Funding.
Paul C. Marsh has served as a director of TXU Europe Limited since May
1999. He has been with TXU Europe Group since October 1992 and has served as
Finance Director of TXU Europe Group since February 24, 1997. Before that, Mr.
Marsh worked in Ernst & Young's Corporate Advisory Services Division. Before
that, Mr. Marsh served as Finance Director in two medium sized private sales and
trading groups. Mr. Marsh is also a director of TXU Europe Group and Funding.
Derek C. Bonham has served as a director of TXU Europe Limited since
May 1999. He has served as Chairman of Imperial Tobacco Group PLC since October
1996. Before that, Mr. Bonham was Chairman of The Energy Group PLC from February
1997 through July 1998. Before that, Mr. Bonham served as Deputy Chairman and
Chief Executive of Hanson PLC from November 1993 through February 1997 and as
Chief Executive of Hanson PLC from April 1992 through November 1993. Mr. Bonham
is also a director of Glaxo Wellcome PLC, Imperial Tobacco Group PLC, Newsquest
PLC, Fieldens PLC and TXU Corp.
There is no family relationship between any of the above-named
directors. TXU Europe Limited has no executive officers other than its
directors.
DIRECTOR COMPENSATION OF TXU EUROPE LIMITED
In the fiscal year ended December 31, 1998, the directors of TXU
Europe Limited did not receive any compensation in respect of their services
performed for TXU Europe Limited. Mr. Wooldridge did not receive compensation
for his services as a director of TXU Europe Limited. Messrs. Nye, Gibbs and
McNally received, and will continue to receive, compensation in respect of
services performed by those persons as directors of TXU Europe Limited from
their primary employer which is either TXU Corp or another US subsidiary of TXU
Corp and an affiliate of TXU Europe Limited. These directors received no cash or
non-cash compensation beyond that which they would have otherwise received from
TXU Corp or a TXU Corp subsidiary for the services performed by them for those
companies. During 1998 all persons performing the functions of executive
officers of TXU Europe Limited were directors of that company.
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<PAGE>
RELATIONSHIPS OF MANAGEMENT TO FUNDING AND
TXU EUROPE LIMITED AND RELATED TRANSACTIONS
Mr. Wooldridge is a partner in Worsham, Forsythe & Wooldridge, L.L.P.,
which provides legal services to Funding and TXU Europe Limited, as well as TXU
Corp and other subsidiaries of TXU Corp. These legal services were provided on
terms at least as favorable to those companies as could have been obtained from
others for comparable services.
MANAGEMENT OF TXU EUROPE GROUP PLC
The following table lists information with respect to the management
of TXU Europe Group:
NAME AGE POSITION
---- --- --------
H. Jarrell Gibbs 61 Director
David J. H. Huber 49 Director
Edward B. Hyams 48 Director
Paul C. Marsh 41 Director
David W. Owens 47 Director
Roger E. Partington 43 Director
Philip G. Turberville 48 Director
H. Jarrell Gibbs has served as a director of TXU Europe Group since
July 2, 1998. He is Vice Chairman of TXU Corp and a director and Vice Chairman
of the Board of TXU Gas Company. Before that, Mr. Gibbs was the President of TXU
Electric Company and Vice President and Principal Financial Officer of TXU Corp.
Mr. Gibbs is also a director of Funding and TXU Europe Limited.
David J. H. Huber has been the Human Resources Director of TXU Europe
Group since September 1, 1997. Before that, Dr. Huber was the Human Resources
Director of Safeway Stores plc from 1988; before that, Dr. Huber was the Senior
Personnel Director at Burton Group plc from 1985.
Edward B. Hyams has served as a director of TXU Europe Group since
September 13, 1996, first as the Managing Director of its networks business and,
since May 1998, as the Managing Director, Generation. Before that, Mr. Hyams
served as Director of Engineering at Southern Electric plc from 1992.
Paul C. Marsh has been with TXU Europe Group since October 1992 and
has served as Finance Director of TXU Europe Group since February 24, 1997.
Before that, Mr. Marsh worked in Ernst & Young's Corporate Advisory Services
Division. Before that, Mr. Marsh served as Finance Director in two medium sized
private sales and trading groups. Mr. Marsh has also served as a director of TXU
Europe Limited since May 1999.
David W. Owens has been the Managing Director, Networks, since May 18,
1998. Before that, Mr. Owens served as Managing Director at ABB Power T&D
Limited from 1994. Before that, Mr. Owens held a number of senior positions at
GEC Alstom and GEC.
Roger E. Partington has served as a director of TXU Europe Group, and
as President of Eastern Energy, since December 6, 1999. Before that, Mr.
Partington was first the Marketing Director and then the main Board Director
responsible for customer development of Safeway Stores plc. Prior to that, he
was Marketing Director at Nestle UK.
Philip G. Turberville has served as a director and the Chairman of the
Board and Chief Executive Officer of TXU Europe Group since January 4, 1999.
Before that, Mr. Turberville was President of the Europe Oil Products division
of The Royal Dutch Shell Group, where he had worked in a variety of roles
providing him with extensive international experience since 1976. Mr.
Turberville has also served as a director of TXU Europe Limited since May 1999.
There is no family relationship among any of the above-named
directors.
64
<PAGE>
DESCRIPTION OF THE TOPRS
The TOPrS will be issued pursuant to the terms of the trust agreement.
The trust agreement will be qualified as an indenture under the Trust Indenture
Act. The Property Trustee, The Bank of New York, will act as trustee for the
TOPrS under the trust agreement for purposes of compliance with the provisions
of the Trust Indenture Act. Material terms and provisions of the TOPrS are
summarized below. A copy of the form of the trust agreement is filed as an
exhibit to the registration statement of which this prospectus is a part. You
should refer to the trust agreement, the Delaware Business Trust Act and the
Trust Indenture Act for provisions that may be important to you.
The TOPrS will be issued in fully registered form without coupons.
TOPrS will not be issued in bearer form. Investors may elect to hold interests
in the TOPrS through either DTC (in the United States) or Clearstream Banking or
Morgan Guaranty Trust Company of New York, Brussels Office, as operator of
Euroclear (in Europe) if they are participants of such systems, or indirectly
through organizations which are participants in such systems. See Book-Entry
Only Issuance -- "The Depository Trust Company."
The trust agreement authorizes the Administrative Trustees of the
trust to issue the TOPrS, which represent undivided beneficial ownership
interests in the assets of the trust, and the control certificate. The trust
agreement does not permit the acquisition by the trust of any assets other than
the Preferred Partnership Securities, the issuance by the trust of any
securities other than the TOPrS or the control certificate or the incurrence by
the trust of any indebtedness. The payment of distributions out of money held by
the trust, and payments out of money held by the trust upon redemption of the
TOPrS or dissolution and liquidation of the trust, are guaranteed by TXU Europe
Limited to the extent described under DESCRIPTION OF THE TRUST GUARANTEE. The
Trust Guarantee will be held by The Bank of New York, the Trust Guarantee
Trustee, for the benefit of the holders of the TOPrS. The Trust Guarantee does
not cover payment of distributions when the trust does not have sufficient
available funds to pay such distributions. In the event the trust does not have
sufficient available funds to pay distributions, holders of TOPrS will have the
remedies described below under -- "Trust Enforcement Events."
DISTRIBUTIONS
Distributions on the TOPrS will be made to the extent that the trust
has funds available for the payment of those distributions in the property
account. Amounts available to the trust for distribution to the holders of the
TOPrS will be limited to payments received by the trust from the partnership
with respect to the Preferred Partnership Securities or from TXU Europe Limited
under the Partnership Guarantee or the Trust Guarantee. Distributions on the
Preferred Partnership Securities will be paid only if, as and when declared in
the sole discretion of TXU Europe Limited, as the general partner of the
partnership. Pursuant to the limited partnership agreement, the general partner
is not obligated to declare distributions on the Preferred Partnership
Securities at any time, including upon or following a Partnership Enforcement
Event. See DESCRIPTION OF PREFERRED PARTNERSHIP SECURITIES -- "Partnership
Enforcement Events." If the Property Trustee on behalf of the trust, as the
holder of the Preferred Partnership Securities for the benefit of the holders of
the TOPrS, receives written notice of any determination by the general partner
not to pay distributions on the Preferred Partnership Securities, the Property
Trustee shall give notification of this determination to those holders.
Amounts payable on the Preferred Partnership Securities will be fixed
at a rate per annum of 9.75% of the stated liquidation preference of $25 per
Preferred Partnership Security. Amounts payable on Preferred Partnership
Securities which are not paid on the scheduled payment date will accumulate and
compound quarterly at a rate per annum equal to 9.75%. The term "amounts
payable" as used in this prospectus includes any compounded amounts unless
otherwise stated or the context otherwise requires. The amounts payable on
Preferred Partnership Securities for any period will be computed on the basis of
a 360-day year of twelve 30-day months and, for any period shorter than a
quarter, on the basis of the number of days elapsed in that period.
Amounts payable on the Preferred Partnership Securities will be
cumulative, will accumulate from the date of initial issuance and will be
payable quarterly in arrears on each March 31, June 30, September 30 and
December 31, commencing June 30, 2000, provided that, as noted above, the
general partner is not obligated to declare distributions on the Preferred
Partnership Securities at any time.
If quarterly distributions are made on the Preferred Partnership
Securities at the full fixed rate, the trust will have sufficient funds to pay
the holders of the TOPrS a quarterly cash distribution at the rate of 9.75% of
the stated liquidation amount of $25 per TOPrS per annum. For purposes of this
prospectus, the term "distributions" with respect to TOPrS for any period means
the full expected quarterly amounts of 9.75% of the stated liquidation amount of
$25 per TOPrS per annum; in addition, unpaid distributions shall be deemed to
accumulate and compound quarterly at a rate per annum equal to 9.75%, and
"distributions" shall include any such compounded amount unless otherwise stated
or the context otherwise requires.
Distributions on the TOPrS will be payable to the holders as they
appear on the books and records of the trust on the relevant record dates, which
will be one business day prior to the relevant payment dates. Distributions will
be paid to the trust through the Property Trustee who will hold amounts received
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in respect of the Preferred Partnership Securities in the property account for
the benefit of the holders of the TOPrS. Subject to any applicable laws and
regulations and the provisions of the trust agreement, each payment will be made
as described under -- "Book-Entry Only Issuance -- The Depository Trust Company"
below. If the TOPrS do not remain in book-entry only form, the relevant record
dates will be the 15th day of the month of the relevant payment dates. If any
date on which distributions are payable on the TOPrS is not a business day,
payment of the distribution payable on that date will be made on the next
succeeding day that is a business day (without any interest or other payment in
respect of the distribution subject to the delay) except that, if the next
business day is in the next succeeding calendar year, the payment will be made
on the immediately preceding business day, (without any reduction in interest or
other payments in respect of such early payment) in each case with the same
force and effect as if made on the date the distribution was initially payable.
A "business day" means any day other than a day on which banking institutions in
The City of New York are authorized or required by law to close.
If distributions on TOPrS are not paid when regularly scheduled, the
accumulated distributions shall be paid to the holders of record of TOPrS as
they appear on the books and records of the trust on the record date with
respect to the payment date for the TOPrS, which will correspond to the actual
payment date fixed by the partnership with respect to the payment of cumulative
distributions payable in respect of the Preferred Partnership Securities not
declared for distribution and paid when regularly scheduled.
The assets of the partnership will consist only of subsidiary
debentures and eligible debt securities. To the extent that the issuers defer or
fail to make any payment in respect of the subsidiary debentures, or TXU Europe
Limited, as guarantor of the subsidiary debentures in which the partnership
invests, fails to make any payment under the guarantees, the partnership will
not have sufficient funds to pay and will not declare or pay distributions on
the Preferred Partnership Securities. If the partnership does not declare and
pay distributions on the Preferred Partnership Securities out of funds legally
available for distribution, the trust will not have sufficient funds to make
distributions on the TOPrS. In that event the Trust Guarantee will not apply to
those distributions until the trust has sufficient funds available to make those
distributions. See DESCRIPTION OF THE PREFERRED PARTNERSHIP SECURITIES --
"Distributions" and DESCRIPTION OF THE TRUST GUARANTEE. In addition, the
partnership may not have sufficient funds to pay current or liquidating
distributions on the Preferred Partnership Securities if:
o at any time that the partnership is receiving current
payments in respect of the securities held by the
partnership (including the subsidiary debentures), TXU
Europe Limited, as the general partner of the partnership,
in its sole discretion, does not declare distributions on
the Preferred Partnership Securities and the partnership
receives insufficient amounts from its investments to pay
the resulting additional compounded distributions that will
accumulate on any unpaid distributions,
o the partnership reinvests the proceeds received from the
subsidiary debentures upon their redemption or at their
maturities in other subsidiary debentures or eligible debt
securities that do not generate income sufficient to pay
full quarterly distributions in respect of the Preferred
Partnership Securities at a rate of 9.75% per annum or, if
sufficient to pay those distributions either in full or in
part, the partnership does not declare or make those
distributions, or
o subsidiary debentures cannot be liquidated by the
partnership for an amount sufficient to pay liquidating
distributions in full or, if sufficient to pay those
distributions either in full or, in part, the partnership
does not declare or make those distributions.
TRUST ENFORCEMENT EVENTS
The occurrence, at any time, of:
o the failure of the trust to pay an amount equal to
distributions at the full fixed rate on the Preferred
Partnership Securities, which is expected to be $0.609375
per quarter for each $25 TOPrS (plus any accumulated and
compounded distributions), that exists for six consecutive
quarterly distribution periods,
o a default by TXU Europe Limited in respect of any of its
obligations under the Trust Guarantee, or
o a partnership enforcement event under the limited
partnership agreement,
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will constitute a trust enforcement event under the trust agreement with respect
to the TOPrS. See DESCRIPTION OF THE PREFERRED PARTNERSHIP SECURITIES --
"Partnership Enforcement Events" for a description of the events which will
trigger the occurrence of a partnership enforcement event.
Upon the occurrence of a trust enforcement event:
(a) the Property Trustee on behalf of the trust, as the holder of the
Preferred Partnership Securities, will have the right to enforce
the terms of the Preferred Partnership Securities, including the
right to direct the special representative to enforce:
o the partnership's creditors' rights and other rights,
including the right to receive payments under the subsidiary
debentures and any of TXU Europe Limited's guarantees of
subsidiary debentures,
o the rights of the holders of the Preferred Partnership
Securities under the Partnership Guarantee and
o the rights of the holders of the Preferred Partnership
Securities to receive distributions only if and to the
extent declared out of funds legally available for payment
on the Preferred Partnership Securities, and
(b) the Trust Guarantee Trustee will have the right to enforce the terms
of the Trust Guarantee, including the right to enforce the covenant
restricting specified payments and loans by TXU Europe Limited and its
subsidiaries.
If the Property Trustee on behalf of the trust fails to enforce the
trust's rights under the Preferred Partnership Securities after a holder of
TOPrS has made a written request, that holder of record of TOPrS may to the
fullest extent permitted by law, directly institute a legal proceeding against
the partnership or the special representative to enforce the trust's rights
under the Preferred Partnership Securities without first instituting any legal
proceeding against TXU Europe Limited, the Property Trustee, the trust or any
other person or entity. In addition, for so long as the trust holds any
Preferred Partnership Securities, if the special representative fails to enforce
its rights on behalf of the partnership in the subsidiary debentures or TXU
Europe Limited's guarantees of subsidiary debentures after a holder of TOPrS has
made a written request, a holder of record of TOPrS may, to the fullest extent
permitted by law, on behalf of the partnership directly institute a legal
proceeding against TXU Europe Limited or its subsidiaries that have issued
subsidiary debentures, without first instituting any legal proceeding against
the Property Trustee, the trust, the special representative, the partnership or
any other person or entity. In any event, for so long as the trust is the holder
of any Preferred Partnership Securities, if a trust enforcement event has
occurred and is continuing and that trust enforcement event is attributable to
the failure of a subsidiary of TXU Europe Limited to make any required payment
when due on any subsidiary debenture or the failure of TXU Europe Limited to
make any required payment when due on any guarantee of a subsidiary debenture,
then a holder of TOPrS may, to the fullest extent permitted by law, on behalf of
the partnership directly institute a proceeding against the subsidiary of TXU
Europe Limited with respect to that subsidiary debenture or against TXU Europe
Limited with respect to that guarantee, in each case for enforcement of payment.
Under no circumstances, however, will the trust, the Property Trustee,
the special representative or any holder of TOPrS have authority to cause the
general partner to declare distributions on the Preferred Partnership
Securities. As a result, although the Property Trustee on behalf of the trust,
the special representative or these holders may be able to enforce the
partnership's creditors' rights to accelerate and receive payments in respect of
the subsidiary debentures and TXU Europe Limited's guarantees of subsidiary
debentures, the partnership would be entitled to reinvest such payments in
additional subsidiary debentures, subject to satisfying the reinvestment
criteria described under DESCRIPTION OF THE PREFERRED PARTNERSHIP SECURITIES --
"Partnership Investments," and in eligible debt securities, rather than
declaring and making distributions on the Preferred Partnership Securities.
The trust is required to file annually with the Property Trustee an
officer's certificate as to its compliance with all conditions and covenants
under the trust agreement.
MANDATORY REDEMPTION
The Preferred Partnership Securities may be redeemed by the
partnership at the option of the general partner, in whole, or in part, from
time to time at any time on or after March 2, 2005 or at any time in certain
circumstances, in whole, upon the occurrence of a partnership special event.
Upon the redemption of the Preferred Partnership Securities, either at the
option of the general partner or in connection with a partnership special event,
the proceeds from the redemption will simultaneously be applied to redeem TOPrS
having an aggregate liquidation amount equal to the Preferred Partnership
Securities redeemed at an amount per TOPrS equal to $25 plus accumulated and
unpaid distributions on those TOPrS; provided, that holders of the TOPrS will be
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given not less than 30 nor more than 60 days notice of the redemption. See
DESCRIPTION OF THE PREFERRED PARTNERSHIP SECURITIES -- "Optional Redemption."
TRUST SPECIAL EVENT REDEMPTION OR DISTRIBUTION
If, at any time, a "trust special event", which is either a trust tax
event or a trust investment company event, occurs and is continuing, the
Administrative Trustees will, unless the Preferred Partnership Securities are
redeemed in the limited circumstances described below, within 90 days following
the occurrence of that trust special event, elect to either (i) dissolve the
trust upon not less than 30 nor more than 60 days notice with the result that,
after satisfaction of creditors of the trust, if any, Preferred Partnership
Securities will be distributed on a pro rata basis to the holders of the TOPrS
in liquidation of those holders' interests in the trust; provided, however, that
if at the time there is available to the trust the opportunity to eliminate,
within that 90-day period, the trust special event by taking some ministerial
action, such as filing a form or making an election, or pursuing some other
reasonable measure which in the sole judgment of the Control Party has or will
cause no material adverse effect on the trust, the partnership, TXU Europe
Limited, the Control Party or the holders of the TOPrS and will involve no
material cost, the trust will pursue that measure instead of dissolution or (ii)
cause the TOPrS to remain outstanding, provided that in the case of this clause
(ii), TXU Europe Limited will pay any and all costs or expenses (including any
tax or governmental charges) incurred by or payable by the trust attributable to
the trust special event.
If, in the case of the occurrence of a trust tax event described
below, (i) the Administrative Trustees have received an opinion of nationally
recognized independent tax counsel in the US or the UK, as applicable,
experienced in such matters, that, as a result of the occurrence of the trust
tax event, there is more than an insubstantial risk that interest payable by a
subsidiary of TXU Europe Limited with respect to its subsidiary debentures is
not, or will not be, fully deductible by that subsidiary for US federal income
or UK corporation tax purposes or (ii) TXU Europe Limited certifies to the
Administrative Trustees that, as a result of a tax action, Additional Amounts,
as described under DESCRIPTION OF THE TRUST GUARANTEE - "Additional Amounts,"
are, or will be, payable with respect to any payments made on the subsidiary
debentures, or under the guarantees of the subsidiary debentures, the Trust
Guarantee or the Partnership Guarantee, and further certifies that it or any
issuer of subsidiary debentures, as the case may be, cannot avoid the
requirement to pay such Additional Amounts by using its reasonable efforts, in
each case, even if the Preferred Partnership Securities were distributed to the
holders of the TOPrS in liquidation of such holder's interests in the trust as
described above, then the general partner will have the right, within 90 days
following the occurrence of that trust tax event, to elect to cause the
partnership to either (a) redeem the Preferred Partnership Securities in whole,
but not in part, for cash upon not less than 30 nor more than 60 days notice and
promptly following that redemption, the TOPrS will be redeemed by the trust at a
redemption price that is equal to $25 per TOPrS plus accumulated and unpaid
distributions on those TOPrS; provided however, that, if at the time there is
available to the trust or the partnership the opportunity to eliminate within
that 90-day period, the trust tax event by taking some ministerial action, such
as filing a form or making an election, or pursuing some other reasonable
measure that in the sole judgment of the Control Party has or will cause no
material adverse effect on the partnership, the trust, TXU Europe Limited, the
Control Party or the holders of the TOPrS, and will involve no material cost,
the trust or the partnership will pursue that measure instead of dissolution of
the trust or (b) cause the Preferred Partnership Securities (and therefore the
TOPrS) to remain outstanding, provided that in the case of this clause (b), TXU
Europe Limited will pay any and all expenses (including any tax or governmental
charges) incurred by or payable by the trust attributable to the trust tax
event.
"Trust tax event" means that TXU Europe Limited:
(A) has requested, received and delivered to the Administrative
Trustees an opinion of nationally recognized independent tax counsel in the US
or UK, as applicable, experienced in such matters to the effect that there has
been a tax action which means:
o an amendment to, change in or announced proposed change in the
laws (or any regulations thereunder) of the US, the UK or any
political subdivision or taxing authority thereof or therein,
o a judicial decision interpreting, applying, or clarifying such
laws or regulations,
o an administrative pronouncement or action that represents an
official position, including a clarification of an official
position, of the governmental authority or regulatory body making
the administrative pronouncement or taking the action, or
o a threatened challenge asserted in connection with an audit of
TXU Europe Limited or any of its affiliates, the partnership or
the trust, or a threatened challenge asserted in writing against
any other taxpayer that has raised capital through the issuance
of securities that are substantially similar to the subsidiary
debentures, the Preferred Partnership Securities, or the TOPrS,
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which amendment or change is adopted, or which proposed change, decision or
pronouncement is announced, or which action, clarification or challenge occurs
on or after the date of initial issuance of the TOPrS, which tax action relates
to any of the events described below in this paragraph, and that as a result of
the occurrence of that tax action there is more than an insubstantial risk that:
o the trust is, or will be, subject to US federal income tax or UK
income tax or corporation tax with respect to income accrued or
received on the Preferred Partnership Securities,
o the trust is, or will be, subject to more than a de minimis
amount of other taxes, duties or other governmental charges, or
o interest payable by a subsidiary of TXU Europe Limited with
respect to its subsidiary debentures is not, or will not be,
fully deductible by that subsidiary for US federal income or UK
taxation purposes,
or (B) has certified to the Administrative Trustees that, as a result
of a tax action, Additional Amounts, as described under DESCRIPTION OF THE TRUST
GUARANTEE - "Additional Amounts," are, or will be, payable with respect to any
payments made on the subsidiary debentures, or under the guarantees of the
subsidiary debentures, the Trust Guarantee or the Partnership Guarantee, and has
further certified to the Administrative Trustee that it or any issuer of
subsidiary debentures, as the case may be, cannot avoid the requirement to pay
such Additional Amounts by using its reasonable efforts.
"Trust investment company event" means that TXU Europe Limited has
requested and received and shall have delivered to the Administrative Trustees
an opinion of nationally recognized independent legal counsel in the US
experienced in such matters to the effect that as a result of the occurrence on
or after the date of initial issuance of the TOPrS of a change in law or
regulation or a change in interpretation or application of law or regulation by
any legislative body, court, governmental agency or regulatory authority, there
is more than an insubstantial risk that the trust is or will be considered an
"investment company" which is required to be registered under the Investment
Company Act.
If the Preferred Partnership Securities are distributed to the holders
of the TOPrS, TXU Europe Limited will use its best efforts to cause the
Preferred Partnership Securities to be listed on the NYSE or on such other
national securities exchange or similar organization on which the TOPrS are then
listed or quoted.
On the date fixed for any distribution of Preferred Partnership
Securities, upon dissolution of the trust, (i) the TOPrS will no longer be
deemed to be outstanding and (ii) certificates representing TOPrS will be deemed
to represent the Preferred Partnership Securities having a liquidation
preference equal to the stated liquidation amount of those TOPrS until those
certificates are presented to TXU Europe Limited or its agent for transfer or
reissuance.
There can be no assurance as to the market price for the Preferred
Partnership Securities which may be distributed in exchange for TOPrS if a
dissolution and liquidation of the trust were to occur. Accordingly, the
Preferred Partnership Securities which an investor may subsequently receive on
dissolution and liquidation of the trust may trade at a discount to the price of
the TOPrS exchanged.
REDEMPTION PROCEDURES
The trust may not redeem fewer than all of the outstanding TOPrS
unless all accumulated and unpaid distributions have been paid on all TOPrS for
all quarterly distribution periods terminating on or prior to the date of
redemption.
Notice of redemption of TOPrS will be irrevocable. If the trust gives
a notice of redemption in respect of TOPrS, and if the partnership has paid to
the Property Trustee a sufficient amount of cash in connection with the related
redemption of the Preferred Partnership Securities, then, by 12:00 noon, New
York City time, on the redemption date, the trust will irrevocably deposit with
DTC, so long as the TOPrS are represented by global certificates held by DTC,
funds sufficient to pay the amount payable on redemption of all TOPrS and will
give DTC irrevocable instructions and authority to pay that amount to holders of
the TOPrS. See -- "Book-Entry Only Issuance --The Depository Trust Company." If
the TOPrS are held in certificated form, the Property Trustee on behalf of the
trust will pay the applicable redemption price to the holders upon surrender of
their certificates evidencing the TOPrS in accordance with the trust agreement.
If notice of redemption has been given and funds are deposited as
required, then upon the date of the deposit, all rights of holders of such TOPrS
called for redemption will cease, except the right of the holders of such TOPrS
to receive the redemption price, but without interest on the redemption price,
and such TOPrS will cease to be outstanding. In the event that any date fixed
for redemption of TOPrS is not a business day, then payment of the amount
payable on that date will be made on the next succeeding day that is a business
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day, without any interest or other payment in respect of the amount payable
subject to the delay, except that, if the next business day falls in the next
calendar year, the payment will be made on the immediately preceding business
day without any reduction in interest or other payments in respect of such early
payments, in each case with the same force and effect as if made on such date
fixed for redemption. In the event that payment of the redemption price in
respect of TOPrS is improperly withheld or refused and not paid either by the
trust or by TXU Europe Limited pursuant to the Trust Guarantee described under
DESCRIPTION OF THE TRUST GUARANTEE, distributions on those TOPrS will continue
to accumulate from the original redemption date to the date of payment. The date
of payment will be considered the date fixed for redemption for purposes of
calculating the redemption price plus accumulated and unpaid distributions.
If fewer than all of the outstanding TOPrS are to be redeemed, the
TOPrS will be redeemed in accordance with the procedures of DTC. See --
"Book-Entry Only Issuance -- The Depository Trust Company." If the TOPrS do not
remain in book-entry only form and fewer than all of the outstanding TOPrS are
to be redeemed, the TOPrS shall be redeemed on a pro rata basis or pursuant to
the rules of any securities exchange on which the TOPrS are listed.
The Property Trustee promptly will notify the Administrative Trustees
in writing of the TOPrS selected for redemption and, in the case of any TOPrS
selected for partial redemption, the aggregate liquidation amount to be
redeemed.
Subject to the foregoing and applicable law, including, without
limitation, US federal securities laws, TXU Europe Limited or its affiliates may
at any time and from time to time purchase outstanding TOPrS by tender, in the
open market or by private agreement.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any voluntary or involuntary dissolution of the trust,
the holders of the TOPrS will be entitled to receive out of the assets of the
trust, after satisfaction of liabilities to creditors, if any, a pro rata trust
liquidation distribution in cash or other immediately available funds in an
amount equal to the assets of the trust, unless, in connection with the trust
liquidation, Preferred Partnership Securities (which will have an aggregate
liquidation preference equal to the aggregate stated liquidation amount of, a
distribution rate identical to the expected distribution rate of, and
accumulated and unpaid distributions equal to accumulated and unpaid
distributions on the TOPrS) shall be distributed on a pro rata basis to the
holders of the TOPrS in exchange for those TOPrS.
Under the trust agreement, the trust will dissolve (i) upon the
bankruptcy of TXU Europe Limited, or a successor, as the depositor of the trust,
(ii) upon the filing of a certificate of dissolution or the equivalent with
respect to TXU Europe Limited, or a successor, as the depositor, upon the
consent of at least a majority in liquidation amount of the TOPrS, voting
together as a single class, to dissolve the trust or the revocation of the
charter of TXU Europe Limited, or a successor, as the depositor and the
expiration of 90 days after the date of revocation without a reinstatement of
the charter, (iii) upon the distribution of all of the Preferred Partnership
Securities upon the occurrence of a trust special event, (iv) upon the entry of
a decree of a judicial dissolution of TXU Europe Limited, or a successor, as the
depositor or the trust, or (v) upon the redemption of all the TOPrS.
VOTING RIGHTS
Except as described in this prospectus, under the Delaware Business
Trust Act, the Trust Indenture Act and under DESCRIPTION OF THE TRUST GUARANTEE
- -- "Amendments and Assignment," and as otherwise required by law and the trust
agreement, the holders of the TOPrS will have no voting rights.
Subject to the requirement of the Property Trustee obtaining a tax
opinion as set forth in the last sentence of this paragraph, the holders of a
majority in liquidation amount of the TOPrS have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Property Trustee on behalf of the trust, or direct the exercise of any trust or
power conferred upon the Property Trustee on behalf of the trust under the trust
agreement, including the right to direct the Property Trustee on behalf of the
trust, as holder of the Preferred Partnership Securities, to (i) exercise the
remedies available to it under the limited partnership agreement as a holder of
the Preferred Partnership Securities, including the right to direct the special
representative to exercise its rights in the manner described above under --
"Trust Enforcement Events" and (ii) consent to any amendment, modification or
termination of the limited partnership agreement or the Preferred Partnership
Securities where a consent is required; provided, however, that where a consent
or action under the limited partnership agreement would require the consent or
act of the holders of more than a majority of the aggregate liquidation
preference of the Preferred Partnership Securities affected by that consent or
action, only the holders of the percentage of the aggregate stated liquidation
amount of the TOPrS which is at least equal to the percentage required under the
limited partnership agreement may direct the Property Trustee to give that
consent or take that action on behalf of the trust. See DESCRIPTION OF THE
PREFERRED PARTNERSHIP SECURITIES -- "Voting Rights." The Property Trustee will
notify all holders of the TOPrS of any notice of any partnership enforcement
event received from the general partner with respect to the Preferred
Partnership Securities, the subsidiary debentures and the guarantees of these
subsidiary debentures. That notice will state that the partnership enforcement
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event also constitutes a trust enforcement event. Except with respect to
directing the time, method, and place of conducting a proceeding for a remedy as
described above, the Property Trustee will be under no obligation to take any of
the actions described in clauses (i) or (ii) above unless it has obtained an
opinion of independent tax counsel in the US or the UK, as applicable, to the
effect that, as a result of such action, the trust will not fail to be
classified as a grantor trust for US federal income tax purposes or as a
transparent entity for UK taxation purposes and that after the action each
holder of TOPrS will continue to be treated as owning an undivided beneficial
ownership interest in the Preferred Partnership Securities.
In the event the consent of the Property Trustee on behalf of the
trust, as the holder of the Preferred Partnership Securities, is required under
the limited partnership agreement with respect to any amendment, modification or
termination of the limited partnership agreement, the Property Trustee shall
request the direction of the holders of the TOPrS with respect to such
amendment, modification or termination and shall vote with respect to such
amendment, modification or termination as directed by a majority in liquidation
amount of the TOPrS voting together as a single class; provided, however, that
where a consent under the limited partnership agreement would require the
consent of the holders of more than a majority in aggregate liquidation
preference of the Preferred Partnership Securities, the Property Trustee may
only give such consent at the direction of the holders of at least the same
proportion in aggregate stated liquidation amount of the TOPrS. The Property
Trustee shall not take any action in accordance with the direction of the
holders of the TOPrS unless the Property Trustee has obtained an opinion of
independent tax counsel in the US or the UK, as applicable, to the effect that
such action is not inconsistent with the trust being classified as a grantor
trust for US federal income tax purposes or as a transparent entity for UK
taxation purposes.
A waiver of a partnership enforcement event with respect to the
Preferred Partnership Securities held by the Property Trustee will constitute a
waiver of the corresponding trust enforcement event.
Any required approval or direction of holders of TOPrS may be given at
a separate meeting of holders of TOPrS convened for that purpose or pursuant to
written consent. The Administrative Trustees will cause a notice of any meeting
at which holders of TOPrS are entitled to vote to be mailed to each holder of
record of TOPrS. Each notice will include the following information: (i) the
date of the meeting, (ii) a description of any resolution proposed for adoption
at the meeting on which the holders are entitled to vote and (iii) instructions
for the delivery of proxies.
No vote or consent of the holders of TOPrS will be required for the
trust to redeem and cancel TOPrS or distribute Preferred Partnership Securities
in accordance with the trust agreement.
Notwithstanding that holders of TOPrS are entitled to vote or consent
under any of the circumstances described above, any of the TOPrS that are
beneficially owned at that time by TXU Europe Limited or any entity directly or
indirectly controlled by, or under direct or indirect common control with, TXU
Europe Limited, will not be entitled to vote or consent and will, for purposes
of that vote or consent, be treated as if those TOPrS were not outstanding;
provided, however, that persons, other than affiliates of TXU Europe Limited, to
whom TXU Europe Limited or any of its affiliates have pledged TOPrS may vote or
consent with respect to the pledged TOPrS under the terms of that pledge.
The procedures by which holders of TOPrS represented by global
certificates may exercise their voting rights are described below. See --
"Book-Entry Only Issuance -- The Depository Trust Company."
Holders of the TOPrS will have no rights to appoint or remove the
Administrative Trustees, who may be appointed, removed or replaced solely by the
Control Party.
MERGER, CONSOLIDATION OR AMALGAMATION OF THE TRUST
The trust may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to, any corporation or other entity,
except as described below. The trust may, with the consent of a majority of the
Administrative Trustees and without the consent of the holders of the TOPrS, the
Property Trustee, the Control Party or the Delaware Trustee consolidate,
amalgamate, merge with or into, or be replaced by, or convey, transfer or lease
its properties and assets as an entirety or substantially as an entirety, to a
trust organized under the laws of any state of the US; provided, that:
o if the trust is not the survivor, the successor entity
either
-- expressly assumes all of the obligations of the trust
under the TOPrS or
-- substitutes for the TOPrS successor securities having
substantially the same terms as the TOPrS, so long as
these successor securities rank the same as the TOPrS
rank with respect to distributions, assets and
payments, upon liquidation, redemption and otherwise,
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o the successor entity transfers to the Control Party,
directly or indirectly, a control certificate (or similar
instrument) relating to the successor entity,
o the Control Party expressly acknowledges a trustee of such
successor entity possessing the same powers and duties as
the Property Trustee with respect to the Preferred
Partnership Securities,
o the TOPrS or any successor securities are listed, or any
successor securities will be listed upon notification of
issuance, on any national securities exchange and other
organization on which the TOPrS are then listed or quoted,
o the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not cause the TOPrS,
including any successor securities, to be downgraded by any
nationally recognized statistical securities rating
organization,
o the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the
rights, preferences and privileges of the holders of the
TOPrS, including any successor securities, in any material
respect,
o the successor entity has a purpose substantially identical
to that of the trust,
o TXU Europe Limited or a successor permitted by the Trust
Guarantee, guarantees the obligations of the successor
entity under the successor securities at least to the same
extent as provided by the Trust Guarantee and
o prior to any merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, the Control
Party has received an opinion of a nationally recognized
independent counsel to the trust in the US or UK, as
applicable, experienced in these matters to the effect that:
-- the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, is lawful and may be
properly undertaken by the trust and will not adversely
affect the rights, preferences and privileges of the
holders of the TOPrS, including any successor
securities, in any material respect, other than with
respect to any dilution of the holders' interest in the
new entity,
-- following the merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the
trust nor the successor entity will be required to
register as an investment company under the Investment
Company Act,
-- following the merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, the trust
(or the successor entity) will not be classified as an
association or a publicly traded partnership taxable as
a corporation for US federal income tax purposes,
-- following the merger, consolidation, amalgamation or
replacement, conveyance, transfer or lease, the
partnership will not be classified as an association or
a publicly traded partnership taxable as a corporation
for US federal income tax purposes or as a company for
UK taxation purposes, and
-- following the merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, the trust
(or the successor entity) will not be classified as
other than a transparent entity for UK taxation
purposes.
In any event, the trust may not, except with the consent of holders of 100% in
liquidation amount of the TOPrS, consolidate, amalgamate, merge with or into, or
be replaced by, or convey, transfer or lease its property and assets as an
entirety or substantially as an entirety to, any other entity or permit any
other entity to consolidate, amalgamate, merge with or into, or replace it, if
the consolidation, amalgamation, merger, replacement, conveyance, transfer or
lease would cause the trust, the successor entity or the partnership to be
classified as an association or a publicly traded partnership taxable as a
corporation for US federal income tax purposes or as a company for UK taxation
purposes.
MODIFICATION OF THE TRUST AGREEMENT
The trust agreement may be modified and amended if approved by a
majority of the Administrative Trustees, and in some circumstances the Property
Trustee, the Control Party and the Delaware Trustee, provided, that if any
proposed amendment provides for, or the Administrative Trustees otherwise
propose to effect, (i) any action that would materially adversely affect the
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powers, preferences or special rights of the TOPrS, whether by way of amendment
to the trust agreement or otherwise or (ii) the dissolution, winding-up or
termination of the trust other than under the terms of the trust agreement, then
the holders of the TOPrS will be entitled to vote on the amendment or proposal
and the amendment or proposal will not be effective except with the approval of
at least a majority in liquidation amount of the TOPrS affected by the amendment
or proposal.
The trust agreement may be amended by the Control Party and the
Administrative Trustees without the consent of the holders of the TOPrS to:
o cure any ambiguity,
o correct or supplement any provision in the trust agreement
that may be defective or inconsistent with any other
provision of the trust agreement,
o add to the covenants, restrictions or obligations of TXU
Europe Limited,
o conform to any change in the Investment Company Act, the
Trust Indenture Act or the rules or regulations of either of
those Acts,
o change the name of the trust, and
o modify, eliminate and add to any provision of the trust
agreement to such extent as may be necessary or desirable;
provided that no such amendment shall have a material
adverse effect on the rights, preferences or privileges of
the holders of the TOPrS.
In any event, no amendment or modification may be made to the trust agreement if
that amendment or modification would (i) cause the trust to fail to continue to
be classified as a grantor trust for US federal income tax purposes or as a
transparent entity for UK taxation purposes, (ii) cause the partnership to be
classified as an association or publicly traded partnership taxable as a
corporation for US federal income tax purposes or as a company for UK taxation
purposes, (iii) reduce or otherwise adversely affect the powers of the Property
Trustee in contravention of the Trust Indenture Act or (iv) cause the trust, the
partnership or the Control Party to be deemed an "investment company" which is
required to be registered under the Investment Company Act.
BOOK-ENTRY ONLY ISSUANCE -- THE DEPOSITORY TRUST COMPANY
DTC will act as securities depository for the TOPrS and, to the extent
distributed to the holders of TOPrS, the Preferred Partnership Securities. The
TOPrS will be issued only as fully-registered securities registered in the name
of DTC's nominee, Cede & Co. One or more fully-registered global certificates,
representing the total aggregate number of TOPrS, will be issued and will be
deposited with DTC or its custodian.
DTC is a New York clearing corporation and a clearing agency
registered under Section 17A of the Exchange Act. DTC holds securities for its
participants. DTC facilitates settlement transactions among its participants
through electronic computerized book-entry changes in participants' accounts.
This eliminates the need for physical movement of securities certificates. The
participants include securities brokers and dealers, banks, trust companies and
clearing corporations. DTC is owned by a number of its participants and by the
New York Stock Exchange, Inc., the American Stock Exchange, Inc., and the
National Association of Securities Dealers, Inc. Other indirect participants who
maintain a custodial relationship with a participant can use the DTC system. The
rules that apply to DTC and those using its systems are on file with the SEC.
Purchases of TOPrS within the DTC system must be made by or through
participants, which will receive a credit for the TOPrS on DTC's records. The
ownership interest of each beneficial owner of TOPrS is in turn to be recorded
on the participants' and indirect participants' records. Beneficial owners will
not receive written confirmation from DTC of their purchases, but beneficial
owners are expected to receive written confirmations providing details of the
transactions, as well as periodic statements of their holdings, from the
participants or indirect participants through which the beneficial owners
purchased TOPrS. Transfers of ownership interests in the TOPrS are to be
accomplished by entries made on the books of participants and indirect
participants acting on behalf of beneficial owners. Beneficial owners will not
receive certificates representing their ownership interests in TOPrS, except in
the event that use of the book-entry system for the TOPrS is discontinued.
The laws of some jurisdictions require that purchasers of securities
take physical delivery of securities in definitive form. Those laws may impair
the ability to transfer beneficial interests in the TOPrS as represented by a
global certificate.
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DTC has no knowledge of the actual beneficial owners of the TOPrS.
DTC's records reflect only the identity of the participants to whose accounts
the TOPrS are credited, which may or may not be the beneficial owners. The
participants and indirect participants will remain responsible for keeping
account of their holdings on behalf of their customers.
So long as DTC, or its nominee, is the registered owner or holder of a
global certificate representing TOPrS, DTC or its nominee, as the case may be,
will be considered the sole owner or holder of the TOPrS represented by that
global certificate for all purposes under the trust agreement and the TOPrS. No
beneficial owner of an interest in a global certificate will be able to transfer
that interest except in accordance with DTC's applicable procedures, in addition
to those provided for under the trust agreement.
DTC has advised TXU Europe Limited that it will take any action
permitted to be taken by a holder of TOPrS, including the presentation of TOPrS
for exchange as described below, only at the direction of one or more
participants to whose account the DTC interests in the global certificates are
credited and only in respect of the portion of the aggregate liquidation amount
of TOPrS as to which those participants have given directions. Also, if there is
a trust enforcement event under the TOPrS, DTC will exchange the global
certificates for certificated TOPrS, which it will distribute to its
participants in accordance with its customary procedures.
Conveyance of notices and other communications by DTC to participants,
by participants to indirect participants, and by participants and indirect
participants to beneficial owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
Redemption notices in respect of the TOPrS held in book-entry form
will be sent to Cede & Co. If less than all of the TOPrS are being redeemed, DTC
will determine the amount of the interest of each participant to be redeemed in
accordance with its procedures.
Although voting with respect to the TOPrS is limited, in those cases
where a vote is required, neither DTC nor Cede & Co. will itself consent or vote
with respect to TOPrS. Under its usual procedures, DTC would mail an Omnibus
Proxy to the trust as soon as possible after the record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those participants to whose
accounts the TOPrS are allocated on the record date, as identified in a listing
attached to the Omnibus Proxy.
Distributions on the TOPrS held in book-entry form will be made to DTC
in immediately available funds. DTC's practice is to credit participants'
accounts on the relevant payment date in accordance with their respective
holdings shown on DTC's records unless DTC has reason to believe that it will
not receive payments on the payment date. Payments by participants and indirect
participants to beneficial owners will be governed by standing instructions and
customary practices and will be the responsibility of those participants and
indirect participants and not of DTC, the trust or TXU Europe Limited, subject
to any statutory or regulatory requirements as may be in effect from time to
time. Payment of any distributions to DTC is the responsibility of the trust,
disbursement of the payments to participants is the responsibility of DTC, and
disbursement of the payments to the beneficial owners is the responsibility of
participants and indirect participants.
Except as described below, a beneficial owner of an interest in a
global certificate will not be entitled to receive physical delivery of TOPrS.
Accordingly, each beneficial owner must rely on the procedures of DTC to
exercise any rights under the TOPrS.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interests in the global certificates among participants
of DTC, DTC is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither TXU
Europe Limited nor the trust will have any responsibility for the performance by
DTC or its participants or indirect participants under the rules and procedures
governing DTC. DTC may discontinue providing its services as securities
depository with respect to the TOPrS at any time by giving notice to the trust.
Under those circumstances, in the event that a successor securities depository
is not obtained, TOPrS certificates are required to be printed and delivered to
the Property Trustee. In addition, the trust, with the consent of TXU Europe
Limited, may decide to discontinue use of the system of book-entry transfers
through DTC or any successor depository. In that event, certificates for the
TOPrS will be printed and delivered to the Property Trustee. In each of the
above circumstances, TXU Europe Limited will appoint a paying agent with respect
to the TOPrS.
Investors may elect to hold interests in the TOPrS through either DTC
(in the United States) or Clearstream Banking, societe anonyme (Clearstream), or
Morgan Guaranty Trust Company of New York, Brussels Office, as operator of
Euroclear (in Europe) if they are participants of such systems, or indirectly
through organizations which are participants in such systems. Clearstream and
Euroclear will hold interests on behalf of their participants through customers'
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securities accounts in Clearstream's and Euroclear's names on the books of their
respective depositaries, which in turn will hold such interests in customers'
securities accounts in the names of their respective depositaries (US
Depositaries) on the books of DTC. Citibank, N.A. will act as the US Depositary
for Clearstream and The Chase Manhattan Bank will act as the US Depositary for
Euroclear.
Clearstream has advised us that it is incorporated under the laws of
Luxembourg as a professional depositary. Clearstream holds securities for its
customers and facilitates the clearance and settlement of securities
transactions between Clearstream customers through electronic book entry changes
in accounts of Clearstream customers, thereby eliminating the need for physical
movement of certificates. Clearstream provides to Clearstream customers, among
other things, services for safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and borrowing.
Clearstream interfaces with domestic markets in several countries. As a bank,
Clearstream is subject to regulation by the Luxembourg Commission for the
Supervision of the Financial Section. Clearstream customers are recognized
financial institutions around the world, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations and may include the underwriters. Indirect access to
Clearstream is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Clearstream customer either directly or indirectly.
Distributions with respect to the TOPrS held beneficially through
Clearstream will be credited to cash accounts of Clearstream customers in
accordance with its rules and procedures, to the extent received by the US
Depositary for Clearstream.
Euroclear has advised us that it was created in 1968 to hold
securities for participants of Euroclear (Euroclear Participants) and to clear
and settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Euroclear includes various other services,
including securities lending and borrowing and interfaces with domestic markets
in several countries. Euroclear is operated by the Brussels, Belgium office of
Morgan Guaranty Trust Company of New York (Euroclear Operator), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation
(Cooperative). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries and may include the underwriters.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System, and applicable Belgian
law (collectively, the Terms and Conditions). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to the TOPrS held beneficially through
Euroclear will be credited to the cash accounts of Euroclear Participants in
accordance with the Terms and Conditions, to the extent received by the US
Depositary for Euroclear.
Euroclear has also advised us that investors that acquire, hold and
transfer interests in our Notes by book-entry through accounts with the
Euroclear Operator or any other securities intermediary are subject to the laws
and contractual provisions governing their relationship with their intermediary,
as well as the laws and contractual provisions governing the relationship
between such an intermediary and each other intermediary, if any, standing
between themselves and the global certificates representing the TOPrS.
Under Belgian law, the Euroclear Operator is required to pass on the
benefits of ownership in any interests in securities on deposit with it (such as
dividends, voting rights and other entitlements) to any person credited with
such interests in securities on its records.
PAYMENT AND PAYING AGENT
Payments in respect of the TOPrS represented by the global
certificates will be made to DTC, which will credit the relevant accounts at DTC
on the scheduled payment dates or, in the case of certificated securities, if
any, payments will be made by check mailed to the address of the holder entitled
thereto as such address shall appear on the register. The Bank of New York will
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initially be the Paying Agent. The Paying Agent will be permitted to resign as
Paying Agent upon 30 days prior written notice to the Administrative Trustees.
In the event that The Bank of New York is no longer the Paying Agent, the
Administrative Trustees will appoint a successor to act as Paying Agent. The
successor will be a bank or trust company.
REGISTRATION OF TRANSFERS AND REGISTRAR AND TRANSFER AGENT
TXU Business Services Company will act as initial Registrar and
Transfer Agent for the TOPrS.
Registration of transfers of TOPrS will be effected without charge by
or on behalf of the trust by the Registrar and Transfer Agent but upon payment,
together with any indemnity as the Registrar and Transfer Agent may require, in
respect of any tax or other governmental charges that may be imposed in relation
to the transfer.
The trust will not be required to register or cause to be registered
the transfer of TOPrS after the TOPrS have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, prior to the occurrence of a default with
respect to the TOPrS, undertakes to perform only those duties as are provided in
the trust agreement and, after a default, will exercise the same degree of care
as a prudent individual would exercise in the conduct of his or her own affairs.
Subject to these provisions, the Property Trustee is under no obligation to
exercise any of the powers vested in it by the trust agreement at the request of
any holder of TOPrS, unless offered reasonable indemnity by the holder against
the costs, expenses and liabilities which might be incurred by the Property
Trustee in exercising those powers. The holders of TOPrS will not be required to
offer an indemnity in the event the holders, by exercising their voting rights,
direct the Property Trustee to take any action following a trust enforcement
event.
TXU Europe Limited and its affiliates maintain deposit accounts and
credit and liquidity facilities, conduct other banking transactions and maintain
various trust relationships with the Property Trustee. The Property Trustee also
acts as trustee under the Trust Guarantee, the Partnership Guarantee and the
indentures under which the subsidiary debentures and TXU Europe Limited's
guarantee of the subsidiary debentures are issued.
GOVERNING LAW
The trust agreement and the TOPrS will be governed by, and construed
in accordance with, the internal laws of the State of Delaware.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the trust in such a way that neither the trust nor the
Control Party will be deemed to be an "investment company" required to be
registered under the Investment Company Act or that the trust will not be
characterized as other than a grantor trust for US federal income tax purposes
or other than a transparent entity for UK taxation purposes. In this connection,
the Control Party and the Administrative Trustees are authorized to take any
action, not inconsistent with applicable law, the certificate of trust or the
trust agreement that they determine in their discretion to be necessary or
desirable for those purposes as long as that action does not adversely affect
the interests of the holders of the TOPrS.
Holders of the TOPrS have no preemptive or similar rights.
DESCRIPTION OF THE TRUST GUARANTEE
Material terms and provisions of the Trust Guarantee that will be
executed and delivered by TXU Europe Limited for the benefit of the holders from
time to time of TOPrS are summarized below. A copy of the form of the Trust
Guarantee is filed as an exhibit to the registration statement of which this
prospectus is a part. The Trust Guarantee will be qualified as an indenture
under the Trust Indenture Act. The Bank of New York, as the Trust Guarantee
Trustee, will hold the Trust Guarantee for the benefit of the holders of the
TOPrS and will act as indenture trustee for the purposes of compliance with the
Trust Indenture Act. You should refer to the Trust Guarantee and the Trust
Indenture Act for provisions that may be important to you.
Under the Trust Guarantee, TXU Europe Limited will irrevocably and
unconditionally agree, on a subordinated basis and to the extent set forth in
the Trust Guarantee, to pay in full to the holders of the TOPrS, except to the
extent paid by the trust, as and when due, regardless of any defense, right of
set-off or counterclaim that the trust may have or assert, the following Trust
Guarantee payments, without duplication: (i) any accumulated and unpaid
distributions on the TOPrS to the extent the trust has funds available for
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payment, (ii) the redemption price with respect to any TOPrS called for
redemption by the trust, to the extent the trust has funds available for payment
and (iii) upon a voluntary or involuntary dissolution, winding-up or termination
of the trust, other than in connection with the distribution of Preferred
Partnership Securities to the holders of TOPrS or the redemption of all of the
TOPrS, the lesser of (a) the aggregate of the liquidation amount and all
accumulated and unpaid distributions on the TOPrS to the date of payment and (b)
the amount of assets of the trust, after satisfaction of all liabilities,
remaining available for distribution to holders of TOPrS in liquidation of the
trust. TXU Europe Limited's obligation to make a Trust Guarantee payment may be
satisfied by direct payment of the required amounts by TXU Europe Limited to the
holders of TOPrS or by causing the trust to pay those amounts to the holders.
The Trust Guarantee will be a guarantee on a subordinated basis with
respect to the TOPrS from the time of issuance of the TOPrS but will only apply
to any payment of distributions or the redemption price, or to payments upon the
dissolution, winding-up or termination of the trust, to the extent the trust has
funds legally available for those payments. If the partnership fails to declare
distributions on Preferred Partnership Securities, the trust would lack
available funds for the payment of distributions or amounts payable on
redemption of the TOPrS or otherwise, and in that event holders of the TOPrS
would not be able to rely upon the Trust Guarantee for payment of those amounts.
Instead, holders of the TOPrS will have the remedies described in this
prospectus under DESCRIPTION OF THE TOPrS -- "Trust Enforcement Events,"
including the right to direct the Trust Guarantee Trustee to enforce the
covenant restricting dividends, distributions and other similar payments by TXU
Europe Limited and its finance subsidiaries. See -- "Covenants in the Trust
Guarantee" below.
The Trust Guarantee and the Partnership Guarantee, when taken together
with TXU Europe Limited's guarantees of the subsidiary debentures and TXU Europe
Limited's obligation to pay all fees and expenses of the trust and the
partnership, constitute a guarantee to the extent described in this prospectus
by TXU Europe Limited of the distribution, redemption and liquidation payments
payable to the holders of the TOPrS. Those guarantees do not apply, however, to
current distributions by the partnership unless and until those distributions
are declared by the partnership out of funds legally available for payment or to
liquidating distributions unless there are assets available for payment in the
partnership, each as more fully described under RISK FACTORS -- "The partnership
may have insufficient income or assets to pay distributions to the trust that
are sufficient to pay distributions on the TOPrS."
ADDITIONAL AMOUNTS
All payments made under the Trust Guarantee will be made without
withholding or deduction for any taxes or other governmental charges imposed by
a jurisdiction in which TXU Europe Limited is incorporated or organized or is
managed or controlled 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 Europe Limited will pay to each holder
of TOPrS such additional amounts as shall be necessary so that the net amount
received by each holder of TOPrS after the withholding or deduction equals the
amount that the holder would have received absent the withholding or deduction
(Additional Amounts), except that no Additional Amounts will be payable:
o to or for a holder who is liable for Gross-Up Taxes because
of the holder's connection with the relevant Taxing
Jurisdiction, whether as a citizen, a resident or a national
of the jurisdiction or because the holder carries on a
business or maintains a permanent establishment there or is
physically present there other than through the mere receipt
of guarantee payments (unless, in the case of the UK, that
connection arises solely as a result of the Control Party
being a UK resident);
o to or for a holder who presents a TOPrS 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 TOPrS on the last day of the 30 day period;
o to or for a holder who presents a TOPrS, when presentation
is required, at any place other than in The City of New
York; or
o to or for a holder who would not be liable for Gross-Up
Taxes by making a declaration of non-residence or similar
claim for exemption to the relevant tax authority.
No Additional Amounts will be payable with respect to any TOPrS if the
beneficial owner would not have been entitled to that payment if that beneficial
owner had been the holder.
References in this prospectus to any payments under the Trust
Guarantee will include any Additional Amounts payable in connection with those
payments.
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COVENANTS IN THE TRUST GUARANTEE
TXU Europe Limited and any issuer of initial subsidiary debentures
will covenant in the Trust Guarantee that if:
o for any quarterly period, the trust does not pay to holders of
TOPrS an amount equal to distributions at the full fixed rate on
a cumulative basis on any Preferred Partnership Securities,
o an investment event of default with respect to any subsidiary
debentures has occurred and is continuing and TXU Europe Limited
defaults on its obligations under the related guarantee of
subsidiary debentures, or
o TXU Europe Limited is in continuing default of its obligations
under the Trust Guarantee or the Partnership Guarantee,
then, during that period, TXU Europe Limited and any issuer of initial
subsidiary debentures will not, and in the case of clause (iv) below, TXU Europe
Limited will cause its subsidiaries to not, directly or indirectly,
(i) declare or pay any cash dividends or distributions on, or
redeem, purchase, acquire, or make a liquidation payment
with respect to, any of its issued share capital or
comparable equity interests, other than dividends or
distributions paid to TXU Europe Limited or any of its
subsidiaries,
(ii) make any payments on, or repay, repurchase or redeem, any of
its debt securities that rank equally with or junior to any
subsidiary debentures or any guarantee of subsidiary
debentures,
(iii) make any payments with respect to any guarantee that ranks
equally with or junior to any subsidiary debentures or any
guarantee of subsidiary debentures, or
(iv) make any payments on, or repay, repurchase or redeem, any
debt or other securities held or issued by, or make any
payments with respect to any guarantee of such debt or other
securities, or make any loans or advances to, any affiliate
of TXU Europe Limited that is not also a subsidiary of TXU
Europe Limited.
These restrictions will not apply, however, to any of the following
transactions:
(a) any payments required by law,
(b) dividends or distributions in, or options, warrants or
rights to subscribe for or purchase, shares or comparable
equity interests of TXU Europe Limited or of any issuer of
subsidiary debentures, and exchanges or conversions of
shares or comparable equity interests of one class for
shares or comparable equity interests of another class of
the same issuer,
(c) payments by TXU Europe Limited under the Trust Guarantee or
the Partnership Guarantee,
(d) payments by any issuer of subsidiary debentures on those
subsidiary debentures or payments by TXU Europe Limited
under any guarantee of those subsidiary debentures,
(e) any dividend or payment by TXU Europe Limited which is
applied, directly or indirectly, to any Tax Payments (as
defined below), or
(f) payments by TXU Europe Limited or any issuer of subsidiary
debentures, directly or indirectly, on loans from Funding
(or any other subsidiary of TXU Europe Limited) to TXU
Europe Limited or any of its subsidiaries made with the
proceeds from the issuance by Funding (or the other
subsidiary making the loan) of securities guaranteed by TXU
Europe Limited (provided that the guarantee ranks senior to
all subordinated indebtedness of TXU Europe Limited,
including the TXU Europe Limited guarantees of subsidiary
debentures), or loans made in connection with the
reinvestment of those proceeds.
"Tax Payments" means any direct or indirect payment to governmental authorities,
as and when due, in respect of taxes imposed by the US, UK or any other country
in which TXU Europe Limited or its subsidiaries operate, and arising from the
operations of TXU Europe Limited, Funding, the partnership, the trust or any
other subsidiary of TXU Europe Limited.
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Under the terms of the limited partnership agreement, the partnership
will be permitted to reinvest in subsidiary debentures of eligible subsidiaries,
among other conditions, only if those subsidiaries agree to be bound by the
covenants described above.
For so long as the TOPrS remain outstanding, TXU Europe Limited will
covenant in the Trust Guarantee (i) to cause a direct or indirect wholly-owned
subsidiary of TXU Europe Limited to retain the control certificate, (ii) to
cause the trust to remain a statutory business trust and not to voluntarily
dissolve, wind-up, liquidate or be terminated, except as permitted by the trust
agreement and (iii) to use its commercially reasonable efforts to ensure that
the trust will not be (A) an "investment company" for purposes of the Investment
Company Act or (B) classified as other than a grantor trust for US federal
income tax purposes or as other than a transparent entity for UK taxation
purposes.
EVENTS OF DEFAULT; ENFORCEMENT OF TRUST GUARANTEE
An event of default under the Trust Guarantee will occur upon the
failure of TXU Europe Limited to perform any of its payment or other obligations
under the Trust Guarantee.
The Trust Guarantee Trustee has the right to enforce the Trust
Guarantee on behalf of the holders of the TOPrS. The holders of a majority in
liquidation amount of the TOPrS have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trust
Guarantee Trustee or to direct the exercise of any trust or power conferred upon
the Trust Guarantee Trustee under the Trust Guarantee. If the Trust Guarantee
Trustee fails to enforce its rights under the Trust Guarantee after a holder of
TOPrS has made a written request, that holder may institute a legal proceeding
directly against TXU Europe Limited to enforce the Trust Guarantee Trustee's
rights under the Trust Guarantee, without first instituting a legal proceeding
against the trust, the Trust Guarantee Trustee or any other person or entity. In
any event, if TXU Europe Limited has failed to make a guarantee payment under
the Trust Guarantee, a holder of TOPrS may directly institute a proceeding in
that holder's own name against TXU Europe Limited for enforcement of the Trust
Guarantee for such payment.
STATUS OF THE TRUST GUARANTEE; SUBORDINATION
The Trust Guarantee will constitute an unsecured obligation of TXU
Europe Limited and will rank subordinate and junior in right of payment to all
other liabilities of TXU Europe Limited, including the guarantees of subsidiary
debentures, other than those that are made to rank equally or made subordinate
by their terms to the Trust Guarantee. The Trust Guarantee will rank equally
with any preference share capital of TXU Europe Limited issued in the future and
with similar guarantees entered into by TXU Europe Limited in respect of any
preferred security of any other finance subsidiary. "Finance subsidiary" means
any wholly-owned subsidiary of TXU Europe Limited the principal purpose of which
is to raise capital for TXU Europe Limited by issuing securities that are
guaranteed by TXU Europe Limited and the proceeds of which are loaned to or
invested in TXU Europe Limited or one or more of its affiliates. Accordingly,
the rights of the holders of TOPrS to receive payments under the Trust Guarantee
will be subject to the rights of the holders of any obligations of TXU Europe
Limited that are senior in priority to the obligations under the Trust
Guarantee. Since TXU Europe Limited is a holding company, the Trust Guarantee
will be effectively subordinated to existing and future liabilities and
preference share capital of TXU Europe Limited's subsidiaries. The terms of the
TOPrS provide that each holder of TOPrS, by acceptance of the TOPrS, agrees to
the subordination provisions and other terms of the Trust Guarantee.
The Trust Guarantee will constitute a guarantee of payment and not of
collection. Therefore, the guaranteed party may directly institute a legal
proceeding against TXU Europe Limited to enforce its rights under the Trust
Guarantee without instituting a legal proceeding against any other person or
entity.
AMENDMENTS AND ASSIGNMENT
No approval of the holders of TOPrS will be required with respect to
any amendment to the Trust Guarantee that does not materially adversely affect
the rights, preferences or privileges of holders of TOPrS. In all other cases,
the Trust Guarantee may be amended only with the prior approval of the holders
of a majority in liquidation amount of all the outstanding TOPrS. The manner of
obtaining any such approval of holders of the TOPrS will be as set forth under
DESCRIPTION OF THE TOPrS -- "Voting Rights." All guarantees and agreements
contained in the Trust Guarantee will bind the successors, assigns, receivers,
trustees and representatives of TXU Europe Limited and will inure to the benefit
of the holders of the TOPrS then outstanding. Except in connection with any
permitted merger or consolidation of TXU Europe Limited with or into another
entity or any permitted sale, transfer or lease of TXU Europe Limited's assets
to another entity in which the surviving corporation, if TXU Europe Limited is
not the surviving corporation, assumes TXU Europe Limited's obligations under
the Trust Guarantee, TXU Europe Limited may not assign its rights or delegate
its obligations under the Trust Guarantee without the prior approval of the
holders of a majority in liquidation amount of the TOPrS then outstanding.
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TERMINATION OF THE TRUST GUARANTEE
The Trust Guarantee will terminate and be of no further force and
effect as to the TOPrS upon (i) full payment of the redemption price of all
TOPrS, (ii) distribution of the Preferred Partnership Securities held by the
trust to the holders of the TOPrS or (iii) full payment of the amounts payable
in accordance with the trust agreement upon liquidation of the trust. The Trust
Guarantee will continue to be effective or will be reinstated, as the case may
be, if at any time any holder of TOPrS must restore payment of any sum paid
under the TOPrS or the Trust Guarantee.
INFORMATION CONCERNING THE TRUST GUARANTEE TRUSTEE
The Trust Guarantee Trustee, prior to the occurrence of a default with
respect to the Trust Guarantee, undertakes to perform only such duties as are
specifically set forth in the Trust Guarantee and, after default with respect to
the Trust Guarantee, will exercise the same degree of care as a prudent
individual would exercise in the conduct of his or her own affairs. Subject to
this provision, the Trust Guarantee Trustee is under no obligation to exercise
any of the powers vested in it by the Trust Guarantee at the request of any
holder of TOPrS unless it is offered reasonable indemnity against the costs,
expenses and liabilities that might be incurred by doing so.
GOVERNING LAW
The Trust Guarantee will be governed by, and construed in accordance
with, the internal laws of the State of New York.
DESCRIPTION OF THE PREFERRED PARTNERSHIP SECURITIES
All of the partnership interests in the partnership, other than the
Preferred Partnership Securities acquired by the trust, are owned directly by
TXU Europe Limited. Initially, TXU Europe Limited will be the general partner of
the partnership. The limited partnership agreement authorizes and creates the
Preferred Partnership Securities, which represent limited partner interests in
the partnership. The limited partner interests represented by the Preferred
Partnership Securities will have a preference with respect to distributions and
amounts payable on redemption or liquidation over the general partner's interest
in the partnership. Except as otherwise described in this prospectus, the
limited partnership agreement does not permit the issuance of any additional
partnership interests, or the incurrence of any indebtedness by the partnership.
Material terms and provisions of the Preferred Partnership Securities
are summarized below. A copy of the limited partnership agreement is filed as an
exhibit to the registration statement of which this prospectus is a part. You
should refer to the form of the limited partnership agreement and the Delaware
Revised Uniform Limited Partnership Act for provisions that may be important to
you.
DISTRIBUTIONS
Holders of Preferred Partnership Securities will be entitled to
receive cumulative cash distributions if, as and when declared by the general
partner in its sole discretion out of assets of the partnership legally
available for payment. Amounts payable on each Preferred Partnership Security
will be fixed at a rate per annum of 9.75% of the stated liquidation preference
of $25 per Preferred Partnership Security. Amounts payable on Preferred
Partnership Securities which are not distributed on the scheduled payment date
will accumulate and compound quarterly at the rate per annum equal to 9.75%.
Amounts payable on Preferred Partnership Securities for any period will be
computed on the basis of a 360-day year of twelve 30-day months and, for any
period shorter than a quarter, on the basis of the number of days elapsed in
that period.
Amounts payable on the Preferred Partnership Securities will be
cumulative, will accumulate from the date of original issuance and will be
scheduled to be payable quarterly in arrears on March 31, June 30, September 30,
and December 31 of each year, commencing June 30, 2000, provided that, as noted
above, the general partner is not obligated to declare distributions on the
Preferred Partnership Securities at any time. If distributions are not declared
and paid at the full fixed rate, the accumulated distributions will be paid to
the holders of record of Preferred Partnership Securities as they appear on the
books and records of the partnership on the record date with respect to the
payment date for the Preferred Partnership Securities.
The partnership's earnings available for distribution to the holders
of the Preferred Partnership Securities will be limited to payments made on the
subsidiary debentures or TXU Europe Limited's guarantees of subsidiary
debentures and payments on eligible debt securities in which the partnership has
invested from time to time. See -- "Partnership Investments." To the extent that
the issuers of the subsidiary debentures defer or fail to make any payment in
respect of the subsidiary debentures or TXU Europe Limited fails to make any
payment in respect of its guarantees of subsidiary debentures, the partnership
will not have sufficient funds to pay and will not declare or pay distributions
on the Preferred Partnership Securities. In that event the Partnership Guarantee
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will not apply to those distributions until the partnership has sufficient funds
available to make those distributions. See DESCRIPTION OF THE PARTNERSHIP
GUARANTEE. In addition, distributions on the Preferred Partnership Securities
may be declared and paid only as determined in the sole discretion of the
general partner of the partnership. If the partnership (i) fails to declare and
pay distributions on the Preferred Partnership Securities or (ii) declares
distributions but does not have sufficient funds legally available for
distribution, the Partnership Guarantee will not apply to those distributions
and the trust will not have sufficient funds to make distributions on the TOPrS.
In that event the Trust Guarantee will not apply to those distributions until
the trust has sufficient funds available to pay those distributions. In
addition, as described under RISK FACTORS -- "The partnership may have
insufficient income or assets to pay distributions to the trust that are
sufficient to pay distributions on the TOPrS," the partnership may not have
sufficient funds to pay current or liquidating distributions on the Preferred
Partnership Securities if:
o at any time that the partnership is receiving current payments in
respect of the securities held by the partnership (including the
subsidiary debentures), TXU Europe Limited, as the general
partner of the partnership, in its sole discretion, does not
declare distributions on the Preferred Partnership Securities and
the partnership receives insufficient amounts from its
investments to pay the resulting additional compounded amounts
payable that will accumulate on any unpaid distributions,
o the partnership reinvests the proceeds received from the
subsidiary debentures upon their redemption or at their
maturities in other subsidiary debentures or eligible debt
securities that do not generate income sufficient to pay full
quarterly distributions in respect of the Preferred Partnership
Securities at a rate of 9.75% per annum or, if sufficient to pay
those distributions either in full or in part, the partnership
does not declare or make such distributions, or
o subsidiary debentures cannot be liquidated by the partnership for
an amount sufficient to pay liquidating distributions in full or,
if sufficient to pay those distributions either in full or in
part, the partnership does not declare or make those
distributions.
Distributions on the Preferred Partnership Securities will be payable
to the holders as they appear on the books and records of the partnership on the
relevant record dates, which, as long as the TOPrS remain, or, in the event that
the trust has been dissolved in connection with a trust special event and
Preferred Partnership Securities are distributed to holders of the TOPrS, the
Preferred Partnership Securities remain, in book-entry only form, will be one
business day prior to the relevant payment dates. In the event the TOPrS do not,
or in the event that the trust has been dissolved in connection with a trust
special event and Preferred Partnership Securities are distributed to holders of
the TOPrS, the Preferred Partnership Securities do not, remain in book-entry
only form, the relevant record dates will be the 15th day of the month of the
relevant payment dates. In the event that any date on which distributions are
payable on the Preferred Partnership Securities is not a business day, then
payment of the distribution payable on that date will be made on the next
succeeding day that is a business day without any interest or other payment in
respect of the distribution subject to the delay, except that, if the next
business day is in the next succeeding calendar year, the payment will be made
on the immediately preceding business day (without any reduction in interest or
other payments in respect of such early payment), in each case with the same
force and effect as if made on the date the distribution was initially payable.
PARTNERSHIP ENFORCEMENT EVENTS
If one or more of the following partnership enforcement events occurs
and is continuing:
o the partnership fails to pay an amount equal to distributions at
the full fixed rate on the Preferred Partnership Securities,
which is expected to be $0.609375 per quarter for each $25
Preferred Partnership Security (plus any accumulated and
compounded distributions), for six consecutive quarterly
distribution periods,
o TXU Europe Limited is in default on any of its obligations under
the Partnership Guarantee, or
o an investment event of default occurs and is continuing on any
subsidiary debentures and on TXU Europe Limited's guarantee of
those subsidiary debentures,
then the Property Trustee on behalf of the Trust, for so long as the Preferred
Partnership Securities are held by the trust, will have the right, or holders of
the Preferred Partnership Securities will be entitled by the vote of holders of
a majority in aggregate liquidation preference of Preferred Partnership
Securities:
o to enforce under the limited partnership agreement the terms of
the Preferred Partnership Securities, including the right to
appoint and authorize a special representative of the partnership
and the limited partners to enforce:
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-- the partnership's creditors' rights and other rights,
including the right to receive payments under the subsidiary
debentures and any of TXU Europe Limited's guarantees of
subsidiary debentures,
-- the rights of the holders of the Preferred Partnership
Securities under the Partnership Guarantee,
-- the rights of the holders of the Preferred Partnership
Securities to receive distributions, only if and to the
extent declared out of funds legally available for payment,
on the Preferred Partnership Securities, and
-- the terms of the Partnership Guarantee, including the right
to enforce the covenant restricting specified payments and
loans by TXU Europe Limited and its subsidiaries.
If the special representative fails to enforce its rights on behalf of
the partnership under the subsidiary debentures or TXU Europe Limited's
guarantees of subsidiary debentures after a holder of Preferred Partnership
Securities has made a written request, that holder may, to the fullest extent
permitted by law, directly institute a legal proceeding against TXU Europe
Limited or its subsidiaries that have issued subsidiary debentures to enforce
the rights of the special representative and the partnership in the subsidiary
debentures or TXU Europe Limited's guarantees of those debentures without first
instituting any legal proceeding against the special representative, the
partnership or any other person or entity. In any event, if a partnership
enforcement event has occurred and is continuing and that event is attributable
to the failure of a subsidiary of TXU Europe Limited to make any required
payment when due on any subsidiary debenture or the failure of TXU Europe
Limited to make any required payment when due on any guarantee of a subsidiary
debenture, then a holder of Preferred Partnership Securities may, to the fullest
extent permitted by law, on behalf of the partnership directly institute a
proceeding against that subsidiary of TXU Europe Limited with respect to that
subsidiary debenture or against TXU Europe Limited with respect to that
guarantee, in each case for enforcement of payment. A holder of Preferred
Partnership Securities, may, to the fullest extent permitted by law, also bring
a direct action against TXU Europe Limited to enforce that holder's right under
the Partnership Guarantee. See DESCRIPTION OF THE PARTNERSHIP GUARANTEE --
"Events of Default; Enforcement of Partnership Guarantee."
Under no circumstances, however, will the special representative, any
holder of Preferred Partnership Securities or any holder of TOPrS have authority
to cause the general partner to declare distributions on the Preferred
Partnership Securities. As a result, although the special representative or
these holders may be able to enforce the partnership's creditors' rights to
accelerate and receive payments in respect of the subsidiary debentures and TXU
Europe Limited's guarantees of subsidiary debentures, the partnership would be
entitled to reinvest those payments in additional subsidiary debentures, subject
to satisfying the reinvestment criteria described under -- "Partnership
Investments," and in eligible debt securities, rather than declaring and making
distributions on the Preferred Partnership Securities. The special
representative will not, by virtue of acting in the capacity of special
representative, be admitted as a general or limited partner in the partnership
or otherwise be deemed to be a general or limited partner in the partnership and
will have no liability for the debts, obligations or liabilities of the
partnership.
PARTNERSHIP INVESTMENTS
Approximately 99% of the initial proceeds from the issuance of the
Preferred Partnership Securities and the general partner's contemporaneous
capital contribution will be used by the partnership to purchase beneficial
interests in the subsidiary debentures and the remaining 1% of those proceeds
will be used to purchase eligible debt securities. The purchase of beneficial
interests in the subsidiary debentures by the partnership will occur
contemporaneously with the issuance of the Preferred Partnership Securities.
The initial subsidiary debentures will be purchased by the partnership
from two or more subsidiaries of TXU Europe Limited. TXU Europe Limited
anticipates that approximately 80% of the initial proceeds will be used to
purchase debentures of Funding, and approximately 19% of the initial proceeds
will be used to purchase debentures of one or more other eligible subsidiaries
of TXU Europe Limited. Each subsidiary debenture is expected to have a term of
20 years and to provide for interest accruing from the date of original issuance
and payable on March 31, June 30, September 30 and December 31 of each year,
commencing June 30, 2000, at market rates for those subsidiary debentures. The
subsidiary debentures will be unsecured and subordinated debt obligations of the
relevant issuer.
The payment of interest on each of the subsidiary debentures may be
deferred at any time, and from time to time, by the relevant issuer for a period
not exceeding six consecutive quarters and, in any event, not beyond the
maturity date of the subsidiary debentures held by the partnership at that time.
If an issuer were to so defer the payment of interest, interest would continue
to accrue and compound at the stated interest rate on the subsidiary debenture.
The subsidiary debentures will contain covenants appropriate for unsecured and
subordinated debt securities issued or guaranteed by similar borrowers pursuant
to a public offering or private placement under Rule 144A of the Securities Act
of a comparable debt security, including a limitation on consolidation, merger
and sale or conveyance of assets. The subsidiary debentures will contain
redemption provisions that correspond to the redemption provisions applicable to
the Preferred Partnership Securities, including an option to redeem the
subsidiary debentures by the relevant issuer, in whole, at any time, or in part,
from time to time, on and after March 2, 2005, and, at any time, in whole,
following the occurrence of a partnership special event, in each case, in the
same manner described under -- "Optional Redemption" and -- "Partnership Special
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Event Redemption." The initial subsidiary debentures, and any other subsidiary
debentures acquired by the partnership in the future, will also contain
customary events of default, or investment events of default, including events
of default for defaults in payments on such securities when due, provided that
no default shall occur upon a valid deferral of an interest payment by an
issuer, defaults in the performance of the relevant issuer's obligations under
its debenture and certain bankruptcy, insolvency or reorganization events,
subject to customary exceptions and grace periods. All subsidiary debentures
will contain a covenant customary for non-US issuers that the payments made on
the subsidiary debentures will be without withholding or deduction for taxes or
other governmental charges, unless required by law. The covenant will also
provide that if withholding or deduction is required with respect to payments
made on the subsidiary debentures, the issuers of the debentures will pay the
partnership Additional Amounts so that the partnership would receive the same
payments on those subsidiary debentures as if no withholding or deduction had
been made. This covenant will be similar in scope to the covenant that TXU
Europe Limited will agree to with respect to any payments made under the
Partnership Guarantee as described under DESCRIPTION OF THE PARTNERSHIP
GUARANTEE -- "Additional Amounts."
For a more detailed description of the subsidiary debentures to be
issued by Funding, see DESCRIPTION OF THE FUNDING DEBENTURES.
The payment of interest and principal when due and other payment terms
of the subsidiary debentures will be fully and unconditionally guaranteed on a
subordinated basis to the extent described under -- "Investment Guarantees" by
TXU Europe Limited for the benefit of the holders of the subsidiary debentures
and, accordingly, the holders of the Preferred Partnership Securities.
Approximately 1% of the initial partnership proceeds will be invested
in eligible debt securities. "Eligible debt securities" means cash or book-entry
securities, negotiable instruments, or other securities of entities not
affiliated with TXU Europe Limited represented by instruments in registered form
which evidence any of the following:
o any security issued or guaranteed as to principal or interest by the
US, or by a person controlled or supervised by and acting as an
instrumentality of the US Government under authority granted by the US
Congress, or any certificate of deposit for any of the foregoing;
o commercial paper issued pursuant to Section 3(a)(3) of the Securities
Act and having, at the time of the investment or contractual
commitment to invest therein, a rating from each of S&P and Moody's in
the highest investment rating category granted by such rating agency
and having a maturity not in excess of nine months;
o demand deposits, time deposits and certificates of deposit which are
fully insured by the Federal Deposit Insurance Corporation, or FDIC;
o repurchase obligations with respect to any security that is a direct
obligation of, or fully guaranteed by, the US Government or any agency
or instrumentality thereof, the obligations of which are backed by the
full faith and credit of the US, in either case entered into with a
depository institution or trust company which is an eligible
institution, as defined below, and the deposits of which are insured
by the FDIC; and
o any other security which is identified as a permitted investment of a
finance subsidiary pursuant to Rule 3a-5 under the Investment Company
Act at the time it is acquired by the partnership.
"Eligible institution" means a depository institution organized under
the laws of the US or any one of the states of the US or the District of
Columbia (or any US branch of a foreign bank), (1) (i) which has either (A) a
long-term unsecured debt rating of AA or better by S&P and Aa or better by
Moody's or (B) a short-term unsecured debt rating or a certificate of deposit
rating of A-1+ by S&P and P-1 by Moody's and (ii) whose deposits are insured by
the FDIC or (2) (i) the parent of which has a long-term or short-term unsecured
debt rating which signifies investment grade and (ii) whose deposits are insured
by the FDIC.
The partnership may, from time to time and subject to the restrictions
described below, reinvest payments received with respect to the subsidiary
debentures and the eligible debt securities in additional subsidiary debentures
and eligible debt securities. The general partner's authority to reinvest in
additional subsidiary debentures will be subject to its fiduciary obligations as
described in the limited partnership agreement. As of the date of this
prospectus, TXU Europe Limited, as the general partner, does not intend to cause
the partnership to reinvest regularly scheduled, periodic payments of interest
or dividends received by the partnership in the manner described below, although
there can be no assurance that the general partner's intention in respect of
such reinvestments will not change in the future.
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The fairness of specific terms of all subsidiary debentures, including
the initial subsidiary debentures, will be passed upon by an independent
financial advisor designated by TXU Europe Limited, which will be a nationally
recognized accounting firm, bank or investment banking firm that does not, and
who represents that its directors, officers, employees and affiliates do not,
have a direct or indirect material equity interest in TXU Europe Limited or any
of its affiliates. The fairness of the initial subsidiary debentures will be
passed upon by Merrill Lynch, Pierce Fenner & Smith Incorporated, the lead
underwriter of the offering of the TOPrS, as the initial independent financial
advisor.
The partnership may reinvest in additional subsidiary debentures only
if certain procedures and criteria are satisfied with respect to each subsidiary
debenture, including the satisfaction of the following conditions:
o the partnership did not hold debt securities of the issuer of the
proposed subsidiary debenture within the three-year period ending
on the date of such proposed investment;
o there was never a default on any debt obligation of the issuer of
the proposed subsidiary debenture that was previously owned by
the partnership and there has been no default in the 10 years
immediately preceding the proposed date of issuance of the
proposed subsidiary debenture by that issuer on any of its debt
securities;
o the applicable financial terms and conditions with respect to the
proposed subsidiary debenture taken as a whole have been
determined by the independent financial advisor to be at least as
favorable as the terms and conditions which could be obtained by
the partnership in a contemporaneous public offering or private
placement under Rule 144A of the Securities Act of a comparable
security issued by the relevant subsidiary; provided, however,
that if the comparable security would be fully and
unconditionally guaranteed by any entity, the proposed subsidiary
debenture would be required to be fully and unconditionally
guaranteed by that entity; and
o the subsidiary will not be deemed to be an investment company by
reason of Section 3(a) or 3(b) of the Investment Company Act or
is otherwise an eligible recipient of funds directly or
indirectly from the trust pursuant to an order issued by the SEC;
and
o the issuer of the proposed subsidiary debenture agrees to be
bound by the relevant covenants described under DESCRIPTION OF
THE TRUST GUARANTEE - "Covenants in the Trust Guarantee" and
DESCRIPTION OF THE PARTNERSHIP GUARANTEE - "Covenants in the
Partnership Guarantee" pursuant to a written instrument
reasonably satisfactory to the Trust Guarantee Trustee and the
Partnership Guarantee Trustee, respectively.
If the partnership is unable to reinvest payments and proceeds from subsidiary
debentures in additional subsidiary debentures meeting the above criteria, the
partnership may only invest such funds in eligible debt securities, subject to
restrictions of applicable law, including the Investment Company Act.
GUARANTEES OF SUBSIDIARY DEBENTURES
TXU Europe Limited will agree to execute and deliver a guarantee, on a
subordinated basis, for the benefit of the holders of the subsidiary debentures
and, therefore, the holders of the Preferred Partnership Securities, with
respect to each subsidiary debenture to the extent set forth below. The
guarantees of subsidiary debentures will be enforceable regardless of any
defense, right of set-off or counterclaim, except the defense of payment that
TXU Europe Limited may have or assert. The guarantees of subsidiary debentures
will be full and unconditional guarantees, to the extent described below, with
respect to the applicable subsidiary debentures from the time of issuance. To
the extent that, as described above, the partnership invests in additional
subsidiary debentures, the determination as to whether those subsidiary
debentures will be guaranteed by TXU Europe Limited will be made at the date of
its issuance and will be based, among other things, upon its approval by the
independent financial advisor in accordance with the reinvestment criteria
described above.
The following payments will be subject to the guarantees without
duplication:
o any accrued and unpaid interest required to be paid on the
subsidiary debentures; and
o principal and premium, if any, plus all accrued and unpaid
interest and Additional Amounts, if any, required to be paid on
the subsidiary debentures at maturity, upon acceleration or upon
redemption.
The guarantees will contain a covenant customary for non-US guarantors
that the payments made on the guarantees will be without withholding or
deduction for taxes or other governmental charges unless required by law. The
covenant will also provide that if withholding or deduction is required with
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respect to payments under the guarantees, TXU Europe Limited will agree to pay
the partnership Additional Amounts so that the partnership would receive the
same payments under the guarantees as if no withholding or deduction had been
made. This covenant will be similar in scope to the covenant that TXU Europe
Limited will agree to with respect to any payments made under the Partnership
Guarantee as described under DESCRIPTION OF THE PARTNERSHIP GUARANTEE --
"Additional Amounts."
The guarantees of subsidiary debentures will constitute guarantees of
payment and not of collection. Therefore, the guaranteed party may directly
institute a legal proceeding against TXU Europe Limited to enforce its rights
under the applicable guarantee of subsidiary debentures without instituting a
legal proceeding against any other person or entity. If no special
representative has been appointed to enforce any guarantee of subsidiary
debentures, the general partner has the right to enforce those guarantees on
behalf of the holders of the Preferred Partnership Securities. The holders of
not less than a majority in aggregate liquidation preference of the Preferred
Partnership Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available in respect of any guarantee
of subsidiary debentures, including the giving of directions to the general
partner or the special representative, as the case may be. If the general
partner or the special representative fails to enforce any guarantee of
subsidiary debentures as provided above, any holder of TOPrS may institute its
own legal proceeding to enforce that guarantee. No guarantee of subsidiary
debentures will be discharged except by payment in full of all amounts
guaranteed by that guarantee, without duplication of amounts already paid by the
relevant subsidiary.
Amendments and Assignment
No approval of holders of Preferred Partnership Securities will be
required with respect to any amendment to guarantees of subsidiary debentures
that does not adversely affect the rights of holders of Preferred Partnership
Securities. In all other cases, the guarantees of subsidiary debentures may be
amended only with the prior approval of the holders of not less than a majority
in liquidation preference of the outstanding Preferred Partnership Securities,
provided that for so long as the Property Trustee is the holder of the Preferred
Partnership Securities, no amendment will be effective without the prior written
approval of a majority in liquidation amount of the outstanding TOPrS. All
guarantees and agreements contained in the guarantees of subsidiary debentures
will bind the successors, assigns, receivers, trustees and representatives of
TXU Europe Limited and will inure to the benefit of the holders of Preferred
Partnership Securities. Except in connection with any permitted merger or
consolidation of TXU Europe Limited with or into another entity or any permitted
sale, transfer or lease of TXU Europe Limited's assets to another entity in
which the surviving corporation, if TXU Europe Limited is not the surviving
corporation, assumes TXU Europe Limited's obligations under the guarantees of
subsidiary debentures, TXU Europe Limited may not assign its rights or delegate
its obligations under the guarantees of subsidiary debentures without the prior
approval of the holders of at least a majority of the aggregate stated
liquidation preference of the outstanding Preferred Partnership Securities
provided, however, that if the Property Trustee on behalf of the trust is the
holder of the Preferred Partnership Securities, any amendment or proposal
requiring the approval of the holders of a majority of the Preferred Partnership
Securities will not be effective without the prior or concurrent approval of the
holders of a majority in liquidation amount of the outstanding TOPrS having a
right to vote.
Status of the Guarantees of Subsidiary Debentures; Subordination
TXU Europe Limited's obligations under the guarantees of subsidiary
debentures will constitute unsecured obligations of TXU Europe Limited and will
rank subordinate and junior in right of payment to all other unsubordinated
liabilities of TXU Europe Limited and will rank equally with other subordinated
obligations of TXU Europe Limited that are not subordinated by their terms to
the guarantees of subsidiary debentures and with similar guarantees entered into
by TXU Europe Limited in respect of any subordinated debentures of any other
subsidiary. Accordingly, the rights of the holders of the subsidiary debentures
(initially the partnership) to receive payments under the guarantees of those
debentures will be subject to the rights of the holders of any obligations that
are senior in priority to the obligations under those guarantees. Since TXU
Europe Limited is a holding company, the guarantees will be effectively
subordinated to existing and future liabilities and preference share capital of
TXU Europe Limited's subsidiaries. The terms of the subsidiary debentures
provide that each holder of subsidiary debentures, by acceptance of the
subsidiary debentures, agrees to the subordination provisions and other terms of
the guarantees of subsidiary debentures.
Governing Law
The guarantees of subsidiary debentures will be governed by and
construed in accordance with the internal laws of the State of New York.
OPTIONAL REDEMPTION
The Preferred Partnership Securities are redeemable, at the option of
the general partner, in whole, at any time, or in part, from time to time, on or
after March 2, 2005 upon not less than 30 nor more than 60 days notice, at an
amount per Preferred Partnership Security equal to $25 plus accumulated and
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unpaid distributions on the Preferred Partnership Securities to the date fixed
for redemption. If the partnership redeems Preferred Partnership Securities in
accordance with their terms, TOPrS will be mandatorily redeemed at that
redemption price. If a partial redemption of the Preferred Partnership
Securities would result in the delisting of the TOPrS, or if the trust is
dissolved in connection with a trust special event, or if a partial redemption
would result in the delisting of the Preferred Partnership Securities, the
partnership must redeem all of the Preferred Partnership Securities.
PARTNERSHIP SPECIAL EVENT REDEMPTION
If, at any time, a "partnership special event," which is either a
partnership tax event or a partnership investment company event, occurs and is
continuing, the general partner will, within 90 days following the occurrence of
that partnership special event, elect to either (i) redeem the Preferred
Partnership Securities in whole, but not in part, upon not less than 30 or more
than 60 days notice at a redemption price of $25 per Preferred Partnership
Security plus accumulated and unpaid distributions; provided, however, that, if
at the time there is available to the partnership the opportunity to eliminate,
within that 90-day period, the partnership special event by taking some
ministerial action, such as filing a form or making an election, or pursuing
some other reasonable measure that in the sole judgment of the general partner
has or will cause no material adverse effect on the partnership, the trust, TXU
Europe Limited or the holders of the Preferred Partnership Securities, the
general partner will pursue that measure instead of redemption; or (ii) cause
the Preferred Partnership Securities to remain outstanding, provided that in the
case of this clause (ii), the general partner will pay any and all costs and
expenses (including any tax or governmental charges) incurred by or payable by
the partnership attributable to the partnership special event.
"Partnership tax event" means that the general partner:
(A) has requested, received and delivered to the Partnership an
opinion of nationally recognized independent tax counsel in the US or the UK, as
applicable, experienced in such matters to the effect that there has been a tax
action as described under DESCRIPTION OF THE TOPrS -- "Trust Special Event
Redemption or Distribution," which relates to any of the events described below
in this paragraph and that, as a result of the occurrence of that tax action,
there is more than an insubstantial risk that:
o the partnership is, or will be, subject to US federal income tax
or UK income tax or corporation tax with respect to income
accrued or received on the subsidiary debentures or the eligible
debt securities,
o the partnership is, or will be, subject to more than a de minimis
amount of other taxes, duties or other governmental charges, or
o interest payable by a subsidiary of TXU Europe Limited with
respect to its subsidiary debentures is not, or will not be,
fully deductible by that subsidiary for US federal income tax or
UK taxation purposes,
or (B) has certified to the Partnership that, as a result of a tax
action, Additional Amounts as described under DESCRIPTION OF THE TRUST GUARANTEE
- -- "Additional Amounts," are, or will be, payable with respect to any payments
made in respect of the subsidiary debentures, the guarantees of the subsidiary
debentures, the Trust Guarantee or the Partnership Guarantee, and has further
certified to the Partnership that it cannot avoid the requirement to pay such
Additional Amounts by using its reasonable efforts.
"Partnership investment company event" means that the general partner
has requested and received an opinion of nationally recognized independent legal
counsel in the US experienced in such matters to the effect that as a result of
the occurrence on or after the date of initial issuance of the TOPrS of a change
in law or regulation or a change in interpretation or application of law or
regulation by any legislative body, court, governmental agency or regulatory
authority, there is more than an insubstantial risk that the partnership is or
will be considered an "investment company" which is required to be registered
under the Investment Company Act.
REDEMPTION PROCEDURES
The partnership may not redeem fewer than all the outstanding
Preferred Partnership Securities unless all accumulated and unpaid distributions
have been paid on all Preferred Partnership Securities for all quarterly
distribution periods terminating on or prior to the date of redemption.
Notice of redemption of Preferred Partnership Securities will be
irrevocable. If the partnership gives a notice of redemption in respect of
Preferred Partnership Securities then, by 12:00 noon, New York City time, on the
redemption date, the partnership:
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o if the Preferred Partnership Securities are represented by global
certificates held by DTC, will irrevocably deposit with DTC funds
sufficient to pay the applicable redemption price and will give
DTC irrevocable instructions and authority to pay the redemption
price in respect of those Preferred Partnership Securities or
o if the Preferred Partnership Securities are held in certificated
form, will irrevocably deposit with the paying agent for the
Preferred Partnership Securities funds sufficient to pay the
applicable redemption price and will give such paying agent
irrevocable instructions and authority to pay the redemption
price to the holders of Preferred Partnership Securities upon
surrender of their certificates evidencing the Preferred
Partnership Securities. See DESCRIPTION OF THE TOPrS --
"Book-Entry Only Issuance -- The Depository Trust Company."
If notice of redemption has been given and funds deposited as
required, then upon the date of the deposit, all rights of holders of such
Preferred Partnership Securities called for redemption will cease, except the
right of the holders of such Preferred Partnership Securities to receive the
redemption price, but without interest on the redemption price, and such
Preferred Partnership Securities will cease to be outstanding. In the event that
any date fixed for redemption of Preferred Partnership Securities is not a
business day, then payment of the amount payable on that date will be made on
the next succeeding day that is a business day, without any interest or other
payment in respect of the amount payable subject to the delay, except that, if
that business day falls in the next calendar year, the payment will be made on
the immediately preceding business day (without any reduction in interest or
other payments in respect of such early payment), in each case with the same
force and effect as if made on such date fixed for redemption. In the event that
payment of the redemption price in respect of Preferred Partnership Securities
is improperly withheld or refused and not paid either by the partnership or by
TXU Europe Limited under the Partnership Guarantee described under DESCRIPTION
OF THE PARTNERSHIP GUARANTEE, distributions on those Preferred Partnership
Securities will continue to accumulate, from the original redemption date to the
date of payment.
In the event that fewer than all of the outstanding Preferred
Partnership Securities are to be redeemed and the Preferred Partnership
Securities have been distributed to holders of the TOPrS, the Preferred
Partnership Securities will be redeemed in accordance with the procedures of
DTC. See -- "Book-Entry Only Issuance -- The Depository Trust Company." In the
event that the Preferred Partnership Securities do not remain in book-entry only
form after they are distributed to the holders of the TOPrS and fewer than all
of the outstanding Preferred Partnership Securities are to be redeemed, the
Preferred Partnership Securities shall be redeemed on a pro rata basis or
pursuant to the rules of any securities exchange on which the Preferred
Partnership Securities are listed.
Subject to the foregoing and applicable law, including, without
limitation, US federal securities laws, if Preferred Partnership Securities have
been distributed to the holders of the TOPrS, TXU Europe Limited or any of its
affiliates may at any time and from time to time purchase outstanding Preferred
Partnership Securities by tender, in the open market or by private agreement.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any voluntary or involuntary dissolution of the
partnership, the holders of the Preferred Partnership Securities will be
entitled to receive a partnership liquidation distribution out of the assets of
the partnership available for distribution to partners after satisfaction of
liabilities of creditors as required by the Delaware Revised Uniform Limited
Partnership Act, before any distribution of assets is made to the general
partner, an amount equal to, in the case of holders of Preferred Partnership
Securities, the aggregate of the stated liquidation preference of $25 per
Preferred Partnership Security plus accumulated and unpaid distributions on the
Preferred Partnership Securities to the date of payment.
Under the limited partnership agreement, the partnership will be
dissolved and its affairs will be wound up:
o upon the bankruptcy or insolvency of the general partner,
o upon the assignment by the general partner of its entire interest
in the partnership when the assignee is not admitted to the
partnership as a general partner of the partnership in accordance
with the limited partnership agreement, or the filing of a
certificate of dissolution or its equivalent with respect to the
general partner, or the revocation of the general partner's
charter and the expiration of 90 days after the date of notice to
the general partner of revocation without a reinstatement of its
charter, or if any other event occurs that causes the general
partner to cease to be a general partner of the partnership under
the Delaware Revised Uniform Limited Partnership Act, unless the
business of the partnership is continued in accordance with that
Act,
o if the partnership has redeemed or otherwise purchased all the
Preferred Partnership Securities,
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o upon the entry of a decree of judicial dissolution,
o upon the written consent of all partners of the partnership or
o on any Dissolution Date as described under -- "Voting Rights"
below.
VOTING RIGHTS
Except as provided below and under DESCRIPTION OF THE PARTNERSHIP
GUARANTEE -- "Amendments and Assignment" and as otherwise required by law and
the limited partnership agreement, the holders of the Preferred Partnership
Securities will have no voting rights.
Not later than 30 days after any partnership enforcement event occurs,
the general partner will convene a meeting for the purpose of appointing a
special representative. If the general partner fails to convene a meeting for
that purpose within the 30-day period, the holders of 10% in liquidation
preference of the outstanding Preferred Partnership Securities will be entitled
to convene a meeting. The provisions of the limited partnership agreement
relating to the convening and conduct of the meetings of the partners will apply
with respect to any meeting. In the event that, at any meeting convened to
appoint a special representative, holders of less than a majority in aggregate
liquidation preference of Preferred Partnership Securities entitled to vote for
the appointment of a special representative vote for an appointment, no special
representative will be appointed. Any special representative appointed will
cease to be a special representative of the partnership and the limited partners
if:
o the partnership, or TXU Europe Limited under the terms of the
Partnership Guarantee, has paid in full all accumulated and
unpaid distributions on the Preferred Partnership Securities,
o any investment event of default or default on any guarantee of
subsidiary debentures giving rise to the partnership enforcement
event has been cured, and
o TXU Europe Limited is in compliance with all its obligations
under the Partnership Guarantee and TXU Europe Limited, in its
capacity as the general partner, will continue the business of
the partnership without dissolution.
Notwithstanding the appointment of any special representative, TXU
Europe Limited will continue as general partner and will retain all rights under
the limited partnership agreement, including the right to declare, in its sole
discretion, the payment of distributions on the Preferred Partnership
Securities, and the failure to declare distributions would not constitute a
default under the limited partnership agreement.
If any proposed amendment to the limited partnership agreement
provides for, or the general partner otherwise proposes to effect:
o any action that would materially adversely affect the
powers, preferences or special rights of the holders of the
Preferred Partnership Securities, whether by way of
amendment to the limited partnership agreement or otherwise,
including, without limitation, the authorization or issuance
of any limited partner interests in the partnership ranking,
as to participation in the profits or distributions or in
the assets of the partnership, senior to the Preferred
Partnership Securities, or
o the liquidation, dissolution, winding-up or termination of
the partnership, other than in connection with the
occurrence of a partnership special event or as described
under -- "Merger, Consolidation or Amalgamation of the
Partnership" below,
then the holders of outstanding Preferred Partnership Securities will be
entitled to vote on that amendment or proposal of the general partner, but not
on any other amendment or proposal, as a class, and that amendment or proposal
will not be effective except with the approval of the holders of a majority in
liquidation preference of the outstanding Preferred Partnership Securities
having a right to vote on the matter; provided, however, that if the Property
Trustee or the trust is the holder of the Preferred Partnership Securities, any
amendment or proposal requiring the approval of the holders of a majority of the
Preferred Partnership Securities will not be effective without the prior or
concurrent approval of the holders of a majority in liquidation amount of the
outstanding TOPrS having a right to vote.
The holders of the Preferred Partnership Securities (or, if the trust
is the only holder of the Preferred Partnership Securities, the holders of the
TOPrS) will have the right to cause the dissolution of the partnership at any
Dissolution Date upon a vote in favor of dissolution by 100% in aggregate
liquidation preference of the Preferred Partnership Securities (or 100% in
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aggregate liquidation amount of TOPrS, if the trust is the only holder of the
Preferred Partnership Securities). "Dissolution Date" means any date (i) on
which a subsidiary debenture matures and all other subsidiary debentures are
subject to optional redemption by the issuer or (ii) on which the partnership
has not held any subsidiary debentures for a period of 12 consecutive months. If
there is such a dissolution and any subsidiary debentures are outstanding, those
debentures will be retained by the partnership unless sold, repurchased or
redeemed.
Subject to certain exceptions, the holders of a majority in
liquidation preference of the Preferred Partnership Securities may waive any
past partnership enforcement event with respect to the Preferred Partnership
Securities. A waiver of an investment event of default by the special
representative, acting at the direction of the holders of the Preferred
Partnership Securities, constitutes a waiver of the corresponding partnership
enforcement event.
Neither the general partner nor the special representative shall:
o direct the time, method and place of conducting any proceeding
for any remedy available,
o waive any investment event of default that is waivable under the
subsidiary debentures,
o waive any default under any guarantee of subsidiary debentures,
o exercise any right to rescind or annul a declaration that the
principal of any subsidiary debentures is due and payable,
o waive the breach of the covenant in the Partnership Guarantee
restricting specified payments and loans by TXU Europe Limited
and its subsidiaries, or
o consent to any amendment, modification or termination of any
subsidiary debenture or any guarantee of a subsidiary debenture,
where a consent is required from the holder thereof,
without, in each case, obtaining the prior approval of the holders of at least a
majority in liquidation preference of the Preferred Partnership Securities;
provided, however, that if the Property Trustee or the trust is the holder of
the Preferred Partnership Securities, any waiver, consent or amendment or other
action will not be effective without the prior or concurrent approval of the
holders of a majority in liquidation amount of the outstanding TOPrS having a
right to vote. Neither the general partner nor the special representative will
revoke any action previously authorized or approved by a vote of the holders of
the Preferred Partnership Securities without the approval of that revocation by
a majority in liquidation preference of the outstanding Preferred Partnership
Securities. The general partner will notify all holders of the Preferred
Partnership Securities of any notice of an investment event of default received
with respect to any subsidiary debenture or guarantee of a subsidiary debenture.
Any required approval of holders of Preferred Partnership Securities
may be given at a separate meeting of holders of Preferred Partnership
Securities convened for that purpose, at a meeting of all of the partners in the
partnership or pursuant to written consent without prior notice. The general
partner will cause a notice of any meeting at which holders of Preferred
Partnership Securities are entitled to vote to be mailed to each holder of
record of Preferred Partnership Securities. Each notice will include the
following (i) the date of the meeting, (ii) a description of any resolution
proposed for adoption at the meeting on which the holders are entitled to vote
and (iii) instructions for the delivery of proxies.
No vote or consent of the holders of Preferred Partnership Securities
will be required for the partnership to redeem and cancel Preferred Partnership
Securities in accordance with the limited partnership agreement.
Notwithstanding that holders of Preferred Partnership Securities are
entitled to vote or consent under any of the circumstances described above, any
of the Preferred Partnership Securities at that time that are beneficially owned
by TXU Europe Limited or by any entity directly or indirectly controlled by, or
under direct or indirect common control with, TXU Europe Limited, will not be
entitled to vote or consent and will, for purposes of the vote or consent, be
treated as if they were not outstanding, provided, however, that persons (other
than affiliates of TXU Europe Limited) to whom TXU Europe Limited or any of its
affiliates have pledged Preferred Partnership Securities may vote or consent
with respect to those pledged Preferred Partnership Securities under the terms
of that pledge.
Holders of the Preferred Partnership Securities will have no rights to
remove or replace the general partner.
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MERGER, CONSOLIDATION OR AMALGAMATION OF THE PARTNERSHIP
The partnership may not consolidate, amalgamate, merge with or into,
or be replaced by, or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to, any corporation or other entity,
except as described below. The partnership may, as determined by its general
partner and without the consent of the holders of the Preferred Partnership
Securities, consolidate, amalgamate, merge with or into, or be replaced by, or
convey, transfer or lease its properties and assets as an entirety or
substantially as an entirety to a limited partnership, limited liability company
or trust organized under the laws of any state of the US, provided, that:
o if the partnership is not the survivor, the successor entity
either:
-- expressly assumes all of the obligations of the
partnership under the Preferred Partnership Securities
or
-- substitutes for the Preferred Partnership Securities
other securities having substantially the same terms as
the Preferred Partnership Securities so long as these
successor partnership securities are not junior to any
other equity securities of the successor entity, with
respect to participation in the profits and
distributions, and in the assets, of the successor
entity, upon dissolution, redemption or otherwise,
o the issuers of subsidiary debentures expressly acknowledge
the successor entity as the holder of the subsidiary
debentures, or if the holder of the subsidiary debentures is
a depositary, then this depositary expressly acknowledges
the successor entity as the holder of the beneficial
interests in the subsidiary debentures,
o the Preferred Partnership Securities or any successor
partnership securities are listed, or any successor
partnership securities will be listed upon notification of
issuance, on any national securities exchange or other
organization on which the Preferred Partnership Securities,
if so listed, are then listed,
o the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not cause the TOPrS or,
in the event that the trust has been dissolved in connection
with a trust special event, the Preferred Partnership
Securities, including any successor partnership securities,
to be downgraded by any nationally recognized statistical
securities rating organization,
o the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the
powers, preferences and other special rights of the holders
of the TOPrS or the Preferred Partnership Securities,
including any successor partnership securities, in any
material respect other than, in the case of the Preferred
Partnership Securities, with respect to any dilution of the
holders' interest in the new resulting entity,
o the successor entity has a purpose substantially identical
to that of the partnership,
o prior to the merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, the general
partner has received an opinion of nationally recognized
independent counsel to the partnership in the US or UK, as
applicable, experienced in these matters to the effect that
-- the successor entity will be treated as a partnership
(and not a publicly-traded partnership) for US federal
income tax purposes,
-- the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease would not cause the trust
to be classified as other than a grantor trust for US
federal income tax purposes,
-- following the merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, the general
partner and that successor entity will be in compliance
with the Investment Company Act without registering as
an investment company,
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-- the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease will not adversely affect
the limited liability of the holders of the Preferred
Partnership Securities (or the successor partnership
securities), and
-- following the merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, the trust
will not be classified as other than a transparent
entity for UK income tax purposes.
o TXU Europe Limited guarantees the obligations of the
successor entity under the successor partnership securities
at least to the same extent as provided by the Partnership
Guarantee.
BOOK-ENTRY AND SETTLEMENT
If the Preferred Partnership Securities are distributed to holders of
TOPrS in connection with the involuntary or voluntary dissolution and
liquidation of the trust as a result of the occurrence of a trust special event,
the Preferred Partnership Securities will be issued in the form of one or more
global certificates registered in the name of DTC, as the depository, or, its
nominee. For a description of DTC and the specific terms of the depository
arrangements, see DESCRIPTION OF THE TOPrS -- "Book-Entry Only Issuance -- The
Depository Trust Company." As of the date of this prospectus, the description of
DTC's book-entry system and DTC's practices as they relate to purchases,
transfers, notices and payments with respect to the TOPrS would apply in all
material respects to any Preferred Partnership Securities represented by one or
more global certificates.
REGISTRAR, TRANSFER AGENT AND PAYING AGENT
The general partner will act as registrar, transfer agent and paying
agent for the Preferred Partnership Securities for so long as the Preferred
Partnership Securities are held by the trust or, if the trust has been dissolved
in connection with a trust special event, for so long as the Preferred
Partnership Securities remain in book-entry only form. In the event the
Preferred Partnership Securities are distributed in connection with a trust
special event and the book-entry system for the Preferred Partnership Securities
is discontinued, it is anticipated that TXU Business Services Company will act
as transfer agent and registrar and The Bank of New York or one of its
affiliates will act as paying agent for the Preferred Partnership Securities.
Registration of transfers of Preferred Partnership Securities will be
effected without charge by or on behalf of the partnership, but upon payment,
together with any indemnity as the partnership or the general partner may
require, in respect of any tax or other governmental charges that may be imposed
in relation to the transfer.
The partnership will not be required to register or cause to be
registered the transfer of Preferred Partnership Securities after the Preferred
Partnership Securities have been called for redemption.
GOVERNING LAW
The limited partnership agreement and the Preferred Partnership
Securities will be governed by, and construed in accordance with, the internal
laws of the State of Delaware.
MISCELLANEOUS
The general partner is authorized and directed to conduct its affairs
and to operate the partnership in such a way that:
o the partnership will not be deemed to be an "investment
company" required to be registered under the Investment
Company Act,
o the subsidiary debentures will be treated as indebtedness of
their issuers for US federal income and UK taxation
purposes, and
o the partnership will not be treated as an association or as
a "publicly traded partnership" (within the meaning of
Section 7704 of the US Internal Revenue Code) taxable as a
corporation for US federal income tax purposes or to be
treated as a company for UK taxation purposes.
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In this connection, the general partner is authorized to take any
action, not inconsistent with applicable law, the certificate of limited
partnership of the partnership or the limited partnership agreement, that the
general partner determines in its sole discretion to be necessary or desirable
for those purposes as long as that action does not adversely affect the
interests of the holders of the Preferred Partnership Securities.
Holders of the Preferred Partnership Securities have no preemptive or
similar rights.
DESCRIPTION OF THE PARTNERSHIP GUARANTEE
Material terms and provisions of the Partnership Guarantee that will
be executed and delivered by TXU Europe Limited for the benefit of the holders
from time to time of Preferred Partnership Securities are summarized below. A
copy of the Partnership Guarantee is filed as an exhibit to the registration
statement of which this prospectus is a part. The Partnership Guarantee will be
qualified as a trust indenture under the Trust Indenture Act. The Bank of New
York , as Partnership Guarantee Trustee, will hold the Partnership Guarantee for
the benefit of the holders of Preferred Partnership Securities and will act as
indenture trustee for the purposes of compliance with the Trust Indenture Act.
You should refer to the Partnership Guarantee and the Trust Indenture Act for
provisions that may be important to you.
Under the Partnership Guarantee, TXU Europe Limited will irrevocably
agree, on a subordinated basis to the extent set forth in the Partnership
Guarantee, to pay in full to the holders of the Preferred Partnership
Securities, except to the extent paid by the partnership, as and when due,
regardless of any defense, right of set-off or counterclaim that the partnership
may have or assert, the following Partnership Guarantee payments, without
duplication: (i) any accumulated and unpaid distributions that have been
declared on the Preferred Partnership Securities out of funds legally available
for payment, (ii) the redemption price with respect to any Preferred Partnership
Securities called for redemption by the partnership out of funds legally
available for payment, and (iii) upon a voluntary or involuntary dissolution,
winding up or termination of the partnership, the lesser of (a) the aggregate of
the liquidation preference and all accumulated and unpaid distributions on the
Preferred Partnership Securities to the date of payment and (b) the amount of
assets of the partnership, after satisfaction of all liabilities, remaining
available for distribution to holders of Preferred Partnership Securities in
liquidation of the partnership. TXU Europe Limited's obligation to make a
Partnership Guarantee payment may be satisfied by direct payment of the required
amounts by TXU Europe Limited to the holders of Preferred Partnership Securities
or by causing the partnership to pay those amounts to the holders.
The Partnership Guarantee will be a guarantee on a subordinated basis
with respect to the Preferred Partnership Securities from the time of issuance
of the Preferred Partnership Securities. However, the Partnership Guarantee will
not apply to any payment of redemption price, or to payments upon the
dissolution, winding-up or termination of the partnership, except to the extent
the partnership has funds legally available for payment and will not apply to
distributions except to the extent the distributions are declared by the general
partner and the partnership has funds legally available for payment. If issuers
of subsidiary debentures or TXU Europe Limited as the guarantor of the
subsidiary debentures fail to make any payment in respect of those debentures
or, if applicable, guarantees, the partnership may not declare or pay
distributions on the Preferred Partnership Securities. In that event, holders of
the Preferred Partnership Securities would not be able to rely upon the
Partnership Guarantee for payment of those amounts. Instead, holders of the
Preferred Partnership Securities will have the remedies described herein under
DESCRIPTION OF THE PREFERRED PARTNERSHIP SECURITIES -- "Partnership Enforcement
Events," including the right to direct the general partner or the special
representative, as the case may be, to enforce the covenant restricting
dividends, distributions and similar payments by TXU Europe Limited and its
finance subsidiaries. See -- "Covenants in the Partnership Guarantee" below.
The Partnership Guarantee, when taken together with TXU Europe
Limited's guarantees of the subsidiary debentures and TXU Europe Limited's
obligation to pay all fees and expenses of the trust and the partnership,
constitute a guarantee to the extent described in this prospectus by TXU Europe
Limited of the distribution, redemption and liquidation payments payable to the
holders of the TOPrS. Those guarantees do not apply, however, to current
distributions by the partnership unless and until those distributions are
declared by the partnership out of funds legally available for payment or to
liquidating distributions unless there are assets available for payment in the
partnership.
ADDITIONAL AMOUNTS
All payments made under the Partnership Guarantee will be made without
withholding or deduction for any taxes or other governmental charges imposed by
a jurisdiction in which TXU Europe Limited is organized or is managed or
controlled 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 Europe Limited will pay to each holder
of Preferred Partnership Securities Additional Amounts as shall be necessary so
that the net amount received by each holder of Preferred Partnership Securities
after the withholding or deduction equals the amount that the holder would have
received absent the withholding or deduction, except that, if the Preferred
Partnership Securities are distributed to the holders of the TOPrS upon the
dissolution and liquidation of the trust, no Additional Amounts will be payable:
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o to or for a holder who is liable for Gross-Up Taxes because of
the holder's connection with the relevant Taxing Jurisdiction,
whether as a citizen, a resident or a national of such
jurisdiction or because the holder carries on a business or
maintains a permanent establishment there or is physically
present there, other than through the mere receipt of guarantee
payments;
o to or for a holder who presents a Preferred Partnership Security
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
Preferred Partnership Security on the last day of the 30 day
period;
o to or for a holder who presents a Preferred Partnership Security,
when presentation is required, at any place other than in The
City of New York; or
o to or for a holder who would not be liable for Gross-Up Taxes by
making a declaration of non-residence or similar claim for
exemption to the relevant tax authority.
Following any distribution of Preferred Partnership Securities to the
holders of TOPrS upon liquidation of the trust, no Additional Amounts will be
payable with respect to any Preferred Partnership Security if the beneficial
owner would not have been entitled to that payment if that beneficial owner had
been the holder.
References in this prospectus to any payments under the Partnership
Guarantee will include any Additional Amounts payable in connection with those
payments.
COVENANTS IN THE PARTNERSHIP GUARANTEE
TXU Europe Limited and any issuer of initial subsidiary debentures
will covenant in the Partnership Guarantee that if:
o for any quarterly period, the partnership does not pay to holders
of Preferred Partnership Securities an amount equal to
distributions at the full fixed rate on a cumulative basis on any
Preferred Partnership Securities,
o an investment event of default with respect to any subsidiary
debentures has occurred and is continuing and TXU Europe Limited
defaults on its obligations under the related guarantee of
subsidiary debentures, or
o TXU Europe Limited is in continuing default of its obligations
under the Trust Guarantee or the Partnership Guarantee,
then, during that period, TXU Europe Limited and any issuer of initial
subsidiary debentures will not, and in the case of clause (iv) below, TXU Europe
Limited will cause its subsidiaries to not, directly or indirectly,
(i) declare or pay any cash dividends or distributions
on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of its
issued share capital or comparable equity
interests, other than dividends or distributions
paid to TXU Europe Limited or any of its
subsidiaries,
(ii) make any payments on, or repay, repurchase or
redeem, any of its debt securities that rank
equally with or junior to any subsidiary
debentures or any guarantee of subsidiary
debentures,
(iii) make any payments with respect to any guarantee
that ranks equally with or junior to any
subsidiary debentures or any guarantee of
subsidiary debentures, or
(iv) make any payments on, or repay, repurchase or
redeem, any debt or other securities held or
issued by, or make payments with respect to any
guarantee of such debt or other securities, or
make any loans or advances to, any affiliate of
TXU Europe Limited that is not also a subsidiary
of TXU Europe Limited.
These restrictions will not apply, however, to any of the following
transactions:
(a) any payments required by law,
(b) dividends or distributions, or options, warrants
or rights to subscribe for or purchase, shares or
comparable equity interests of TXU Europe Limited
or of any issuer of subsidiary debentures, and
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exchanges or conversions of shares or comparable
equity interests of one class for common shares or
comparable equity interests of another class of
the same issuer,
(c) payments by TXU Europe Limited under the Trust
Guarantee or the Partnership Guarantee,
(d) payments by any issuer of subsidiary debentures on
those subsidiary debentures or payments by TXU
Europe Limited under any guarantee of those
subsidiary debentures,
(e) any dividend or payment by TXU Europe Limited
which is applied, directly or indirectly, to any
Tax Payments (as defined below), or
(f) payments by TXU Europe Limited or any issuer of
subsidiary debentures, directly or indirectly, on
loans from Funding (or any other subsidiary of TXU
Europe Limited) to TXU Europe Limited or any of
its subsidiaries made with the proceeds from the
issuance by Funding (or the other subsidiary
making the loan) of securities guaranteed by TXU
Europe Limited (provided that the guarantee ranks
senior to all subordinated indebtedness of TXU
Europe Limited, including the TXU Europe Limited
guarantees of subsidiary debentures), or loans
made in connection with the reinvestment of those
proceeds.
"Tax Payments" means any direct or indirect payment to governmental
authorities, as and when due, in respect of taxes imposed by the US, UK or any
other country in which TXU Europe Limited or its subsidiaries operate, and
arising from the operations of TXU Europe Limited, Funding, the partnership, the
trust or any other subsidiary of TXU Europe Limited.
Under the terms of the limited partnership agreement, the partnership
will be permitted to reinvest in subsidiary debentures of eligible subsidiaries,
among other conditions, only if those subsidiaries agree to be bound by the
covenants described above.
TXU Europe Limited will also covenant in the Partnership Guarantee to
maintain, directly or indirectly, ownership of 100% of the general partner's
interest in the partnership.
EVENTS OF DEFAULT; ENFORCEMENT OF PARTNERSHIP GUARANTEE
An event of default under the Partnership Guarantee will occur upon
the failure of TXU Europe Limited to perform any of its payment or other
obligations under the Partnership Guarantee.
The holders of a majority in liquidation amount of the Preferred
Partnership Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Partnership Guarantee
Trustee or the special representative in respect of the Partnership Guarantee or
to direct the exercise of any trust or power conferred under the Partnership
Guarantee. If a special representative has been appointed, this special
representative may enforce the rights of the holders of the Preferred
Partnership Securities under the Partnership Guarantee. If the special
representative or the Partnership Guarantee Trustee fails to enforce its rights
under the Partnership Guarantee, after a holder of Preferred Partnership
Securities has made a written request, that holder of Preferred Partnership
Securities may institute a legal proceeding directly against TXU Europe Limited
to enforce its rights under the Partnership Guarantee without first instituting
a legal proceeding against the partnership, the special representative, the
Partnership Guarantee Trustee or any other person or entity. In any event, if
TXU Europe Limited has failed to make a guarantee payment required by the
Partnership Guarantee, a holder of Preferred Partnership Securities may directly
institute a proceeding against TXU Europe Limited for enforcement of the
Partnership Guarantee for such payment.
STATUS OF THE PARTNERSHIP GUARANTEE; SUBORDINATION
The Partnership Guarantee will constitute an unsecured obligation of
TXU Europe Limited and will rank subordinate and junior in right of payment to
all other liabilities of TXU Europe Limited, including the guarantees of
subsidiary debentures, other than those that are made to rank equally or made
subordinate by their terms to the Partnership Guarantee. The Partnership
Guarantee will rank equally with any preference share capital of TXU Europe
Limited issued in the future and with similar guarantees entered into by TXU
Europe Limited in respect of any preferred security of any other finance
subsidiary. Accordingly, the rights of the holders of Preferred Partnership
Securities to receive payments under the Partnership Guarantee will be subject
to the rights of the holders of any obligations of TXU Europe Limited that are
senior in priority to the obligations under the Partnership Guarantee. Since TXU
Europe is a holding company, the Partnership Guarantee will be effectively
subordinated to existing and future liabilities and preference share capital of
TXU Europe's subsidiaries. The limited partnership agreement provides that each
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holder of Preferred Partnership Securities, by acceptance of the Preferred
Partnership Securities, agrees to the subordination provisions and other terms
of the Partnership Guarantee.
The Partnership Guarantee will constitute a guarantee of payment and
not of collection. Therefore, the guaranteed party may directly institute a
legal proceeding against TXU Europe Limited to enforce its rights under the
Partnership Guarantee without instituting a legal proceeding against any other
person or entity.
The Partnership Guarantee will be deposited with the Partnership
Guarantee Trustee to be held for the benefit of the holders of the Preferred
Partnership Securities. In the event of the appointment of a special
representative to, among other things, enforce the Partnership Guarantee, the
special representative may take possession of the Partnership Guarantee for that
purpose. If no special representative has been appointed to enforce the
Partnership Guarantee, the Partnership Guarantee Trustee has the right to
enforce the Partnership Guarantee on behalf of the holders of the Preferred
Partnership Securities.
AMENDMENTS AND ASSIGNMENT
No approval of the holders of Preferred Partnership Securities will be
required with respect to any amendments to the Partnership Guarantee that do not
adversely affect the rights, preferences or privileges of holders of Preferred
Partnership Securities. In all other cases, the Partnership Guarantee may be
amended only with the prior approval of the holders of not less than a majority
in liquidation preference of the outstanding Preferred Partnership Securities;
provided, however, that if the Property Trustee on behalf of the trust is the
holder of the Preferred Partnership Securities, any amendment or proposal
requiring the approval of the holders of a majority of the Preferred Partnership
Securities will not be effective without the prior or concurrent approval of the
holders of a majority in liquidation amount of the outstanding TOPrS having a
right to vote. All guarantees and agreements contained in the Partnership
Guarantee will bind the successors, assigns, receivers, trustees and
representatives of TXU Europe Limited and will inure to the benefit of the
holders of the Preferred Partnership Securities then outstanding. Except in
connection with any permitted merger or consolidation of TXU Europe Limited with
or into another entity or any permitted sale, transfer or lease of TXU Europe
Limited's assets to another entity in which the surviving corporation, if TXU
Europe Limited is not the surviving corporation, assumes TXU Europe Limited's
obligations under the Partnership Guarantee, TXU Europe Limited may not assign
its rights or delegate its obligations under the Partnership Guarantee without
the prior approval of the holders of at least a majority of the aggregate stated
liquidation preference of the Preferred Partnership Securities then outstanding.
TERMINATION OF THE PARTNERSHIP GUARANTEE
The Partnership Guarantee will terminate and be of no further force
and effect as to the Preferred Partnership Securities upon (i) full payment of
the redemption price of all Preferred Partnership Securities or (ii) full
payment of the amounts payable in accordance with the limited partnership
agreement upon liquidation of the partnership. The Partnership Guarantee will
continue to be effective or will be reinstated, as the case may be, if at any
time any holder of Preferred Partnership Securities must in accordance with the
Delaware Revised Uniform Limited Partnership Act restore payment of any sums
paid under the Preferred Partnership Securities or the Partnership Guarantee.
The Delaware Revised Uniform Partnership Act provides that a limited partner of
a limited partnership who wrongfully receives a distribution may be liable to
the limited partnership for the amount of such distribution.
INFORMATION CONCERNING THE PARTNERSHIP GUARANTEE TRUSTEE
The Partnership Guarantee Trustee, prior to the occurrence of a
default with respect to the Partnership Guarantee, undertakes to perform only
such duties as are specifically set forth in the Partnership Guarantee and,
after default with respect to the Partnership Guarantee, will exercise the same
degree of care as a prudent individual would exercise in the conduct of his or
her own affairs. Subject to this provision, the Partnership Guarantee Trustee is
under no obligation to exercise any of the powers vested in it by the
Partnership Guarantee at the request of any holder of Preferred Partnership
Securities unless it is offered reasonable indemnity against the costs, expenses
and liabilities that might be incurred by doing so.
GOVERNING LAW
The Partnership Guarantee will be governed by, and construed in
accordance with, the internal laws of the State of New York.
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DESCRIPTION OF THE FUNDING DEBENTURES
A portion of the initial subsidiary debentures will be junior
subordinated debentures issued by Funding. The Funding debentures will be issued
under a subordinated indenture among Funding, TXU Europe Limited and The Bank of
New York, as trustee. The indenture will include a full, unconditional and
irrevocable subordinated guarantee of the Funding debentures by TXU Europe
Limited.
Certificates for the Funding debentures in bearer form will be held by
The Bank of New York as depositary under a deposit agreement. Beneficial
interests in the Funding debentures will be registered in the name of the
partnership. Specific terms of each series of the Funding debentures will be
described in an officer's certificate delivered to the trustee. Material terms
of the Funding debentures and the indenture are summarized below. You should
read the indenture, the Trust Indenture Act, the officer's certificate and the
deposit agreement for a more complete description. Copies of the indenture, the
officer's certificate and the deposit agreement are available upon request to
the trustee or depositary. Whenever particular provisions or defined terms in
the indenture are referred to under this DESCRIPTION OF THE FUNDING DEBENTURES,
those provisions or defined terms are incorporated by reference in this
prospectus. For your convenience, we indicate sections of the indenture where
they are described.
Each series of debt securities issued under the indenture will be
unsecured and subordinated obligations of Funding. Funding is a financing
company whose sole source of funds is payment on loans it makes to TXU Europe
Limited. The Funding debentures will be fully, unconditionally and irrevocably
guaranteed by TXU Europe Limited as to payment of principal, premium, if any,
and interest and any Additional Amounts (as described below), and the guarantee
will be an unsecured and subordinated obligation of TXU Europe Limited. See
DESCRIPTION OF THE PREFERRED PARTNERSHIP SECURITIES -- "Guarantees of Subsidiary
Debentures." The indenture does not limit the aggregate amount of indebtedness
that Funding, TXU Europe Limited or TXU Europe Limited's subsidiaries may issue
or the number of series or amount of subordinated debt securities that may be
issued under the indenture.
The covenants contained in the indenture will not afford beneficial
owners of the Funding debentures protection in the event of a highly-leveraged
transaction involving Funding or TXU Europe Limited.
PAYMENT OF INTEREST AND PRINCIPAL
Interest on each series of Funding debentures will:
o Be payable in US dollars at the rate per annum specified in the
title of the series;
o Be computed on the basis of a 360-day year of twelve 30-day
months, and for any period shorter than a quarter, on the basis
of the actual number of days elapsed in that period;
o Be payable quarterly in arrears on March 31, June 30, September
30 and December 31 beginning June 30, 2000 unless Funding defers
the payment of interest as described below under "Option to Defer
Interest Payment Period";
o Originally accrue from, and include March 2, 2000, the date of
initial issuance; and
o Be payable on overdue interest to the extent permitted by law at
the same rate as interest is payable on principal.
If any payment date is not a business day, payment will be made on the
next business day, and no interest or other payment will result from the delay.
If the next business day is in the next succeeding calendar year, then the
payment will be made on the immediately preceding business day (without any
reduction in interest or other payment in respect of this early payment). 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.
TXU Business Services Company is paying agent and transfer agent for
the Funding debentures in The City of New York. So long as the Funding
debentures are listed on the Luxembourg Stock Exchange, or LSE, Funding will
maintain a paying agent and transfer agent in Luxembourg. Initially that paying
agent and transfer agent will be Kredietbank SA Luxembourgeoise.
Interest on each Funding debenture will be paid to the bearer on each
interest payment date, at maturity or upon redemption. If interest has not been
paid when due on any Funding debenture, the defaulted interest may be payable to
the bearer.
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The Funding debentures will mature on March 2, 2020.
The principal of and interest on the Funding debentures at maturity
and upon redemption will be payable, at their principal amount, upon surrender
of the Funding debentures at the office of a paying agent. Funding may change
the place of payment on the Funding debentures, appoint one or more additional
paying agents, including Funding, and may remove any paying agent, all at its
discretion so long as there is a paying agent in The City of New York and, while
the Funding debentures are listed on the LSE, in Luxembourg.
DENOMINATIONS
The Funding debentures will be payable only in US dollars. The Funding
debentures and beneficial interests in them will be issued, and may be
transferred, only in principal amounts of $25 and in multiples of $25. A Funding
debenture may be exchanged at the option of the holder for one or more new
Funding debentures in any authorized denomination and the same aggregate
principal amount upon surrender of the Funding debenture at the office of the
trustee.
FORM, BOOK-ENTRY PROCEDURES
INTRODUCTION
Beneficial interests in the Funding debentures will be registered in
the name of the partnership. The Funding debentures in which beneficial
interests are sold will be issued in the form of one or more Funding debentures
in bearer form. Upon issuance, the trustee will authenticate and deliver the
Funding debentures to The Bank of New York, which will hold those Funding
debentures as depositary for the benefit of the partnership under the deposit
agreement. The depositary will issue to the partnership, in respect of each
Funding debenture, one or more certificateless book-entry interests, which
together will represent a 100% beneficial interest in the Funding debentures.
The Funding debentures will be held in bearer form by the depositary and
certificateless book-entry interests representing beneficial ownership of these
Funding debentures will be held by, or on behalf of, the partnership. Beneficial
interests in the Funding debentures are expected to be qualified to be held
through Euroclear and/or Clearstream.
Under the deposit agreement, the bearer Funding debentures may be
transferred only as a whole and, with Funding's consent, by the depositary or
its nominee to the depositary or to a successor depositary or nominee.
For so long as the depositary or its nominee is the holder of the
Funding debentures, the depositary or its nominee will be considered the sole
owner of the Funding debentures for all purposes under the indenture.
PAYMENTS ON THE FUNDING DEBENTURES
Payments on the Funding debentures will be made by Funding through the
paying agent to the depositary as the holder of Funding debentures. The
depositary will, in turn, make payments in the same amounts to the partnership.
Neither Funding, TXU Europe Limited, the trustee nor any paying agent
will have any responsibility for payments made or to be made by the depositary
to the partnership in respect of the Funding debentures or the book-entry
interests in them, including any payments of Additional Amounts.
REDEMPTION OF BOOK-ENTRY INTERESTS
If any Funding debentures are redeemed, the depositary will deliver
the amount received by it to the partnership.
If all the Funding debentures are redeemed, the depositary will
surrender the Funding debentures of that series to the trustee for cancellation.
The depositary will cancel the book-entry interests issued with respect to those
Funding debentures. If there is a partial redemption, the depositary will
surrender the related Funding debenture to the trustee or the paying agent in
Luxembourg for reduction of principal amount by endorsement on the reverse of
the Funding debenture or in exchange for a substitute Funding debenture in a
reduced principal amount. The depositary will record on its books a
corresponding reduction in the principal amount of the book-entry interests
issued with respect to the Funding debenture.
REPORTS AND NOTICES
Notices to holders of the Funding debentures listed on the Luxembourg
Stock Exchange will be published in a leading daily newspaper having general
circulation in Luxembourg, probably the Luxemburger Wort. The depositary will
promptly send to the partnership a copy of any notices, reports and other
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communications received by it relating to Funding, the Funding debentures or the
book-entry interests.
AMENDMENT AND TERMINATION OF DEPOSIT AGREEMENT
The deposit agreement may be amended by Funding and the depositary
without the consent of the partnership:
o To cure any defect, omission, inconsistency or ambiguity;
o To add covenants and agreements of Funding or the depositary;
o To assign the depositary's rights and duties to a qualified
successor;
o To conform the deposit agreement to the requirements of the
Securities Act, the Exchange Act, the Investment Company Act of
1940 or the Trust Indenture Act or any other applicable
securities laws;
o To modify the deposit agreement in connection with an amendment
to the indenture that does not require the consent of the
partnership; or
o To amend or supplement the deposit agreement in any way which, in
the opinion of counsel acceptable to Funding, is not materially
adverse to the partnership or inconsistent with the deposit
agreement itself.
Otherwise, no amendment that materially adversely affects the
partnership may be made to the deposit agreement without the consent of the
partnership.
The deposit agreement will cease to be of further effect when the
indenture has been satisfied and discharged or:
o All sums payable by Funding under the deposit agreement have been
paid; and
o The deposit agreement has been satisfied and discharged.
RESIGNATION OF DEPOSITARY
The depositary may resign upon 60 days' written notice to Funding and
the partnership. The resignation of the depositary will become effective upon
acceptance of a successor depositary to similar arrangements. If no successor
has been appointed by Funding within 120 days, then the depositary and the
trustee will deliver the Funding debentures to the partnership.
OBLIGATION OF DEPOSITARY
The depositary will undertake to perform only those duties
specifically described in the deposit agreement and, subject to exceptions
described in the deposit agreement, will assume no obligation under the deposit
agreement other than for its own bad faith, negligence or willful misconduct in
the performance of its duties under the deposit agreement.
OPTIONAL REDEMPTION
On or after March 2, 2005, the Funding debentures will be redeemable
as a whole at any time or in part from time to time, at the option of Funding,
at a redemption price of 100% of the unpaid principal amount, plus any unpaid
and accrued interest and any Additional Amounts. In addition, following the
occurrence of a partnership special event, the Funding debentures will be
redeemable as a whole, at the option of Funding, at a redemption price of 100%
of the unpaid principal amount, plus any unpaid and accrued interest and any
Additional Amounts.
The trustee will give notice to the holders of any optional redemption
of Funding debentures, not less than 30 nor more than 60 days before that
redemption. All notices of redemption will state the redemption date and the
redemption price plus accrued and unpaid interest. If less than all the Funding
debentures are to be redeemed, the notice will identify those to be redeemed and
the portion of the principal amount of the Funding debentures to be redeemed in
part. The notice will state that on the redemption date, subject to the
debenture trustee's receipt of the redemption monies, the redemption price plus
accrued and unpaid interest and any Additional Amounts will become due and
payable on each Funding debenture to be redeemed and that interest and any
Additional Amounts will cease to accrue on and after that date. It will name the
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place or places where the Funding debentures are to be surrendered for payment
of the redemption price plus accrued and unpaid interest and any Additional
Amounts (Indenture, Section 404).
OPTION TO DEFER PAYMENT OF INTEREST
Funding may defer the payment of interest at any time, and from time
to time, on the Funding debentures for a period not exceeding six consecutive
quarters and, in any event, not beyond the maturity of the Funding debentures
(Indenture, Section 311). Interest would, however, continue to accrue and
compound at the stated interest rate.
Funding will give the partnership and the trustee notice of its
election to defer interest payments before the earlier of (1) one business day
before the record date for the distribution which would occur if Funding did not
make the election to defer or (2) the date Funding is required to give notice to
the LSE or any other applicable self-regulatory organization of the record date.
So long as the Funding debentures are listed on the LSE, and the rules of the
LSE so require, Funding will give notice of any deferral to the LSE and will
publish notice to the holders as described under -- "Notices" below.
SUBORDINATION
The Funding debentures will be subordinate and junior in right of
payment to all Senior Indebtedness of Funding (Indenture, Section 1601). No
payment of the principal of the Funding debentures, including redemption and
sinking fund payments, or interest on the Funding debentures may be made until
all holders of Senior Indebtedness have been paid, if any of the following
occurs:
o Specified events of bankruptcy, insolvency or reorganization of
Funding;
o Any Senior Indebtedness is not paid when due and that default
continues without waiver;
o Any other default has occurred and continues without waiver,
permitting the holders of Senior Indebtedness to accelerate the
maturity of that indebtedness; or
o The maturity of any other series of subordinated debentures under
the subordinated indenture has been accelerated, because of an
Event of Default under the subordinated indenture which remains
uncured (Indenture, Section 1602).
Upon any distribution of assets of Funding to creditors in connection
with any insolvency, bankruptcy or similar proceeding, 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 Funding debentures are entitled
to receive or retain any payment (Indenture, Section 1604).
Senior Indebtedness is defined in the indenture to include all notes
and other obligations, including guarantees, of Funding for borrowed money that
are not subordinate or junior in right of payment to any other indebtedness of
Funding unless by its terms it is equal in right of payment to the Funding
debentures. The obligations of Funding under the Funding debentures will not be
deemed to be Senior Indebtedness (Indenture, Section 101).
The indenture does not limit the aggregate amount of Senior
Indebtedness that may be issued. As of September 30, 1999, Funding had
approximately $1.5 billion principal amount of indebtedness for borrowed money
constituting Senior Indebtedness.
ADDITIONAL AMOUNTS
All payments made on the Funding debentures or under the related TXU
Europe Limited guarantee will be made without withholding or deduction for any
taxes or other governmental charges imposed by a jurisdiction in which Funding
or TXU Europe Limited is organized or managed or controlled or has a place of
business, or any political subdivision or taxing authority of that jurisdiction,
unless the withholding or deduction is required by law. If any required
withholding or deduction is made, Funding or TXU Europe Limited will pay to each
holder of Funding debentures Additional Amounts as may be necessary so that the
net amount received by each holder of Funding debentures after the withholding
or deduction equals the amount that the holder would have received absent that
withholding or deduction.
References in this prospectus to any payments under the related TXU
Europe Limited guarantee will include any Additional Amounts payable in
connection with the guarantee.
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DEFEASANCE
Funding and TXU Europe Limited will be discharged from their
obligations on the Funding debentures or any other series of debt securities
issued under the indenture when either of them deposits with the trustee cash or
government securities sufficient to pay the principal, interest, any premium and
any other sums when due on or before the stated maturity date or a redemption
date for that series of debt securities (Indenture, Section 701). Funding and
TXU Europe Limited will continue to be liable for any shortfall in the funds
deposited unless they have provided an opinion of counsel that the discharge of
their obligations will not create an adverse US tax effect for the holders.
CONSOLIDATION, MERGER, AND SALE OF ASSETS
Under the terms of the indenture, neither Funding nor TXU Europe
Limited may consolidate with or merge into any other entity or convey, transfer
or lease its properties and assets substantially as an entirety to any entity,
unless:
o The surviving or successor entity is organized under the laws of
any jurisdiction and validly existing under the laws of that
jurisdiction and it expressly assumes the obligations of Funding
or TXU Europe Limited, as the case may be, on all debt
securities, the guarantee and under the indenture;
o Immediately after giving effect to the transaction, no Event of
Default and no event which, after notice or lapse of time or
both, would become an Event of Default will have occurred and be
continuing; and
o Funding or TXU Europe Limited, as the case may be, will have
delivered to the trustee a certificate of an officer and an
opinion of counsel as provided in the indenture (Indenture,
Section 1101).
The indenture does not restrict Funding or TXU Europe Limited from
entering into a merger in which Funding or TXU Europe Limited, as the case may
be, is the surviving entity (Indenture, Section 1103).
EVENTS OF DEFAULT
"Event of Default," when used in the indenture with respect to a
particular series of debt securities issued under the indenture, including the
Funding debentures, means any of the following has occurred:
o Failure to pay interest on that series within 30 days after it is
due (subject to Funding's right to defer those payments);
o Failure to pay the principal of or any premium on that series
when due;
o Failure to perform or remedy any breach of any other covenant of
Funding or TXU Europe Limited in the indenture, other than a
covenant that does not relate to that series of debt securities,
that continues for 90 days after Funding or TXU Europe Limited
receives written notice from the trustee, or Funding or TXU
Europe Limited and the trustee receive a written notice from the
holders of 25% or more in principal amount of the outstanding
debt securities of that series;
o The guarantee of that series becomes ineffective, or is found to
be unenforceable in a judicial proceeding or is disaffirmed by
TXU Europe Limited;
o Specified events in bankruptcy or insolvency of Funding or TXU
Europe Limited; or
o In the case of the Funding debentures and any other series of
debt securities specifically requiring payments of Additional
Amounts, failure to pay Additional Amounts on that series within
30 days after it is due (Indenture, Section 801).
An Event of Default for a particular series of debt securities does
not necessarily constitute an Event of Default for any other series of debt
securities issued under the indenture. The trustee will give notice to the
holders of debt securities of the relevant series of any default known to the
trustee in the manner and to the extent required by the Trust Indenture Act,
unless cured or waived, in respect to payment of that series, effectiveness of
the guarantee, payment of indebtedness of Funding, TXU Europe Limited or a
subsidiary of TXU Europe Limited, or bankruptcy or insolvency of Funding, TXU
Europe Limited or any subsidiary of TXU Europe Limited. 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).
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REMEDIES
If an Event of Default with respect to fewer than all the series of
debt securities occurs and continues, the trustee or the holders of at least 25%
in principal amount of the debt securities of the affected series may declare
the entire principal amount of all the debt securities of that series, together
with accrued interest, to be due and payable immediately. However, if the Event
of Default applies to all outstanding debt securities under the indenture, only
the trustee or holders of at least 25% in principal amount of all outstanding
debt securities of all series, voting as one class, and not the holders of any
one series, may make that declaration of acceleration (Indenture, Section 802).
At any time after a declaration of acceleration with respect to the
debt securities of any series has been made and before a judgment or decree for
payment of the money due has been obtained by the trustee, the Event of Default
giving rise to the declaration of acceleration will be considered waived, and
the declaration and its consequences will be considered rescinded and annulled,
if Funding or TXU Europe Limited has paid or deposited with the trustee a sum
sufficient to pay:
o All overdue interest on all debt securities of the series;
o The principal of and premium, if any, on any debt securities of
the series which have otherwise become due and interest that is
currently due;
o To the extent permitted by law, interest on overdue interest;
o All amounts due to the trustee under the indenture; and
o Any other Event of Default with respect to the debt securities of
that series has been cured or waived as provided in the indenture
(Indenture, Section 802).
There is no automatic acceleration, even in the event of bankruptcy,
insolvency or reorganization of Funding or TXU Europe Limited.
Other than its duties in case of an Event of Default, the trustee is
not obligated to exercise any of its rights or powers under the indenture at the
request, order or direction of any of the holders, unless the holders offer the
trustee a reasonable indemnity. If they provide this reasonable indemnity, the
holders of a majority in principal amount of any series of debt securities will
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the trustee, or exercising any power conferred upon
the trustee. However, if the Event of Default relates to more than one series,
only the holders of a majority in aggregate principal amount of all affected
series will have the right to give this direction. The trustee is not obligated
to comply with directions that conflict with law or other provisions of the
indenture (Indenture, Section 812).
No holder of debt securities of any series will have any right to
institute any proceeding under the indenture, or any remedy under the indenture,
unless:
o The holder has previously given to the trustee written notice of
a continuing Event of Default;
o The holders of a majority in aggregate principal amount of the
outstanding debt securities of all series in respect of which an
Event of Default has occurred and is continuing have made a
written request to the trustee, and have offered reasonable
indemnity to the trustee, to institute proceedings;
o The trustee has failed to institute any proceeding for 60 days
after it receives that notice, request and offer of indemnity;
and
o The holders of a majority in aggregate principal amount of all
series in default have not given the trustee direction
inconsistent with the written request within that 60 day period
(Indenture, Section 807).
However, these limitations do not apply to a suit by a holder of a
debt security for payment of the principal, premium, if any, or interest or
Additional Amounts, if any, due on the debt security on or after the applicable
due date (Indenture, Section 808).
TXU Europe Limited will provide to the trustee an annual statement by
an appropriate officer as to compliance with all conditions and covenants under
the indenture (Indenture, Section 606).
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ENFORCEMENT OF RIGHTS BY HOLDERS OF PREFERRED PARTNERSHIP SECURITIES
If the special representative fails to enforce its rights on behalf of
the partnership in the Funding debentures or TXU Europe Limited's guarantee of
Funding debentures after a holder of Preferred Partnership Securities has made a
written request, the holder of record of Preferred Partnership Securities may,
to the fullest extent permitted by law, directly institute a legal proceeding
against TXU Europe Limited or Funding to enforce the rights of the special
representative and the partnership in the Funding debentures or TXU Europe
Limited's guarantee of those debentures without first instituting any legal
proceeding against the special representative, the partnership or any other
person or entity. In any event, if a partnership enforcement event has occurred
and is continuing and that event is attributable to the failure of Funding to
make any required payment when due on any Funding debenture or the failure of
TXU Europe Limited to make any required payment when due on its guarantee of a
Funding debenture, then a holder of Preferred Partnership Securities may, to the
fullest extent permitted by law, on behalf of the partnership directly institute
a proceeding against Funding with respect to that Funding debenture or against
TXU Europe Limited with respect to that guarantee, in each case for enforcement
of payment.
ENFORCEMENT OF RIGHTS BY HOLDERS OF TOPRS
In addition, for so long as the trust holds any Preferred Partnership
Securities, if the special representative fails to enforce its rights on behalf
of the partnership in the Funding debentures or TXU Europe Limited's guarantee
of Funding debentures after a holder of TOPrS has made a written request, a
holder of record of TOPrS may, to the fullest extent permitted by law, on behalf
of the partnership directly institute a legal proceeding against TXU Europe
Limited or Funding to enforce the rights of the special representative and the
partnership in the Funding debentures or TXU Europe Limited's guarantee of those
debentures, without first instituting any legal proceeding against the Property
Trustee, the trust, the special representative, the partnership or any other
person. In any event, for so long as the trust is the holder of any Preferred
Partnership Securities, if a trust enforcement event has occurred and is
continuing and that trust enforcement event is attributable to the failure of
Funding to make any required payment when due on any Funding debentures or the
failure of TXU Europe Limited to make any required payment when due on its
guarantee of a Funding debenture, then a holder of TOPrS may on behalf of the
partnership directly institute a proceeding against Funding with respect to that
Funding debentures or against TXU Europe Limited with respect to that guarantee,
in each case for enforcement of payment.
MODIFICATION AND WAIVER
Without the consent of any holder of debt securities, Funding, TXU
Europe Limited and the trustee may enter into one or more supplemental
indentures for any of the following purposes:
o To evidence the assumption by any permitted successor of the
covenants of Funding or TXU Europe Limited in the indenture and
in the debt securities;
o To add additional covenants of Funding or TXU Europe Limited or
to surrender any right or power of Funding or TXU Europe Limited
under the indenture;
o To add additional Events of Default;
o To change or eliminate or add any provision to the indenture;
provided, however, if the change, elimination or addition will
adversely affect the interests of the holders of debt securities
of any series in any material respect, that change, elimination
or addition will become effective only:
(1) when the consent of the holders of debt securities of that
series has been obtained in accordance with the indenture;
or
(2) when no debt securities of the affected series remain
outstanding under the indenture;
o To provide collateral security for all but not part of the debt
securities;
o To establish the form or terms of debt securities of any other
series or any guarantees as permitted by the indenture;
o To provide for the issuance of additional bearer securities and
related coupons, if any;
o To evidence and provide for the acceptance of appointment of a
separate or successor trustee;
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o To provide for the procedures required for use of a
noncertificated system of registration for the debt securities of
all or any series;
o To change any place where principal, premium, if any, and
interest and Additional Amounts, if any, will be payable, debt
securities may be surrendered for registration of transfer or
exchange and notices to Funding and TXU Europe Limited 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 Funding and
TXU Europe Limited with some restrictive provisions of the indenture (Indenture,
Section 607). The holders of a majority in aggregate principal amount of the
debt securities of one or more but less than all series or tranches then
outstanding may waive compliance by Funding and TXU Europe Limited with some
restrictive provisions of the indenture with respect to those series or tranches
(Indenture, Section 607). The holders of not less than a majority in principal
amount of the outstanding debt securities of any series may waive any past
default under the indenture with respect to that series, except a default in the
payment of principal, premium, if any, or interest or Additional Amounts, if
any, and some covenants and provisions of the indenture that cannot be modified
or amended without the consent of the holder of each outstanding debt security
of the series affected (Indenture, Section 813).
If the Trust Indenture Act of 1939 is amended after the date of the
indenture to require changes to the indenture, the indenture will be deemed to
be amended so as to conform to that amendment of that Act. Funding, TXU Europe
Limited and the trustee may, without the consent of any holders of any debt
securities, enter into one or more supplemental indentures to evidence the
amendment (Indenture, Section 1201).
The consent of the holders of a majority in aggregate principal amount
of the debt securities of all series then outstanding is required for all other
modifications to the indenture. However, if less than all of the series of debt
securities outstanding are directly affected by a proposed supplemental
indenture, then the consent only of the holders of a majority in aggregate
principal amount of all series that are directly affected will be required. No
amendment or modification may:
o Change the stated maturity of the principal of, or any
installment of principal of or interest on, any debt security, or
reduce the principal amount of any debt security or its rate of
interest or change the method of calculating the interest rate or
reduce any premium payable upon redemption, or change the
currency in which payments are made, or impair the right to
institute suit for the enforcement of any payment on or after the
stated maturity of any debt security, without the consent of the
holder;
o Reduce the percentage in principal amount of the outstanding debt
securities of any series whose consent is required for any
supplemental indenture or any waiver of compliance with a
provision of the indenture or any default under the indenture and
its consequences, or reduce the requirements for quorum or
voting, without the consent of all the holders of the series; or
o Modify some of the provisions of the indenture relating to
supplemental indentures, waivers of specified covenants and
waivers of past defaults with respect to the debt securities of
any series, without the consent of the holder of each outstanding
debt security affected by the modification or waiver (Indenture,
Section 1202).
A supplemental indenture which changes the indenture solely for the
benefit of one or more particular series of debt securities, or modifies the
rights of the holders of debt securities of one or more series, will not affect
the rights under the indenture of the holders of the debt securities of any
other series (Indenture, Section 1202).
The indenture provides that debt securities owned by Funding, TXU
Europe Limited or anyone else required to make payment on the debt securities
will be disregarded and considered not to be outstanding in determining whether
the required holders have given a request or consent.
Funding or TXU Europe Limited may fix in advance a record date to
determine the holders entitled to give any request, demand, authorization,
direction, notice, consent, waiver or other act of the holders, but neither
Funding or TXU Europe Limited will have any obligation to do so. If a record
date is fixed for that purpose, the request, demand, authorization, direction,
notice, consent, waiver or other act of the holders may be given before or after
the record date, but only the holders of record at the close of business on that
record date will be considered holders for the purposes of determining whether
holders of the required percentage of the outstanding debt securities have
authorized or agreed or consented to the request, demand, authorization,
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direction, notice, consent, waiver or other act of the holders. For that
purpose, the outstanding debt securities will be computed as of the record date.
Any request, demand, authorization, direction, notice, consent, election, waiver
or other act of a holder will bind every future holder of the same debt
securities and the holder of every debt security issued upon the registration of
transfer of or in exchange of these debt securities. A transferee will be bound
by acts of the trustee, Funding or TXU Europe Limited taken in reliance on those
requests or directions, whether or not notation of the action is made upon the
debt security (Indenture, Section 104).
RESIGNATION OF A TRUSTEE
A trustee may resign at any time by giving written notice to Funding
and TXU Europe Limited or may be removed at any time by act of the holders of a
majority in principal amount of all outstanding series of debt securities and
notice of that act has been delivered to the trustee, Funding and TXU Europe
Limited. No resignation or removal of a trustee and no appointment of a
successor trustee will be effective until the acceptance of appointment by a
successor trustee. So long as no Event of Default or event which, after notice
or lapse of time, or both, would become an Event of Default has occurred and is
continuing and except with respect to a trustee appointed by act of the holders,
if Funding and TXU Europe Limited deliver to the trustee resolutions of their
Boards of Directors appointing a successor trustee and that successor has
accepted the appointment in accordance with the terms of the indenture, the
trustee will be deemed to have resigned and the successor will be deemed to have
been appointed as trustee in accordance with the indenture (Indenture, Section
910).
NOTICES
Notices to holders of bearer Funding debentures will be given as
provided for in the Funding debentures. The depositary will forward these
notices to the partnership (Indenture, Section 106). So long as the Funding
debentures are listed on the LSE, and the rules of the LSE so require, notices
will also be published in a leading daily newspaper with general circulation in
Luxembourg, probably the Luxemburger Wort.
TITLE
Funding, TXU Europe Limited, the trustee, and any agent of Funding,
TXU Europe Limited or the trustee, will treat the bearer as the absolute owner
of the Funding debentures (Indenture, Section 308).
GOVERNING LAW
The indenture, the deposit agreement, the Funding debentures and the
guarantee will be governed by, and construed in accordance with, the laws of the
State of New York (Indenture, Section 112).
REGARDING THE TRUSTEE
The trustee under the indenture is The Bank of New York. The Bank of
New York is also depositary under the deposit agreement and will act as Property
Trustee, Partnership Guarantee Trustee and Trust Guarantee Trustee. TXU Europe
Limited and some of its affiliates also maintain various banking and trust
relationships with The Bank of New York.
MEETINGS OF HOLDERS OF FUNDING DEBENTURES
The indenture contains provisions for the calling of meetings of
holders of one or more series of debt securities, including of the Funding
debentures to consider matters affecting their interest, including consents or
waivers or other actions by the holders. See -- "Modification and Waiver" and
"Remedies." The trustee may call a meeting of holders of one or more series of
debt securities at any time. The trustee will call a meeting at the request of
Funding, TXU Europe Limited or the holders of 33% in aggregate principal amount
of the debt securities of those series, considered as one class. Notice of the
meeting will be given to the holders of the debt securities of the affected
series not less than 21 nor more than 180 days before the date of the meeting.
The holders of a majority in principal amount of the debt securities of the
affected series, considered as one class, will constitute a quorum at the
meeting. Attendance at a meeting may be in person or by proxy. (Indenture,
Article 13)
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MATERIAL INCOME TAX CONSIDERATIONS
UK TAX CONSIDERATIONS
The following is a summary of current law and practice relating to the
UK income tax treatment of interest on the subsidiary debentures to be issued by
TXU Eastern Funding Company, in the form of the Funding debenture, and
subsidiary debentures issued in the same form as the Funding debenture where the
interest has a UK source, where the TOPrS are held and beneficially owned by
persons who are not residents of the UK for taxation purposes. The UK tax
position in the case of a UK resident holder of the TOPrS is not addressed
because the trust is not a UK entity and is not intended to be resident in the
UK for UK tax purposes and the TOPrS will not be offered to UK resident persons.
Prospective investors who may be taxable in the UK because they are UK
residents or carry on a trade, profession or vocation in the UK to which a
holding of TOPrS is attributable or who may be unsure as to their tax position
should seek their own professional advice.
ISSUER/PAYING AGENT WITHHOLDING TAX
The subsidiary debentures will constitute "quoted Eurobonds" within
the meaning of section 124 of the Income and Corporation Taxes Act 1988 ("the
Act") as long as they continue to be in bearer form and are listed on a
"recognised stock exchange" within the meaning of section 841 of the Act. The
LSE is a "recognised stock exchange" for these purposes. Accordingly, payments
of interest on the subsidiary debentures when they are listed on the LSE may be
made without withholding or deduction for, or on account of, UK income tax where
payment is made by or through a person outside the UK, or where the payment is
made by or through a person in the UK and either:
(1) the beneficial owner of the subsidiary debentures and of the
interest on those notes is not resident in the UK, or
(2) the subsidiary debentures are held in a "recognised clearing
system";
and a declaration to that effect in the required form has been given to the
paying agent and the UK Inland Revenue has not issued a direction that it
considers that no exemption from the requirement to withhold or deduct applies.
Where these conditions are not satisfied, whether or not payment is
made through a paying agent, interest on the subsidiary debentures will be paid
after deduction of UK income tax at the lower rate, which is, currently, 20%,
unless the Inland Revenue has previously directed, in relation to a particular
holder of subsidiary debentures, that payment should be made free of that
deduction or subject to a reduced deduction by virtue of relief being available
to the holder of those subsidiary debentures under the provisions of any
applicable double taxation treaty.
So long as the subsidiary debentures are held by the partnership, it
is intended that the partnership will collect payments of interest on the
subsidiary debentures from a paying agent in New York or Luxembourg.
COLLECTING AGENT WITHHOLDING TAX
A person, referred to in this summary as a collecting agent, in the UK
who, in the course of a trade or profession, either:
(a) acts as custodian of the subsidiary debentures and receives
interest on the subsidiary debentures, or directs that interest
on the subsidiary debentures be paid to another person, or
consents to payment of interest on the subsidiary debentures
being made to another person;
(b) collects or secures payment of, or receives interest on, the
subsidiary debentures for another person, including the holder of
such subsidiary debentures; or
(c) acts for another person in arranging to collect or secure payment
of interest on the subsidiary debentures,
except by means solely of clearing a check or arranging for the clearing of a
check, will be required to withhold UK income tax at the lower rate (currently
20%) unless certain statutory exceptions apply.
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The partnership does not intend to appoint a UK collecting agent in
respect of the interest payments on the subsidiary debentures.
TAXATION OF UK SOURCE INCOME
For the purposes of UK income tax, interest on the subsidiary
debentures will be treated as income to which holders of TOPrS are entitled as
it arises on the subsidiary debentures. However, notwithstanding that the income
arising to the holder of a TOPrS may have a UK source, where interest on the
subsidiary debentures is paid without withholding or deduction for, or on
account of, UK income tax it will not be taxed in the hands of either the trust
or any beneficial owner of the TOPrS who is neither resident in the UK nor
carrying on a trade in the UK to which the holding of the TOPrS is attributable.
US INCOME TAX CONSIDERATIONS
The following summary describes the material US federal income tax
consequences of the acquisition, ownership and disposition of the TOPrS and
represents the opinion of Thelen Reid & Priest LLP, counsel to TXU Europe
Limited, the partnership, and the trust. Except where noted, it deals only with
TOPrS held as capital assets within the meaning of section 1221 of the US
Internal Revenue Code of 1986, as amended (Code), and does not deal with special
situations, such as those of dealers in securities or currencies, financial
institutions, tax-exempt entities, life insurance companies, persons holding the
TOPrS 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 TOPrS other than pursuant to their original
issuance and distribution. Furthermore, the discussion below is based upon the
Code, existing and proposed Treasury regulations promulgated under the Code, and
current administrative rulings and judicial decisions under the Code and
regulations, all of which are subject to change, possibly on a retroactive
basis, so as to result in US federal income tax consequences different from
those discussed below.
As used in this prospectus, a US holder means a holder of a beneficial
interest in TOPrS that is (i) a 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 of the US, (iii) an estate the
income of which is subject to US federal income taxation regardless of its
source, or (iv) a trust the administration of which is subject to the primary
supervision of a court within the US and for which one or more US persons have
the authority to control all substantial decisions.
PROSPECTIVE HOLDERS OF BENEFICIAL INTERESTS IN TOPRS ARE ADVISED TO
CONSULT WITH THEIR TAX ADVISORS AS TO THE US FEDERAL INCOME TAX CONSEQUENCES OF
THE PURCHASE, OWNERSHIP AND DISPOSITION OF TOPRS IN LIGHT OF THEIR PARTICULAR
CIRCUMSTANCES, AS WELL AS THE EFFECT OF ANY STATE, LOCAL OR OTHER TAX LAWS.
CLASSIFICATION OF THE TRUST
Thelen Reid & Priest LLP is of the opinion that, under current law and
assuming full compliance with the limited partnership agreement and the
instruments establishing the trust and other documents, the trust will be
classified for US federal income tax purposes as a grantor trust and not as an
association taxable as a corporation. Accordingly, for US federal income tax
purposes, each holder of TOPrS will be considered the owner of an undivided
interest in the Preferred Partnership Securities held by the trust, and each
holder will be required to include in its gross income its distributive share of
income attributable to the partnership, which generally will be equal to such
holder's allocable share of amounts accrued on the Preferred Partnership
Securities. No amount included in income with respect to the TOPrS will be
eligible for the corporate dividends-received deduction.
CLASSIFICATION OF THE PARTNERSHIP
Thelen Reid & Priest LLP is of the opinion that, under current law,
and based on certain representations, facts and assumptions described below, the
partnership will be classified for US federal income tax purposes as a
partnership and not as an association or publicly traded partnership taxable as
a corporation.
Thelen Reid & Priest LLP's opinion is based on certain factual
assumptions relating to the organization and operation of the partnership and is
conditioned upon certain representations made by the general partner and the
partnership as to factual matters, such as the organization and the operation of
the partnership and the type and frequency of investments made by the
partnership.
The general partner has represented that it intends to operate the
partnership in a manner such that it will continue to constitute a partnership
for all future taxable periods in which any Preferred Partnership Securities
remain outstanding. In particular, pursuant to the limited partnership
agreement, the general partner is prohibited from taking any action that would
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cause the Partnership to constitute a publicly traded partnership taxable as a
corporation under section 7704(a) of the Code. Accordingly, it is expected that
the partnership will continue to qualify as a partnership, and therefore will
not constitute a publicly traded partnership taxable as a corporation, for all
taxable years in which the Preferred Partnership Securities remain outstanding.
CLASSIFICATION OF THE SUBSIDIARY DEBENTURES
The partnership, TXU Europe Limited, the subsidiaries of TXU Europe
Limited that issue subsidiary debentures and the holders of the TOPrS (by
acceptance of a beneficial interest in a TOPrS) will agree to treat the
subsidiary debentures as indebtedness of the relevant issuer for US federal
income tax purposes. In connection with the issuance of the initial subsidiary
debentures, Thelen Reid & Priest LLP will issue its opinion, based on the
reasoning contained therein, that under current law, and based on certain
representations, facts and assumptions set forth in the opinion, the subsidiary
debentures will be classified as indebtedness of the relevant issuer for US
federal income tax purposes.
PARTNERSHIP INCOME
A holder's distributive share of income attributable to the
partnership generally will be substantially equal to the amount of such holder's
allocable share of the cash distributions that accumulate with respect to the
TOPrS. Accordingly, if quarterly distributions on the TOPrS are paid currently,
the amount of income recognized by a holder during a taxable year generally will
be substantially equal to the cash distributions received by the holder with
respect to its TOPrS.
The nature and timing of the income that is allocated to holders of
TOPrS will, however, depend on the US federal income tax characterization of the
investments held by the partnership during the period in question. Because the
partnership will be an accrual basis taxpayer for US federal income tax
purposes, income will accrue on the TOPrS and will be allocated to holders of
TOPrS on a daily accrual basis, generally at a rate that is expected to be equal
to (and that will not be greater than) the distribution rate on the TOPrS,
regardless of the holders' method of accounting. Actual cash distributions on
the TOPrS will not, however, be separately reported as taxable income to the
holders at the time they are received.
If distributions on the Preferred Partnership Securities are not made
currently, the corresponding distributions on the TOPrS will not be made
currently. Because the partnership is an accrual basis taxpayer, it can be
expected that during a period in which interest payments on the subsidiary
debentures or other partnership investments or distributions on the Preferred
Partnership Securities are deferred (for whatever reason), holders will
generally recognize income in advance of their receipt of any cash distributions
with respect to their TOPrS. The amount of income that will be allocated to
holders of TOPrS during any such deferral period will equal their pro rata share
of the amount of distributions accruing on the Preferred Partnership Securities
during such deferral period.
RECEIPT OF PREFERRED PARTNERSHIP SECURITIES UPON LIQUIDATION OF THE TRUST
Under certain circumstances, as described under the caption
DESCRIPTION OF THE TOPrS -- "Trust Special Event Redemption or Distribution",
Preferred Partnership Securities may be distributed to holders of TOPrS in
exchange for their TOPrS upon the dissolution and liquidation of the trust.
Unless the dissolution of the trust occurs as a result of the trust being
subject to US federal income tax with respect to income accrued or received on
the Preferred Partnership Securities, such a distribution to holders would, for
US federal income tax purposes, be treated as a nontaxable event to each holder,
each holder would receive an aggregate tax basis in the Preferred Partnership
Securities equal to such holder's aggregate tax basis in its TOPrS, and each
holder's holding period in the Preferred Partnership Securities so received in
liquidation of the trust would include the period during which the TOPrS were
held by such holder. If, however, the dissolution of the trust were to occur
because the trust was subject to US federal income tax with respect to income
accrued or received on the Preferred Partnership Securities, the distribution of
Preferred Partnership Securities to holders by the trust would likely be a
taxable event to each holder, and each holder would recognize gain or loss as if
the holder had exchanged its TOPrS for the Preferred Partnership Securities it
received upon the dissolution and liquidation of the trust in a taxable
exchange. Such gain or loss would be equal to the difference between the
holder's aggregate tax basis in its TOPrS surrendered in the exchange and the
aggregate fair market value of the Preferred Partnership Securities received in
the exchange.
REDEMPTION OF TOPRS FOR CASH
Under certain circumstances, as described under the caption DESCRIPTION
OF THE TOPrS -- "Mandatory Redemption", DESCRIPTION OF THE TOPrS -- "Trust
Special Event Redemption or Distribution" and DESCRIPTION OF THE PREFERRED
PARTNERSHIP SECURITIES -- "Partnership Special Event Redemption", the general
partner may cause the partnership to redeem the Preferred Partnership Securities
for cash, in which event the trust shall simultaneously apply the proceeds of
such redemption to redeem the TOPrS. Under current law, such a redemption would
constitute, for US federal income tax purposes, a taxable disposition, and a
holder would recognize gain or loss as if it had sold its proportionate interest
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in the redeemed Preferred Partnership Securities for an amount of cash equal to
the proceeds received upon redemption. See " -- Disposition of TOPrS".
DISPOSITION OF TOPRS
A holder that sells TOPrS will recognize gain or loss equal to the
difference between the amount realized on the sale of the TOPrS and the holder's
adjusted tax basis in such TOPrS. Such gain or loss will be a capital gain or
loss and will be a long-term capital gain or loss if the TOPrS have been held
for more than one year at the time of the sale.
A holder's tax basis in its TOPrS generally will equal the amount paid
by the holder for its TOPrS, increased by the amount includible in income by
such holder with respect to its TOPrS, and reduced by the amount of cash or
other property distributed to such holder with respect to its TOPrS. A holder
who acquires TOPrS at different prices may be required to maintain a single
aggregate adjusted tax basis in all of its TOPrS and, upon sale or other
disposition of some of its TOPrS, to allocate a pro rata portion of the
aggregate tax basis to the TOPrS sold (rather than maintaining a separate tax
basis in each TOPrS for purposes of computing gain or loss on a sale of that
trust security).
PARTNERSHIP ANTI-ABUSE RULES
The US Department of Treasury has promulgated regulations under
section 701 of the Code that generally permit it to recast a transaction or
disregard a partnership if a partnership is formed or availed of in connection
with a transaction a principal purpose of which is to reduce substantially the
present value of the partners' aggregate US federal tax liability in a manner
that is inconsistent with the intent of the partnership provisions of the Code,
or to treat a partnership as an aggregate of its partners as appropriate to
carry out the purpose of any provision of the Code or the Treasury regulations
thereunder. The partnership has been formed for, and will engage in, activities
typical for partnerships. Although there is no precedent that applies to the
transactions contemplated herein, Thelen Reid & Priest LLP has advised TXU
Europe Limited, the partnership and the trust, and each of TXU Europe, the
partnership and the trust believe, that the partnership is not of a type
intended to fall within the scope of these regulations.
INFORMATION REPORTING AND BACKUP WITHHOLDING
To the extent required by law, income on the TOPrS will be reported to
US holders on Form 1099, which should be mailed to the holders by January 31
following each calendar year.
Payment of the proceeds from the disposition of the TOPrS 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 TOPrS
may be subject to "backup withholding" tax at a rate of 31% if the US holder
fails to comply with identification requirements prescribed by the Code and
regulations, or has previously failed to report in full dividend and interest
income, or does not otherwise establish its entitlement to an exemption. Any
withheld amounts generally will be refunded or allowed as a credit against the
US holder's US federal income tax liability, provided that information required
by the Code and regulations is furnished to the US Internal Revenue Service.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting
agreement, the trust has agreed to sell to each of the underwriters named below,
and each of the underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith
Incorporated is acting as representative, has severally agreed to purchase the
number of TOPrS set forth opposite its name below. In the underwriting
agreement, the several underwriters have agreed, subject to the terms and
conditions in the underwriting agreement, to purchase all the TOPrS offered if
any of the TOPrS are purchased. In the event of default by an underwriter, the
underwriting agreement provides that, in certain circumstances, the purchase
commitments of the non-defaulting underwriters may be increased or the
underwriting agreement may be terminated.
UNDERWRITERS NUMBER OF TOPRS
------------ ---------------
Merrill Lynch, Pierce, Fenner & Smith Incorporated............ 555,000
A.G. Edwards & Sons, Inc. .................................... 555,000
Goldman, Sachs & Co. ......................................... 555,000
Lehman Brothers Inc. ......................................... 555,000
Morgan Stanley & Co. Incorporated............................. 555,000
PaineWebber Incorporated...................................... 555,000
Prudential Securities Incorporated............................ 555,000
Salomon Smith Barney Inc. .................................... 555,000
BNY Capital Markets, Inc. .................................... 60,000
Banc of America Securities LLC................................ 60,000
Banc One Capital Markets, Inc. ............................... 60,000
CIBC World Markets Corp. ..................................... 60,000
Credit Suisse First Boston Corporation........................ 60,000
First Union Securities, Inc. ................................. 60,000
FleetBoston Robertson Stephens Inc. .......................... 60,000
TD Securities (USA) Inc. ..................................... 60,000
Utendahl Capital Partners, L.P. .............................. 60,000
ABN AMRO Incorporated ........................................ 30,000
BB&T Capital Markets, a division of Scott & Stringfellow ..... 30,000
Robert W. Baird & Co. Incorporated ........................... 30,000
Bear, Stearns & Co. Inc. ..................................... 30,000
J.C. Bradford & Co. .......................................... 30,000
Dain Rauscher Incorporated ................................... 30,000
Deutsche Bank Securities Inc. ................................ 30,000
Donaldson, Lufkin & Jenrette Securities Corporation .......... 30,000
Fahnestock & Co. Inc. ........................................ 30,000
Fifth Third Securities, Inc. ................................. 30,000
First Albany Corporation ..................................... 30,000
Gibraltar Securities Co. ..................................... 30,000
Gruntal & Co., L.L.C. ........................................ 30,000
J.J.B. Hilliard, W.L. Lyons, Inc. ............................ 30,000
Janney Montgomery Scott LLC .................................. 30,000
Kirkpatrick, Pettis, Smith, Polian Inc. ...................... 30,000
Legg Mason Wood Walker, Incorporated ......................... 30,000
McDonald Investments Inc., A KeyCorp Company ................. 30,000
Mesirow Financial, Inc. ...................................... 30,000
Morgan Keegan & Company, Inc. ................................ 30,000
David A. Noyes & Company ..................................... 30,000
OLDE Discount Corporation..................................... 30,000
Raymond James & Associates, Inc. ............................. 30,000
The Robinson-Humphrey Company, LLC ........................... 30,000
SG Cowen Securities Corporation .............................. 30,000
Schroder & Co. Inc. .......................................... 30,000
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Southwest Securities, Inc. ................................... 30,000
Stifel, Nicolaus & Company, Incorporated ..................... 30,000
Stone & Youngberg LLC ........................................ 30,000
Trilon International Inc. .................................... 30,000
Tucker Anthony Incorporated .................................. 30,000
U.S. Bancorp Piper Jaffray Inc. .............................. 30,000
Warburg Dillon Read LLC ...................................... 30,000
Wayne Hummer Investments LLC ................................. 30,000
------
Total.................................... 6,000,000
=========
COMMISSION AND DISCOUNTS
The underwriters propose to offer the TOPrS to the public in the
United States at the public offering price set forth on the cover page of this
prospectus, and to certain dealers at that price less a concession not in excess
of $.50 per TOPrS. The underwriters may allow, and those dealers may reallow, a
discount not in excess of $.40 per TOPrS to certain brokers and dealers. After
the TOPrS are released for sale to the public, the offering price, concession
and discount may be changed.
In view of the fact that the proceeds of the sale of the TOPrS will
ultimately be used to purchase the debentures of Funding and other eligible
subsidiaries of TXU Europe Limited, the underwriting agreement provides that TXU
Europe Limited will pay as compensation to the underwriters an amount in
immediately available funds of $4,725,000 for the accounts of the several
underwriters.
LISTING
TXU Europe Limited has applied to have the TOPrS listed on the NYSE.
Trading of the TOPrS on the NYSE is expected to commence within a 30-day period
after the initial delivery of the TOPrS. The representative has advised the
trust that it intends to make a market in the TOPrS prior to the commencement of
trading on the NYSE. The representative will have no obligation to make a market
in the TOPrS, however, and may cease market-making activities, if commenced, at
any time.
Before this offering there has been no public market for the TOPrS. In
order to meet one of the requirements for listing the TOPrS on the NYSE, the
underwriters will undertake to sell lots of 100 or more TOPrS to a minimum of
400 beneficial holders, that there will be at least one million TOPrS
outstanding and that the TOPrS will have a minimum market value of $4,000,000.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
In connection with the offering, the underwriters are permitted to
engage in certain transactions that stabilize the market price of the TOPrS.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the market price of the TOPrS. If an underwriter creates a
short position in the TOPrS in connection with the offering, i.e., if it sells
more TOPrS than are set forth on the cover page of this prospectus, the
underwriter may reduce that short position by purchasing TOPrS in the open
market. In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
The underwriters may also impose a penalty bid on certain underwriters
and selling group members. This means that if an underwriter purchases TOPrS in
the open market to reduce the underwriter's short position or to stabilize the
price of the TOPrS, they may reclaim the amount of the selling concession from
the underwriters and selling group members who sold those TOPrS as part of the
offering. The imposition of a penalty bid might have an effect on the price of a
security to the extent that it were to discourage resales of the security.
Neither the trust, TXU Europe Limited nor any of the underwriters
makes any representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the price of the TOPrS.
In addition, neither the trust, TXU Europe Limited nor any of the underwriters
makes any representation that the underwriters will engage in these transactions
or that these transactions, once commenced, will not be discontinued without
notice.
OVER-ALLOTMENT OPTION
The underwriters have been granted an option, exercisable for 30 days
following the date of this prospectus, to purchase additional TOPrS from the
trust in an amount up to 15% of the total initial TOPrS listed above at the
public offering price listed on the cover page of this prospectus. TXU Europe
110
<PAGE>
Limited will pay to the underwriters a commission of $.7875 per additional TOPrS
purchased. The underwriters may exercise this option only to cover
over-allotments, if any, made on the sale of the TOPrS. To the extent the option
is exercised, each underwriter has agreed to purchase approximately the same
percentage of TOPrS that the number listed opposite its name in the table above
bears to the total number of TOPrS initially offered.
MISCELLANEOUS
The trust, TXU Europe Limited, Funding and the partnership have agreed
to indemnify the underwriters against, or contribute to payments that the
underwriters may be required to make in respect of, certain liabilities,
including liabilities under the Securities Act.
Certain of the underwriters and their affiliates engage in
transactions with, and perform services for, TXU Europe Limited and its
affiliates in the ordinary course of business and have engaged, and may in the
future engage, in commercial banking and investment banking transactions with
TXU Europe Limited and its affiliates. Affiliates of certain of the underwriters
are lenders to TXU Europe Limited under the Sterling Credit Agreement and are
expected to receive a portion of the amounts repaid under the Sterling Credit
Agreement from a portion of the net proceeds of the offering. Because more than
10% of the net proceeds of the offering will be paid to affiliates of members of
the National Association of Securities Dealers, Inc., or NASD, who are
participating in the offering, the offering is being made pursuant to Rule
2710(c)(8) of the Conduct Rules of the NASD. See USE OF PROCEEDS.
EXPERTS
The consolidated financial statements of TXU Europe Limited (formerly
known as TXU Eastern Holdings Limited) and Subsidiaries as of December 31, 1998
and March 31, 1999 and for the periods from formation (February 5, 1998) through
December 31, 1998 and from formation through March 31, 1999; the consolidated
financial statements of Eastern Group plc (now known as TXU Europe Group plc) as
of March 31, 1998, for the years ended March 31, 1997 and March 31, 1998 and for
the period from April 1, 1998 through May 18, 1998; and the financial statements
of Energy Group Overseas B.V. as of March 31, 1998 and for the periods from
October 8, 1997 through March 31, 1998 and April 1, 1998 through May 18, 1998
included in this prospectus have been audited by PricewaterhouseCoopers,
independent accountants, as stated in their reports included in this prospectus,
and have been included in this prospectus in reliance upon the reports of
PricewaterhouseCoopers given upon their authority as experts in accounting and
auditing.
The provisions of the United Kingdom Companies Act of 1985 and the New
Articles of Association of TXU Europe Limited, adopted on May 22, 1998, provide
PricewaterhouseCoopers with indemnification rights. PricewaterhouseCoopers
acknowledges that such indemnification is deemed to be unenforceable under
United States securities laws. PricewaterhouseCoopers confirms that no actual
indemnification has been provided or sought and that no indemnification will be
sought in the future from TXU Europe Limited until Deloitte & Touche, as
successor auditors, issues a report on TXU Europe Limited, which is included in
a filing with the Securities and Exchange Commission.
The financial statements of the trust and the partnership included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports included in this prospectus, and have been
included in this prospectus in reliance upon the reports of Deloitte & Touche
LLP given upon their authority as experts in accounting and auditing.
The statements made as to matters of law and legal conclusions in this
prospectus under MATERIAL INCOME TAX CONSIDERATIONS -- "UK Tax Considerations"
have been reviewed by Norton Rose, London, England, and are included in this
prospectus in reliance upon the opinion of that firm given upon their authority
as experts. The statements made as to matters of law and legal conclusions in
this prospectus under MATERIAL INCOME TAX CONSIDERATIONS -- "US Income Tax
Considerations" have been reviewed by Thelen Reid & Priest LLP, New York, New
York, and are included in this prospectus in reliance upon the opinion of that
firm given upon their authority as experts.
LEGALITY
Matters of Delaware law relating to the legality of the TOPrS, the
validity of the trust agreement, the formation of the trust and the partnership
and the legality of the Preferred Partnership Securities are being passed upon
by Richards, Layton & Finger, P.A., Wilmington, Delaware, special Delaware
counsel to the trust, the partnership, TXU Europe Limited and Funding. The
legality of the Trust Guarantee, the Partnership Guarantee, the subsidiary
debentures and the guarantees with respect to the subsidiary debentures will be
passed upon on behalf of the trust, the partnership, TXU Europe Limited and
Funding by E.J. Lean, General Counsel to TXU Europe Limited and Funding, by
Worsham, Forsythe & Wooldridge, L.L.P., Dallas, Texas and by Thelen Reid &
Priest LLP, New York, New York. All matters concerning the incorporation of TXU
Europe Limited and Funding and all other matters of UK law relating to TXU
Europe Limited and Funding will be passed upon by E.J. Lean. Certain legal
111
<PAGE>
matters will be passed upon on behalf of the underwriters by Winthrop, Stimson,
Putnam & Roberts, New York, New York, counsel to the underwriters. Thelen Reid &
Priest LLP, Worsham, Forsythe & Wooldridge, L.L.P. and Winthrop, Stimson, Putnam
& Roberts may rely on the opinion of Richards, Layton & Finger, P.A. as to
matters of Delaware law and on the opinion of E.J. Lean as to matters of English
law. At September 30, 1999, members of the firm of Worsham, Forsythe &
Wooldridge, L.L.P. owned approximately 41,000 shares of the common stock of TXU
Corp, the parent company of TXU Europe Limited.
WHERE YOU CAN FIND MORE INFORMATION
TXU Europe Limited is required to file reports under the Securities
Exchange Act of 1934 and will file those reports with the SEC. These SEC filings
will be available to the public over the Internet at the SEC's website at
http://www.sec.gov. You will also be able to read and copy any of these SEC
filings at the SEC's public reference rooms in Washington, D.C., New York, New
York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. In addition, these filings will be
available free of charge at the offices of the paying agent in Luxembourg.
No separate financial statements of Funding are included in this
prospectus. TXU Europe Limited and Funding do not consider that those financial
statements would be material to holders of TOPrS because (1) Funding is a
recently incorporated company that has no operating history and no independent
operations, and (2) Funding was formed for the sole purpose of providing
financing for the operations of TXU Europe Limited and its subsidiaries.
112
<PAGE>
INDEX TO FINANCIAL STATEMENTS
TXU EUROPE LIMITED (formerly known as TXU EASTERN HOLDINGS LIMITED)
AND SUBSIDIARIES
(Successor Company) Page
----
Report of Independent Accountants...........................................F-3
Financial Statements:
Consolidated balance sheets as of December 31, 1998 and as of
March 31, 1999....................................................F-4
Statements of consolidated income for the period from formation
through December 31, 1998 and for the period from formation
through March 31, 1999............................................F-6
Statements of consolidated comprehensive income for the period
from formation through December 31, 1998 and for the period
from formation through March 31, 1999.............................F-7
Statements of consolidated common stock equity for the period
from formation through December 31, 1998 and for the period
from formation through March 31, 1999.............................F-8
Statements of consolidated cash flows for the period from formation
through December 31, 1998 and for the period from formation
through March 31, 1999............................................F-9
Notes to the consolidated financial statements.........................F-11
EASTERN GROUP plc (now known as TXU EUROPE GROUP plc) AND SUBSIDIARIES
(Predecessor Company)
Report of Independent Accountants...........................................F-35
Financial Statements:
Consolidated balance sheet as of March 31, 1998........................F-36
Statements of consolidated income for the years ended March 31,
1997 and 1998 and for the period from April 1, 1998
through May 18, 1998..............................................F-38
Statements of consolidated comprehensive income for the years
ended March 31, 1997 and 1998 and for the period from
April 1, 1998 through May 18, 1998................................F-39
Statements of consolidated common stock equity for the years
ended March 31, 1997 and 1998 and for the period from
April 1, 1998 through May 18, 1998................................F-40
Statements of consolidated cash flows for the years ended
March 31, 1997 and 1998 and for the period from April 1,
1998 through May 18, 1998 ........................................F-41
Notes to the consolidated financial statements.........................F-42
ENERGY GROUP OVERSEAS B.V.
Report of Independent Accountants...........................................F-62
Financial Statements:
Balance Sheet as of March 31, 1998.....................................F-63
Statements of income for the periods from formation through
March 31, 1998 and from April 1, 1998 through May 18, 1998........F-64
Statements of comprehensive income for the periods from
formation through March 31, 1998 and from April 1, 1998
through May 18, 1998..............................................F-65
Statements of common stock equity for the periods from formation
through March 31, 1998 and from April 1, 1998
through May 18, 1998..............................................F-66
Statements of cash flows for the periods from formation through
March 31, 1998 and from April 1, 1998 through May 18, 1998........F-67
Notes to the financial statements......................................F-68
TXU EUROPE CAPITAL I
Independent Auditors' Report................................................F-71
Balance Sheet..........................................................F-72
Notes to balance sheet.................................................F-72
TXU EUROPE FUNDING I, L.P.
Independent Auditor's Report................................................F-73
Balance Sheet..........................................................F-74
Notes to balance sheet.................................................F-74
F-1
<PAGE>
TXU EUROPE LIMITED AND SUBSIDIARIES
Financial Statements:
Unaudited condensed consolidated balance sheet as of
September 30, 1999................................................F-75
Unaudited condensed statements of consolidated income of the
Predecessor Company for the period from January 1, 1998
through May 18, 1998 and of the Successor Company for the
period from formation through September 30, 1998
and for the nine months ended September 30, 1999..................F-77
Unaudited condensed statements of consolidated comprehensive
income of the Predecessor Company for the period
from January 1, 1998 through May 18, 1998 and of the
Successor Company for the period from formation through
September 30, 1998 and for the nine months ended
September 30, 1999................................................F-78
Unaudited condensed statements of consolidated cash flows of the
Predecessor Company for the period from January 1, 1998 through
May 18, 1998 and for the period from formation through September
30, 1998 and for the nine months ended September 30,
1999..............................................................F-79
Notes to the unaudited condensed consolidated financial statements.....F-80
TXU EUROPE LIMITED
Unaudited condensed combined pro forma statement of income from
continuing operations for the year
ended December 31, 1998............................................P-1
Notes to unaudited condensed combined pro forma statement of income.....P-3
The financial statement schedules are omitted because of the absence of the
conditions under which they are required or because the information is included
in the consolidated financial statements or the notes thereto.
F-2
<PAGE>
PRICEWATERHOUSECOOPERS
- --------------------------------------------------------------------------------
PRICEWATERHOUSECOOPERS
1 Embankment Place
London WC2N 6NN
Telephone +44 (0) 171 583 5000
Facsimile +44 (0) 171 822 4652
Report of Independent Accountants
---------------------------------
To the Board of Directors and Shareholders of TXU Europe Limited (formerly
known as TXU Eastern Holdings Limited) and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the related
statements of consolidated income, of comprehensive income, of common stock
equity and of cash flows present fairly, in all material respects, the financial
position of TXU Europe Limited (formerly known as TXU Eastern Holdings Limited)
and Subsidiaries at December 3l, 1998 and March 31, 1999, and the results
of their operations and their cash flows for the periods from formation
(February 5, 1998) to December 31, 1998 and from formation to March 31, 1999 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards in the United Kingdom which do not
differ significantly with those in the United States and which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers
London, England
June 30, 1999
PricewaterhouseCoopers is the successor partnership to the UK firms of Price
Waterhouse and Coopers & Lybrand. The principal place of business of
PricewaterhouseCoopers and its associate partnerships, and of Coopers & Lybrand,
is 1 Embankment Place, London WC2N 6NN. The principal place of business of Price
Waterhouse is Southwark Towers, 32 London Bridge Street, London SE1 9SY. Lists
of the partners' names are available for inspection at those places.
All partners in the associate partnerships are authorised to conduct business as
agents of, and all contracts for services to clients are with,
PricewaterhouseCoopers. PricewaterhouseCoopers is authorised by the Institute of
Chartered Accountants in England and Wales to carry on investment business.
F-3
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
CONSOLIDATED BALANCE SHEETS
((pound) million)
<TABLE>
<CAPTION>
As of As of
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Assets
Property, plant and equipment, net 2,676 2,516
----- -----
Current assets
Cash and cash equivalents 467 414
Accounts receivable (net of allowance for uncollectible accounts
of (pound)22 million and (pound)17 million at December 31, 1998 and
March 31, 1999, respectively) 585 619
Inventories:
Materials and supplies 25 23
Fuel stock 116 97
Prepayments 40 22
ACT recoverable 30 30
Other current assets 40 29
----- -----
Total current assets 1,303 1,234
----- -----
Investments
Restricted cash 717 730
Other 233 284
----- -----
Total investments 950 1,014
----- -----
Deferred debits
Goodwill (net of accumulated amortization of (pound)52 million and (pound)73
million at December 31, 1998 and March 31, 1999, respectively) 3,209 3,451
Prepayments for pensions 257 259
Other deferred debits 134 109
----- -----
Total deferred debits 3,600 3,819
----- -----
Total assets 8,529 8,583
===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
CONSOLIDATED BALANCE SHEETS
((pound) million, except for number of shares and par value)
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Capitalization and liabilities
Capitalization
Common stock (3,000,000,000 shares at US$1 par and 100 deferred
shares at (pound)1 par authorized) 2,455,705,299 shares and 100
deferred shares issued and outstanding 1,467 1,467
Retained earnings 76 125
Accumulated other comprehensive loss (8) (11)
------ ------
Total common stock equity 1,535 1,581
------ ------
Minority interest 190 200
------ ------
Note payable to TXU Corp 682 682
Long-term debt, less amounts due currently 3,629 3,754
------ ------
Total long-term debt 4,311 4,436
------ ------
Total capitalization 6,036 6,217
------ ------
Current liabilities
Notes payable - banks 238 53
Long-term debt due currently 382 486
Short-term loans on accounts receivable 300 300
Accounts payable:
Affiliates 7 7
Other 532 403
Taxes accrued 162 213
Interest accrued 53 16
Other current liabilities 17 56
------ ------
Total current liabilities 1,691 1,534
------ ------
Deferred credits and other noncurrent liabilities
Deferred income taxes, net 321 334
Provision for unfavorable contracts 250 248
Due to affiliates 33 45
Other deferred credits and noncurrent liabilities 198 205
------ ------
Total deferred credits and other noncurrent liabilities 802 832
------ ------
Commitments and contingencies (Notes 12 and 13) -- --
Total capitalization and liabilities 8,529 8,583
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
STATEMENTS OF CONSOLIDATED INCOME
((pound) million)
<TABLE>
<CAPTION>
Period from formation Period from formation
through through
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Operating revenues 2,165 3,338
Costs and expenses
Purchased power 961 1,480
Gas purchased for resale 367 646
Operation and maintenance 379 526
Depreciation and amortization 144 202
----- -----
Total operating expenses 1,851 2,854
----- -----
Operating income 314 484
Other income - net 46 47
----- -----
Income before interest, income taxes and minority interest 360 531
Interest income 64 78
Interest expense, net of capitalized interest of (pound)4
million and (pound)5 million for the periods from formation
through December 31, 1998 and March 31, 1999,
respectively 269 356
----- -----
Income before income taxes and minority interest 155 253
Income tax expense 67 106
----- -----
Income before minority interest 88 147
Minority interest 11 21
----- -----
Net income 77 126
===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
((pound) million)
<TABLE>
<CAPTION>
Period from formation Period from formation
through December 31, 1998 through March 31, 1999
------------------------- ----------------------
<S> <C> <C>
Net income 77 126
Other comprehensive income
Unrealized loss on securities classified as available for sale (8) (11)
Cumulative translation adjustment -- --
---- ----
Comprehensive income 69 115
==== ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY
((pound) million)
<TABLE>
<CAPTION>
Period from formation through December 31, 1998
-----------------------------------------------
Common Retained Accumulated Other
Stock Earnings Comprehensive Loss
------------ -------- ------------------
<S> <C> <C> <C>
Balance at February 5, 1998 -- -- --
Net income -- 77 --
Cash dividends -- (1) --
Stock issued (2,456 million shares) 1,467 -- --
Unrealized loss on securities classified as available for sale -- -- (8)
Cumulative translation adjustment -- -- --
----- ----- -----
Balance at December 31, 1998 1,467 76 (8)
===== ===== =====
<CAPTION>
Period from formation through March 31, 1999
-----------------------------------------------
Common Retained Accumulated Other
Stock Earnings Comprehensive Loss
------------ -------- ------------------
<S> <C> <C> <C>
Balance at February 5, 1998 -- -- --
Net income -- 126 --
Cash dividends -- (1) --
Stock issued (2,456 million shares) 1,467 -- --
Unrealized loss on securities classified as available for sale -- -- (11)
Cumulative translation adjustment -- -- --
----- ----- -----
Balance at March 31, 1999 1,467 125 (11)
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
STATEMENTS OF CONSOLIDATED CASH FLOWS
((pound) million)
<TABLE>
<CAPTION>
Period from formation Period from formation
through through
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Cash flows - operating activities
Net income 77 126
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 144 202
Amortization of discount on long-term debt (5) (6)
Deferred income taxes 24 35
Net gain on sale of businesses (13) (12)
Minority interest 11 21
Undistributed equity in earnings of TEG (2) (2)
Changes in operating assets and liabilities:
Accounts receivable (138) (173)
Inventories (26) (7)
Prepayments and other assets (7) (16)
Accounts payable
Affiliates 7 7
Other 198 73
Interest accrued 40 1
Taxes accrued (95) (77)
Other liabilities (211) (173)
Due to affiliates 33 45
------ ------
Cash provided by operating activities 37 44
------ ------
Cash flows - investing activities
Acquisition of TEG, net of cash acquired of (pound)2,011 million (1,432) (1,444)
Capital expenditures (207) (230)
Purchase of Citigen (London) Ltd and BG Cogen Ltd (14) (14)
Proceeds from sale of businesses 60 63
Investment in Svartisen (124) (124)
Investment in marketable securities (36) (36)
Other investments (14) (73)
------ ------
Cash used in investing activities (1,767) (1,858)
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
STATEMENTS OF CONSOLIDATED CASH FLOWS (continued)
((pound) million)
<TABLE>
<CAPTION>
Period from formation Period from formation
through through
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Cash flows - financing activities
Net borrowings under the:
Acquisition facility 1,821 1,821
Interim facility 243 243
Other long-term debt 66 360
Issuance of common stock to parent 1,467 1,467
Retirements of :
Acquisition facility (1,071) (1,071)
Interim facility (243) (243)
Loan notes (9) (9)
Other long-term debt (174) (242)
Change in notes payable - banks 168 (27)
Change in minority interest 166 166
Retirements of advances from TXU Corp (200) (200)
Debt financing cost (36) (36)
Dividends paid (1) (1)
------ ------
Cash provided by financing activities 2,197 2,228
------ ------
Net change in cash and cash equivalents 467 414
Cash and cash equivalents - beginning balance -- --
------ ------
Cash and cash equivalents - ending balance 467 414
====== ======
Supplemental cash flow disclosures:
Cash paid for interest 223 310
Cash paid for income taxes 137 148
Non-cash transactions
Investment received in consideration for sale of EG
Telecoms 22 22
Consolidation of debt and related investment on
cross-border leases 170 170
Issuance of loan notes upon acquisition of TEG 85 85
Advances from TXU Corp upon acquisition of TEG 882 882
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
The business and operations of TXU Europe Limited (formerly known as TXU
Eastern Holdings Limited) and Subsidiaries (the Company) are divided into
three principal segments, as follows:
(i) The energy retail business which supplies electricity and gas to
national domestic, industrial and commercial customers in the United
Kingdom;
(ii) The energy management and generation business which manages an
integrated portfolio of generation assets, physical gas assets and
contracts; and
(iii) The networks business which owns, manages and operates the
electricity distribution system.
These businesses are carried out primarily in the United Kingdom with
interests increasingly being developed throughout the rest of Europe.
Formation
The Company is a holding company that owns 90% of the outstanding common
stock of TXU Finance (No. 2) Limited (TXU Finance) which in turn owns 100%
of the common stock of TXU Acquisitions Limited (TXU Acquisitions).
The Company was incorporated as a private limited company on February 5,
1998. Through a series of restructurings and capital transactions
subsequent to its formation, the Company became an indirect, wholly owned
subsidiary of Texas Utilities Company, doing business as TXU Corp (TXU).
The "period from formation through December 31, 1998" referred to in these
financial statements represents February 5, 1998 through December 31, 1998,
inclusive. The "period from formation through March 31, 1999" referred to
in these financial statements represents February 5, 1998 through March 31,
1999, inclusive. From March 1998 to May 18, 1998 the Company, through TXU
Acquisitions, had acquired an equity interest in The Energy Group PLC (TEG)
of approximately 22%, which resulted in the recognition of equity income of
(pound)2 million, which is reflected in "Other Income-net" in the Statement
of Consolidated Income.
The Company has two classes of shares outstanding, ordinary and deferred.
Both classes are held by wholly owned subsidiaries of TXU. Ordinary shares
have voting rights.
In May 1998, the Company's share capital was redenominated from pounds
sterling into US dollars. The sterling-denominated ordinary shares were
reclassified as deferred shares and the new US dollar denominated
ordinary shares were issued. The deferred shares have no rights to vote or
receive dividends. Upon liquidation, holders of deferred shares are
entitled to receive (pound)1 per share only after holders of ordinary
shares are paid (pound)100 million per share. In addition, all of the
deferred shares may be repurchased for the sum of (pound)1.
Purchase Accounting
As of May 19, 1998, TXU Acquisitions acquired control of TEG. This business
combination was accounted for as a purchase. Substantially all of TEG's
continuing operations are conducted through Eastern Group plc (Eastern),
one of the largest integrated electricity and gas groups in the United
Kingdom. Also on May 19, 1998, TEG sold its United States and Australian
coal businesses and United States energy marketing operations (Peabody
Sale). The "TEG Businesses Acquired" refers to TEG, exclusive of the
operations sold in the Peabody Sale.
The total purchase consideration for the TEG Businesses Acquired was
approximately (pound)4.4 billion. The excess of the purchase consideration
plus acquisition costs over the net fair value of tangible and identifiable
F-11
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Description of Business (continued)
intangible assets acquired and liabilities assumed resulted in goodwill of
(pound)3.5 billion, which is being amortized over 40 years.
In addition to the cash offer, shareholders of TEG were offered a share
alternative, which gave them the option to exchange their TEG shares for
shares of TXU common stock and a loan note option. TXU Acquisitions
exchanged 37,316,884 shares of TXU common stock for the 105,117,980 TEG
shares tendered by those who elected the share alternative, and paid cash
or issued loan notes in exchange for the remainder of TEG shares. TXU
Acquisitions acquired from TXU the shares of TXU common stock exchanged for
TEG shares by issuing a term note to TXU for (pound)882 million, the value
of the TXU common stock.
The allocation of the TEG purchase price to the assets and liabilities
assumed is as follows:
((pound) million)
Assets:
Property plant and equipment 2,624
Cash 2,011
Current assets 751
Investments 593
Deferred debits 565
Liabilities
Long-term debt (2,898)
Current liabilities (1,386)
Deferred credits and other non-current (1,060)
Minority interest (13)
-------
Net assets acquired 1,187
Goodwill 3,261
-------
Total purchase price 4,448
=======
2. Basis of Presentation and Significant Accounting Policies
The consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States (US GAAP).
Consolidation - The consolidated financial statements include the accounts
of the Company and all majority owned subsidiaries. Minority interest
represents the minority shareholders' proportionate share in the equity or
income of the Company's majority-owned subsidiaries.
All significant intercompany items and transactions have been eliminated in
consolidation. Investments in significant unconsolidated affiliates are
accounted for by the equity method.
Use of estimates - The preparation of the Company's consolidated financial
statements, in conformity with US GAAP, requires management to make
estimates and assumptions about future events that affect the reporting and
disclosure of assets and liabilities at the balance sheet dates and the
reported amounts of revenue and expense during the period covered by the
consolidated financial statements. In the event estimates and/or
assumptions prove to be different from actual amounts, adjustments are made
in subsequent periods to reflect more current information.
F-12
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Basis of Presentation and Significant Accounting Policies (continued)
Presentation - Certain December 31, 1998 amounts have been restated to
conform to the March 31, 1999 presentation.
Cash and cash equivalents - Cash equivalents consist of highly liquid
investments, which are readily convertible into cash and have maturities of
three months or less.
Accounts receivable - A provision for uncollectible accounts of (pound)11
million and (pound)13 million was recorded during the period from formation
through December 31, 1998 and the period from formation through March 31,
1999, respectively. The Company did not realize any material recoveries
during the period from formation through December 31, 1998 or the period
from formation through March 31, 1999. The Company wrote-off accounts
receivable of (pound)3 million and (pound)10 million during the period from
formation through December 31, 1998 and the period from formation through
March 31, 1999, respectively.
Inventories - Inventories consist of fuel stock, material and supplies, and
are stated at the lower of cost or net realizable value. The cost of
inventories is determined using a weighted average cost method.
Capitalized interest - Interest is capitalized on major capital
expenditures during the period of construction.
Property, plant and equipment - Property, plant and equipment are stated at
cost less accumulated depreciation. The cost of additions, improvements,
and interest on construction are capitalized, while maintenance and repairs
are charged to expense when incurred.
Leased generating stations meeting certain criteria and related equipment
are capitalized and the present value of the related lease payments is
recorded as a liability. Depreciation of capitalized lease assets is
computed on the straight-line basis over the shorter of the estimated
remaining useful life of the asset or the lease term.
Depletion of gas reserves is charged on a unit-of-production basis, based
on an assessment of proven reserves. Depreciation of all other property,
plant and equipment, is determined on the straight-line method over
estimated useful lives of the assets as follows:
Electricity generating station assets 30 years
Electricity generating station Shorter of Lease period or
assets under capital lease estimated remaining useful life
Electricity distribution system assets 40 years (3% per annum for first
20 years and 2% per annum for
last 20 years)
Buildings Up to 60 years
Leasehold improvements Shorter of remaining lease term
or estimated useful life
Plant and equipment Up to 10 years
Customer contributions to the construction of electricity distribution
system assets are amortized to income over a forty-year period, at a rate
of 3% per year for the first 20 years and 2% per year for the last 20
years. The unamortized amount of these contributions is deducted from
property, plant and equipment.
Upon sale, retirement, abandonment or other disposition of property, the
cost and related accumulated depreciation are eliminated from the accounts
and any gain or loss is reflected in income.
The United Kingdom Government is entitled to claim a portion of any gain
realized by the Company on certain property disposals made up to March 31,
2000. Provisions for such claims are made when an actual disposal occurs.
F-13
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Basis of Presentation and Significant Accounting Policies (continued)
Provision is made for abandonment costs relating to gas fields. Such
provisions are determined in accordance with local conditions and
requirements, and on the basis of costs estimated at the respective balance
sheet date. These costs are expensed on a unit-of-production basis.
The Company early adopted Statement of Position 98-1, "Accounting for the
costs of computer software developed or obtained for internal use" (SOP
98-1) beginning on May 19, 1998. Their costs are being amortized over a
five year period.
Valuation of long-lived assets - The Company periodically evaluates the
carrying value of long-lived assets to be held and used, including
goodwill, when events and circumstances warrant such a review. The carrying
value of a long-lived asset is considered impaired when the projected
undiscounted cash flows from such asset is separately identifiable and is
less than its carrying value. In that event, a loss is recognized based on
the amount by which the carrying value exceeds the fair market value of the
long-lived asset. Fair market value is determined primarily utilizing the
anticipated cash flows discounted at a rate commensurate with the risk
involved.
Goodwill - Goodwill is capitalized and amortized over 40 years using the
straight-line method. The Company reviews the goodwill recoverability
period on a regular basis.
Derivative financial instruments - In order to qualify for hedge
accounting, the following criteria must be met: the item being hedged
exposes the Company to price risk, it is probable that the hedge will
substantially offset this risk, and it has been designated as a hedge by
management.
Gains and losses on hedges of existing assets or liabilities are included
in the carrying amounts of those assets or liabilities and are ultimately
recognized in income. Gains and losses related to qualifying hedges of firm
commitments or anticipated transactions are deferred and are recognized in
income or as adjustments of carrying amounts when the hedged transactions
occurs. The cash flows related to derivative financial instruments are
recorded in the same manner as the cash flow related to the item being
hedged. In the event that an overall analysis of the firm commitments
being hedged indicates that the Company is in a net loss position, a
provision is made for these anticipated losses. Transactions that are
entered into that do not meet the criteria for hedge accounting are marked
to market on the balance sheet at the period end, and the unrealized gain
or loss is recognized in the Statement of Consolidated Income for that
period.
Revenue recognition - Electricity and gas sales revenues are recognized
when services are provided to customers and include an estimate for
unbilled revenues, or the value of electricity and gas consumed by
customers between the date of their last meter reading and the period-end
date. Operating revenues are stated exclusive of value added tax, but
inclusive of the fossil fuel levy.
Other income - net consists of the following for the periods indicated:
Formation through Formation through
December 31, 1998 March 31, 1999
----------------- -----------------
((pound) million)
Dividends from cost investments 5 6
Gain on the sale of Eastern Group
Telecoms 13 13
Dividends from marketable securities
purchased and sold during the
period from formation through
December 31, 1998 26 26
Undistributed equity in earnings of
TEG 2 2
-- --
Total 46 47
== ==
F-14
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Basis of Presentation and Significant Accounting Policies (continued)
Restructuring costs - Restructuring costs relate to voluntary termination
benefits and are recorded in Operation and Maintenance expense in the
Statement of Consolidated Income in the period in which the employee
accepts the offer and the amount can be reasonably estimated. The Company
has established voluntary retirement plans to progressively reduce manpower
levels.
Foreign currencies - Assets and liabilities of foreign subsidiaries are
translated at the exchange rate on the balance sheet date. Revenues, costs
and expenses are translated at average rates of exchange prevailing during
the period. Translation adjustments resulting from this process are charged
or credited to the cumulative currency translation adjustment account in
common stock equity. Gains and losses on foreign currency transactions are
included in nonoperating expenses on the Statement of Consolidated Income.
Income taxes - Income tax expense includes United Kingdom and other
national income taxes. The Company intends to reinvest the earnings of its
foreign subsidiaries into those businesses. Accordingly, no provision has
been made for taxes which would be payable if such earnings were
distributed to the Company.
Advance Corporation Tax (ACT) recoverable represents the amount of tax paid
or payable on outgoing dividends paid and proposed which can be set off
against a corporation tax liability arising currently or in the future,
thereby reducing current tax expense.
Deferred income taxes are determined under the liability method. Deferred
income taxes represent liabilities to be paid or assets to be received in
the future and reflect the tax consequences on future years of temporary
differences between the tax bases of assets and liabilities and their
financial reporting amounts. Future tax rate changes would affect those
deferred tax liabilities or assets in the period when the tax rate change
is enacted.
Future tax benefits, such as net operating loss carryforwards, are
recognized to the extent that realization of such benefits is more likely
than not.
Marketable securities - The Company has classified all of its marketable
securities as available for sale. Available for sale securities are carried
at fair value with the unrealized gains and losses reported as a component
of accumulated other comprehensive income in common stock equity. Declines
in fair value that are other than temporary are reflected in the Statement
of Consolidated Income.
Appraisal and development expenditure of gas fields - Appraisal
expenditures are accounted for under the successful efforts method. General
seismic and other costs are expensed as incurred.
Ceiling test - The capitalized costs of gas fields under evaluation, under
development or in production are assessed each year on a field-by-field
basis. To the extent that the future net revenues from the remaining
commercial reserves, or, in the case of prospects under evaluation, the
estimated potential commercial reserves, are less than the net capitalized
costs of the field, a charge is made to the Statement of Consolidated
Income.
New accounting standards - Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was originally to be effective for fiscal years beginning
after June 15, 1999. This statement requires that all derivative financial
instruments be recognized as either assets or liabilities on the balance
sheet at their fair values and that accounting for the changes in their
fair values is dependent upon the intended use of the derivatives and their
resulting designations. The new standard will supersede or amend existing
standards that deal with hedge accounting and derivatives. The Company has
not determined the effect that adopting this standard will have on its
consolidated financial statements. On May 19, 1999, the Financial
Accounting Standards Board decided that it would amend
F-15
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Basis of Presentation and Significant Accounting Policies (continued)
SFAS No. 133, and defer its effective date to all fiscal quarters of
all fiscal years beginning after June 15, 2000.
The Emerging Issues Task Force (EITF) has issued No. 98-10 "Accounting for
Energy Trading and Risk Management Activities", which is effective for
fiscal years beginning after December 15, 1998. EITF 98-10 requires that
contracts for energy commodities which are entered into under trading
activities should be marked to market with the gains and losses shown net
in the income statement. As the Company's fiscal year ends on December 31,
the Company adopted EITF 98-10 effective January 1, 1999 for the fiscal
year ending December 31, 1999. As the Company is not primarily involved in
trading activities, EITF 98-10 has not had a material impact on the
consolidated financial statements upon adoption.
3. Property, Plant and Equipment
Property, plant and equipment, stated at cost less accumulated
depreciation, consisted of:
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
((pound)million) ((pound)million)
<S> <C> <C>
Electricity distribution system 1,143 1,142
Electricity generating stations 1,262 1,124
Upstream gas assets 35 35
Other land and buildings 100 102
Plant and equipment 225 239
Accumulated depreciation (89) (126)
----- -----
Net property, plant and equipment 2,676 2,516
===== =====
</TABLE>
Depreciation expense for the period from formation through December 31,
1998 was (pound)92 million and for the period from formation through March
31, 1999 was (pound)129 million.
Electricity generating stations and plant and equipment include assets
under capital leases as follows:
December 31, 1998 March 31, 1999
((pound)million) ((pound)million)
---------------- ---------------
Cost 913 835
Accumulated depreciation (25) (36)
----- -----
Net book value 888 799
===== =====
Capitalized software costs totalling (pound)14 million are included in
plant and equipment as of December 31, 1998 and March 31, 1999.
Amortization expense relating to software costs of (pound)1 million has
been recorded in the period from formation through March 31, 1999. No
amortization expense was recorded in the period to December 31, 1998.
4. Restricted Cash
At December 31, 1998 and at March 31, 1999, (pound)408 million of deposits
has been used to cash-collateralize existing future lease obligations to
certain banks related to the funding of the leases of three power stations
from National Power PLC (see Note 9). Additionally, (pound)309 million and
(pound)317 million at December 31, 1998 and March 31, 1999, respectively,
have been used to cash-collateralize existing future lease obligations
arising from a cross-border leasing arrangement on two other power stations
(Note 9). When the Company invested in Eastern Norge Kobbelv AS (Kobbelv)
(see Note 5), it was required to place on restricted deposit (pound)5
million, which is also included in restricted cash at March 31, 1999.
F-16
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments
Marketable investments are classified as available for sale, and are
considered non-current based upon management's intentions in holding the
investments. Marketable investments consisted of the following two
investments:
<TABLE>
<CAPTION>
Cost Fair market value Unrealized gain/(loss)
-------------------------- ------------------------- ---------------------------
December 31, March 31, December 31, March 31, December 31, March 31,
((pound)million) 1998 1999 1998 1999 1998 1999
------------ --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
SME 28 23 13 11 (15) (12)
HC 56 53 63 54 7 1
------ ------ ------ ------ ------ ------
84 76 76 65 (8) (11)
====== ====== ====== ====== ====== ======
</TABLE>
At December 31, 1998 and March 31, 1999, the Company held a 16% investment
in Severomoravska Energetika (SME), which is listed in the Czech Republic.
At December 31, 1998 and March 31, 1999, the Company held a 5% investment
in Hidroelectrica del Cantabrico (HC), which is listed in Spain. As the
Company does not have the ability to exercise significant influence over
either SME's or HC's operating and financial policies, these investments
have been accounted for as marketable securities and accordingly have been
marked to market at December 31, 1998 and March 31, 1999.
Non-marketable investments at December 31, 1998 and March 31, 1999 consist
principally of an investment of (pound)124 million in Eastern Norge
Svartisen AS (Svartisen) consisting of the offtake generated from water
rights in hydro-electric power plants in Norway over the next 55 years,
commencing in 1998. In February of 1999, the Company invested (pound)27
million in Kobbelv which also consists of the offtake generated from water
rights in hydro-electric power plants over the next 55 years. The carrying
value at December 31, 1998 and March 31, 1999 of an investment in the
preferred stock of NTL Incorporated (NTL Inc.), the acquiror of the
Company's telecoms business, which was received as a portion of the
consideration for the sale (Note 15) was (pound)22 million. The remaining
(pound)11 million at December 31, 1998 and (pound)46 million at March 31,
1999 consist of other investments.
There were no sales of marketable securities during the period from
formation through December 31, 1998 and March 31, 1999.
6. Pensions
The majority of Eastern employees are members of the Electricity Supply
Pension Scheme (ESPS) which provides pensions of a defined benefit nature
for employees throughout the England and Wales Electricity Supply Industry.
The ESPS operates on the basis that there is no cross-subsidy between
employers and the financing of Eastern's pension liabilities is therefore
independent of the experience of other participating employers. The assets
of the ESPS are held in a separate trustee-administered fund and consists
principally of United Kingdom and European equities, United Kingdom
property holdings and cash. The pension cost relating to the Eastern
portion of the ESPS is assessed in accordance with the advice of
independent qualified actuaries using the projected unit method. The
benefits under these plans are primarily based on years of service and
compensation levels as defined under the respective plan provisions.
As part of the purchase accounting for TEG, the accrued pension liabilities
were adjusted to recognize all previously unrecognized gains or losses
arising from past experience.
The Company determined the additional pension expense for the three months
from January 1, 1999 through March 31, 1999 based on forecasted expense
from the December 31, 1998 actuary report.
F-17
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Pensions (continued)
<TABLE>
<CAPTION>
Period from Period from
formation through formation through
December 31, 1998 March 31, 1999
----------------- --------------
Change in benefit obligation: ((pound) million)
- ----------------------------
<S> <C> <C>
Benefit obligation at beginning of period 882 882
Service cost 7 11
Interest cost 33 46
Plan participants' contributions 5 7
Plan amendment 7 7
Actuarial loss 82 23
Benefits paid (31) (44)
Net transfer of obligations to other plans -- (27)
---------- ----------
Ending benefit obligation 985 905
========== ==========
Change in plan assets:
- ---------------------
Fair value of plan assets at beginning of period 1,130 1,130
Actual return on plan assets (25) 38
Employer contribution 3 7
Plan participants contributions 5 7
Benefits paid (31) (44)
Net transfer of assets to other plans -- (28)
---------- ----------
Ending fair value of plan assets 1,082 1,110
========== ==========
Funded Status:
- --------------
Funded status 97 205
Unrecognized net actuarial loss 153 47
Unrecognized prior service cost 7 7
---------- ----------
Prepaid benefit cost 257 259
========== ==========
Weighted average assumptions:
- ----------------------------
Discount rate 5.5% 5.5%
Expected return on plan assets 6.0% 6.0%
Rate of compensation increase 3.5% 3.5%
Components of net periodic pension (benefit):
- --------------------------------------------
Service cost 7 11
Interest cost 33 46
Expected return on plan assets (45) (61)
Net amortization -- 1
---------- ----------
Net periodic pension benefit (5) (3)
========== ==========
</TABLE>
The transfer of assets of (pound)28 million in the period to March 31, 1999
and the related transfer of benefit obligations of (pound)27 million relate
to the sale of the contracting business which occurred in January of 1998.
F-18
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Taxation
The components of income tax expense are as follows:
Period from Period from
formation through formation through
December 31, 1998 March 31, 1999
----------------- --------------
((pound)million) ((pound)million)
Current:
United Kingdom 24 51
United States 18 19
Other Countries 1 1
------- -------
43 71
Deferred:
United Kingdom 24 35
------- -------
Total income tax expense 67 106
======= =======
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
((pound)million) ((pound)million)
<S> <C> <C>
Deferred tax assets:
Leased assets (353) (387)
Tax loss carryforwards (9) (9)
Provision for unfavorable contracts (75) (74)
Other (54) (85)
------ ------
Total deferred tax assets (491) (555)
Valuation allowance for deferred tax assets 138 187
------ ------
Net deferred tax assets (353) (368)
------ ------
Deferred tax liabilities:
Excess of book value over taxation value of fixed
assets 281 292
Leased assets 334 326
Other 59 84
------ ------
Total deferred tax liabilities 674 702
------ ------
Net deferred tax liabilities 321 334
====== ======
</TABLE>
The recognized deferred tax asset is based upon the expected future
utilization of net operating loss carryforwards and the reversal of other
temporary differences. For financial reporting purposes, the Company has
recognized a valuation allowance for those benefits for which realization
does not meet the more likely than not criteria. The valuation allowance
has been recognized in respect of leased assets. The Company continually
reviews the adequacy of the valuation allowance and is recognizing these
benefits only as reassessment indicates that it is more likely than not
that the benefits will be realized.
There was no valuation allowance at formation (February 5, 1998). At the
date of acquisition of TEG (May 19, 1998), a valuation allowance of
(pound)130 million, was established for the deferred tax asset for the
book/tax capital asset related to leased assets. The valuation allowance
was increased by (pound)8 million in the
F-19
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Taxation (continued)
period from May 19, 1998 to December 31, 1998, resulting in a balance of
(pound)138 million at December 31, 1998. For the period from May 19, 1998
to March 31, 1999, the valuation allowance increased by (pound)57 million,
resulting in a balance of (pound)187 million at March 31, 1999.
Income before income taxes:
<TABLE>
<CAPTION>
Period from Period from
formation through formation through
December 31, 1998 March 31, 1999
----------------- --------------
((pound)million) ((pound)million)
<S> <C> <C>
United Kingdom 103 198
United States 51 54
Other Countries 1 1
-------- --------
Total income before income taxes and minority interest 155 253
======== ========
</TABLE>
United Kingdom income tax expense at the statutory tax rate is reconciled
below to the actual income tax expense:
<TABLE>
<CAPTION>
Period from Period from
formation through formation through
December 31, 1998 March 31, 1999
----------------- --------------
((pound)million) ((pound)million)
<S> <C> <C>
Tax at United Kingdom statutory rate (31%) 48 78
Non-deductible goodwill 16 22
Effect of overseas tax rates 2 2
Effect of tax rate on United Kingdom dividends (4) (4)
Tax rate change (8) (8)
Movement in valuation allowance charged to expense 8 11
Non-deductible expenses 5 5
-------- --------
Income tax expense 67 106
======== ========
</TABLE>
As at December 31, 1998 and March 31, 1999, the Company has net operating
loss carryforwards of (pound)9 million that are available to offset future
taxable income. The net operating loss carryforwards have no expiration
date.
On July 31, 1998, legislation was enacted that decreased the United Kingdom
statutory income tax rate on companies by 1% with effect from April 1,
1999. In accordance with the provisions of Statement of Financial
Accounting Standards No. 109, the assets and liabilities for deferred
income taxes were adjusted to reflect the expected reversal of certain
temporary differences at the lower income tax rate.
The tax effect of the components included in accumulated other
comprehensive income for the period from formation through December 31,
1998 was a benefit of (pound)2 million and for the period from formation
through March 31, 1999 was a benefit of (pound)6 million.
F-20
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Related Party Transactions
As part of the funding for the acquisition of TEG, TXU provided shares of
its common stock in exchange for a two year term note from TXU Acquisitions
in the amount of (pound)882 million that matures in May 2000 with an
interest rate of 6.7% per annum. In December 1998, (pound)200 million of
this note was repaid, leaving an outstanding balance of (pound)682 million
at both December 31, 1998 and March 31, 1999 (see Note 19). The interest on
the two year term note is due at maturity, and the "Due to affiliates"
balance at December 31, 1998 and March 31, 1999 reflects (pound)33 million
and (pound)45 million, respectively, of accrued interest.
The 10% holding in TXU Finance of (pound)177 million and (pound)187 at
December 31, 1998 and March 31, 1999 respectively, which is held by a
wholly owned subsidiary of TXU, has been included in "Minority interest".
At December 31, 1998 and March 31, 1999 the balance of (pound)7 million in
the "Accounts payable - Affiliate" account arises from payments of amounts
by TXU on behalf of the Company.
9. Notes Payable and Long-term Debt
Weighted average interest rates at December 31, 1998 and March 31, 1999 on
notes payable to banks is 8.98% and 13.8%, respectively.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
((pound)million) ((pound)million)
<S> <C> <C>
Notes and Bonds:
$200 million 7.425% guaranteed notes due 2017 121 124
$300 million 7.55% guaranteed notes due 2027 181 186
(pound)350 million 8.375% bonds due 2004 363 362
(pound)200 million 8.5% bonds due 2025 237 237
(pound)200 million 8.75% bonds due 2012 229 229
Other:
Sterling Credit Agreement (See Note 10) 801 983
Rent factoring loans (weighted average interest rate of
7.35%, due 1999-2001) 649 595
Other unsecured loans, due in installments (weighted
average rates range from 4.95% - 10.8%) 139 164
Capital leases 982 1,043
Note payable to TXU, 6.7% term note due 2000 (see Note 19) 682 682
Cross-border leases 309 317
-------- --------
Total long-term debt 4,693 4,922
Less current portion 382 486
-------- --------
Long-term debt, less amounts due currently 4,311 4,436
======== ========
</TABLE>
The $200 million and $300 million notes due in 2017 and 2027, respectively,
are guaranteed by TEG and the Company.
Rent factoring loans - Certain subsidiaries of Eastern entered into an
agreement with commercial banks whereby future intra-group rental payments
receivable were assigned to these banks in return for a capital sum.
(pound)408 million of the capital sums at both December 31, 1998 and March
31, 1999 have been deposited to cash collateralize existing future lease
obligations to certain banks related to the funding of the leases of three
power stations leased from National Power (see Note 4).
F-21
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Notes Payable and Long-term Debt (continued)
Long-term debt balances are denominated in the following currencies:
December 31, March 31,
1998 1999
-------- --------
((pound)million) ((pound)million)
Sterling 4,044 4,232
United States dollars 611 627
Other 38 63
-------- --------
Total long-term debt 4,693 4,922
======== ========
(pound)100 million of the (pound)350 million 8.375% bonds included in
long-term debt has been converted into floating rate debt by way of
interest rate swaps, which expire in the year 2004.
Long-term debt, excluding capital lease balances, is repayable as follows:
Year Ending Year Ending
December 31, March 31,
------------ ---------
((pound)million) ((pound)million)
1999 222 --
2000 919 225
2001 190 924
2002 24 128
2003 801 1,004
2004 362 362
Thereafter 1,193 1,236
------- -------
3,711 3,879
Capital leases 982 1,043
------- -------
Total long-term debt 4,693 4,922
======= =======
F-22
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Notes Payable and Long-term Debt (continued)
Capital lease obligations - As at December 31, 1998 and March 31, 1999,
future minimum lease payments for assets under capital leases, together
with the present value of minimum lease payments, were:
<TABLE>
<CAPTION>
Year Ending Year Ending
December 31 March 31
----------- --------
((pound)million) ((pound)million)
<S> <C> <C>
1999 48 --
2000 50 53
2001 461 54
2002 17 465
2003 16 21
2004 16 19
Thereafter 67 204
------ ------
Total future minimum lease payments 675 816
Less amounts representing interest (105) (177)
------ ------
Present value of future minimum lease payments 570 639
------ ------
Current 46 50
Non-current 524 589
------ ------
Total 570 639
====== ======
</TABLE>
Substantially all of the capital lease obligations relate to coal-fired
power stations. Additional payments of approximately (pound)6 per megawatt
hour (indexed from 1996 prices) linked to output levels from the stations
are payable for the first seven years of their operation by Eastern
(operations commenced in 1996). In accounting for the acquisition of TEG, a
liability for the estimated probable additional payments linked to output
levels for coal-fired generating stations was established. At December 31,
1998 and March 31, 1999, the balance of the liability of (pound)412 million
and (pound)404 million, respectively, is included with capital lease
obligations, of which (pound)114 million and (pound)211 million are
classified as current, respectively.
The lease agreement for three of the coal-fired power stations contains a
purchase option of (pound)1 in 2046. The lease is for a total of
ninety-nine years.
In the period ended March 31, 1999, the Company entered into a capital
lease relating to the King's Lynn Power Station with a present value
obligation amount of (pound)68 million over the next 25 years.
Cross-border leases - Certain subsidiaries of Eastern have entered into
cross-border lease transactions in respect of two power stations that are
wholly owned by the Company. The Company has retained control of the power
stations and their output and is responsible for their operations. The debt
arising on the cross-border leases is fully collaterized by restricted cash
on deposit (see Note 4).
The Company's debt agreements contain certain covenants with which they
must comply, including leverage ratios, levels of net assets and interest
coverage covenants. At December 31, 1998 and March 31, 1999, the Company
was in compliance with all such covenants.
F-23
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Lines of Credit and Other Credit Facilities
Lines of credit - At December 31, 1998, the Company, TXU Finance, TXU
Acquisitions and TEG had a joint sterling-denominated line of credit with a
group of banking institutions under a credit facility agreement (Sterling
Credit Agreement). At December 31, 1998, the Sterling Credit Agreement
provided for borrowings of up to (pound)1,525 million, of which (pound)351
million was available for use. The Sterling Credit Agreement had two
facilities - Acquisition and Revolving Credit. The Sterling Credit
Agreement bears interest at LIBOR plus 1.25%. The Company has entered into
various interest rates swaps as required by the Sterling Credit Agreements.
The Acquisition Facility provides for borrowings aggregating (pound)825
million outstanding at any one time and terminates March 2, 2003.
Borrowings under this facility provided financing to acquire TEG and pay
acquisition-related expenses. As part of this facility, (pound)75 million
has been allocated to financing the repayment of outstanding loan notes
issued upon acquisition.
The Revolving Credit Facility provides for borrowings aggregating
(pound)450 million outstanding at any one time and terminates March 2,
2003. A separate Eastern Electricity Revolving Credit Facility provides for
borrowings of up to (pound)250 million which can be used by Eastern
Electricity plc for general corporate purposes.
At December 31, 1998, (pound)750 million was borrowed under the Acquisition
Facility, (pound)51 million was borrowed under the Revolving Credit
Facility and (pound)180 million was borrowed under the Eastern Electricity
Revolving Credit Facility. The amounts outstanding under the Acquisition
Facility and Revolving Credit Facility represent long-term debt. There are
letters of credit associated with the Sterling Credit Agreement.
Obligations of commercial banks under standby letters of credit totalled
(pound)118 million at December 31, 1998 which, together with the (pound)51
million of borrowings reduced the amounts available for use under the
Revolving Credit Facility to (pound)281 million at December 31, 1998.
Borrowings under the Eastern Electricity Revolving Credit Facility are
classified as short-term debt.
The Sterling Credit Agreement was amended in March 1999. The amended
Sterling Credit Agreement provides for borrowings of up to (pound)1.275
billion and has two facilities: a (pound)750 million term facility which
will terminate on March 2, 2003 and a (pound)525 million revolving credit
facility which has a (pound)200 million 364-day tranche (Tranche A) and a
(pound)325 million tranche which terminates March 2, 2003 (Tranche B). The
Company and TXU Finance currently are the only permitted borrowers under
the amended Sterling Credit Agreement. The amended Sterling Credit
Agreement allows for borrowings at various interest rates based on the
prevailing rates in effect in the countries in which the borrowings
originate. As of March 31, 1999, (pound)750 million of borrowings were
outstanding under the term facility, and approximately (pound)233 million
were outstanding under Tranche B (see Note 19). In addition, letters of
credit totalling $61 million ((pound)38 million) were issued under Tranche
A and letters of credit totalling $137 million ((pound)85 million) were
issued under Tranche B. The amended Sterling Credit Agreement is unsecured.
There were no borrowings outstanding at March 31, 1999 under the Eastern
Electricity Revolving Credit Facility.
Promissory note program - The Company has a one year promissory note
program issued within the Czech Republic which has been utilized to fund
its investment in SME and Teplarny Brno a.s. The note bears interest at an
annual rate determined on the date of issuance based on PRIBOR plus 0.7%,
which was 13.89%. At December 31, 1998 and March 31, 1999, (pound)58
million and (pound)52 million, respectively, was outstanding under the
promissory note program.
Short-term loan on accounts receivable - Eastern has facilities with a
financial institution whereby it may, from time to time, borrow funds from
the financial institution. Outstanding borrowings under the agreements may
not exceed certain levels and are collateralized by portions of Eastern
Group's trade accounts receivable. At December 31, 1998 and March 31, 1999,
Eastern had borrowed (pound)300 million
F-24
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Lines of Credit and Other Credit Facilities (continued)
under these facilities. The loan bears interest at an annual rate of based
on commercial paper rates plus 0.225%, which at December 31, 1998 and March
31, 1999 was 6.53% and 5.7%, respectively.
Letters of credit - At December 31, 1998 the Company had outstanding
letters of credit totalling (pound)121 million, (pound)118 million of which
was outstanding under the Revolving Credit Facility discussed above. At
March 31, 1999 the Company had outstanding letters of credit totalling
(pound)126 million, (pound)123 million of which was outstanding under the
amended Sterling Credit Agreement discussed above.
11. Provision for Unfavorable Contracts
As part of the purchase accounting for TEG, the Company has made provisions
for certain unfavorable long-term gas and electricity purchase contracts.
The electricity provision relates to two contracts that expire in 2009,
while the gas provision relates to eight contracts that expire in 2011.
During the period from formation through December 31, 1998 and the period
from formation through March 31, 1999, (pound)74 million and (pound)76
million, respectively, of the provision was released to offset expenses
recognized on purchases under unfavorable electricity and gas contacts. Of
the amounts recognized in the Statement of Consolidated Income, (pound)41
million, which is net of a release payment of (pound)24 million, was
related to one gas contract from which the Company negotiated in November
1998. Negotiations for release under the contract were not under
consideration at the purchase date.
12. Commitments
The Company evaluates its position relative to asserted and unasserted
claims, loss-making purchase commitments or future commitments and makes
provisions as needed.
The Company's investment in Svartisen (the offtake generated by water
rights in hydro-electric power plants in Norway) requires coverage of
approximately 31.2% of the costs incurred in relation to the operation of
the power plant, as well as a portion of the maintenance costs, property
tax, and feeding costs (defined as fixed charges such as connection and
capacity charges and volume related charges such as an energy charge) for
55 years, beginning in 1998. The electricity generated from the
hydro-electric plants will be sold into the Norwegian power pool, from
which the Company will receive income.
Gas take-or-pay contracts - The Company is party to various types of
contracts for the purchase of gas. Almost all include "take-or-pay"
obligations under which the buyer agrees to pay for a minimum quantity of
gas in a year. In order to help meet the expected needs of its wholesale
and retail customers, the Company has entered into a range of gas purchase
contracts. As at December 31, 1998 and March 31, 1999, the commitments
under long-term gas purchase contracts amounted to an estimated (pound)1.3
billion covering periods up to 16 years forward. Management does not
consider it likely, on the basis of the Company's current expectations of
demand from its customers as compared with its take-or-pay obligations
under such purchase contracts, that any material payments will become due
from the Company for gas not taken.
Coal contracts - In November 1998, the Company agreed to two coal purchase
agreements with a supplier, supplementing the 12 million tons the Company
had previously contracted to take from said supplier between 1998 and 2001.
The first agreement is for 25 million tons in total between 1998 and 2003.
The second agreement is for 21 million tons in total between 2003 and 2009.
Total committed purchases under these contracts were approximately
(pound)1.4 billion and (pound)1.3 billion at December 31, 1998 and March
31, 1999, respectively.
F-25
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Commitments (continued)
Rental commitments - The future minimum rental commitments under
non-cancellable operating leases were as follows:
Year ending Year Ending
December 31, March 31,
------------ ---------
((pound)million) ((pound)million)
1999 53 53
2000 36 36
2001 37 37
2002 34 34
2003 30 30
Thereafter 27 27
------- -------
Total 217 217
======= =======
The operating lease commitments relate to coal-fired power stations.
Additional variable payments of approximately (pound)6 per megawatt hour
(indexed to 1996 prices) linked to output levels from these stations are
payable through 2000, the first four years of the lease agreement, by the
Company.
Rental expense for operating leases amounted to (pound)16 million and
(pound)25 million for the periods ended December 31, 1998 and March 31,
1999, respectively. Rental expense for operating leases during the periods
ended December 31, 1998 and March 31, 1999 includes (pound)10 million and
(pound)14 million, respectively, of minimum lease payments and (pound)6
million and (pound)11 million, respectively, of variable lease payments.
Other commitments - In December 1998 the Company agreed to purchase various
assets in the North Sea from Monument Oil for (pound)20 million. The assets
comprise a 20% stake in the Johnston field plus a number of non-producing
gas discoveries and prospects. In November 1998, the Company reached an
agreement to purchase all of BHP Petroleum's assets in the North Sea for
(pound)102 million. The assets comprise a 30% stake in the Johnston field,
an 18% stake in Ravenspurn North field plus a number of non-producing gas
discoveries and prospects in a total of seven exploration licenses. Both
transactions are subject to approval from the Department of Trade and
Industry and consents from other parties participating in the fields.
13. Contingencies
The Company is subject to business risks that are actively managed to limit
exposures.
In February 1997, the official government representative of pensioners
(Pensions Ombudsman) made a determination against the National Grid Company
plc (National Grid) and its group trustees with respect to complaints by
two pensioners in National Grid's section of the ESPS relating to the use
of the pension fund surplus resulting from the March 31, 1992 actuarial
valuation of the National Grid section to meet certain costs arising from
the payment of pensions on early retirement upon reorganization or
downsizing. These determinations were set aside by the High Court on June
10, 1997 and the arrangements made by National Grid and its group trustees
in dealing with the surplus were confirmed. The two pensioners have now
appealed against this decision and judgment has now been received although
a final order is awaited. The appeal was allowed endorsing the Pensions
Ombudsman's determination that the corporation was not entitled to
unilaterally deal with any surplus. If a similar complaint were to be made
against Eastern in relation to its use of actuarial surplus in its section
of the ESPS, it would vigorously defend the action, ultimately through the
courts. However, if a determination were finally to be made against it and
upheld by the courts, Eastern could have a potential liability to repay to
its section of the ESPS an amount estimated by the Company to be up to
(pound)45 million (exclusive of any future applicable interest charges).
F-26
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Contingencies (continued)
On May 19, 1998 a complaint was filed by Optimum Solutions Limited against
National Grid, Yorkshire Electricity Group plc, Eastern Electricity and
Logica Plc. Yorkshire Electricity and Eastern Electricity are both members
of the electricity trading market in England and Wales (the Pool). Optimum
Solutions Limited alleges breach of confidence in respect of information
supplied in the context of the development of the trading arrangements for
the 1998 liberalization of electricity supply in England and Wales, or
Trading Arrangements. Optimum Solutions Limited requests an unspecified
amount of damages relating to breach of contract, an unspecified amount of
equitable compensation for misuse of the confidential information and
return of material alleged to contain confidential information. It is
alleged that the Pool has made use of the confidential information in the
development of the Trading Arrangements and that Eastern Electricity made
use of it in using the system developed by Pool for trading purposes. The
action against Eastern Electricity is being strenuously defended. The
Company cannot predict the outcome of this proceeding.
On January 25, 1999, the Hindustan Development Corporation issued
proceedings in the Arbitral Tribunal in Delhi, India against TEG claiming
damages of US$413 million for breach of contract following the termination
of a Joint Development Agreement dated March 20, 1997 relating to the
construction, development and operation of a lignite based thermal power
plant at Barsingsar, Rajasthan. The Company is vigorously defending this
claim. The Company cannot predict the outcome of this proceeding.
In November 1998, five complaints were filed against subsidiaries of
Eastern by five of their former sales agencies. The agencies claim a total
of (pound)104 million arising from the summary termination for the claimed
fundamental breach of their respective contracts in April 1998. The five
agencies are claiming damages for failure to give reasonable notice for
compensation under the UK Commercial Agents Regulations 1994. These actions
are all being defended strenuously, and counterclaims have been filed. The
Company cannot predict the outcome of these claims and counterclaims.
General - In addition to the above, the Company and its subsidiaries are
involved in various legal and administrative proceedings arising in the
ordinary course of its business. The Company believes that all such
lawsuits and resulting claims would not have a material effect on its
financial position, results of operation or cash flows.
Financial Guarantees - TEG has guaranteed up to $110 million ((pound)65
million at December 31, 1998 and (pound)68 million at March 31, 1999) of
certain liabilities that may be incurred and payable by the purchasers of
the businesses sold in the Peabody Sale with respect to the Peabody Holding
Company Retirement Plan for Salaried Employees, the Powder River Coal
Company Retirement Plan and the Peabody Coal UMWA Retirement Plan, subject
to certain specified conditions.
TEG entered into various guarantees of obligations of affiliates of its
former subsidiary Citizens Power LLC, arising under power purchase
agreements and note purchase agreements in connection with various Citizens
Power energy restructuring projects, as well as various indemnity
agreements in connection with such projects. The Company and TEG continue
to be the guarantor or the indemnifying party, as the case may be, under
these various agreements. In connection with the acquisition, letters of
credit were issued under the Sterling Credit Facility in the amount of $198
million ((pound)118 million at December 31, 1998 and (pound)123 million at
March 31, 1999) to support certain debt financings associated with these
restructuring projects (see Note 19).
As a consequence of a restructuring whereby a subsidiary of TXU
Acquisitions transferred Eastern to another wholly-owned subsidiary of TXU
Acquisitions, the Company and certain other affiliated United Kingdom
subsidiaries of TXU may be required to make certain adjustments to the
guarantees, which the Directors of the Company do not currently expect to
have a material adverse impact on the Company.
F-27
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Employee Share Plans
During 1998, the Company instituted the Eastern Group Long Term Incentive
Plan (LTIP) which is administered by a remuneration committee. Awards of
"phantom stock" in TXU under the LTIP may be made available to the
management group, senior managers and salaried directors of Eastern.
Participants of the LTIP receive awards based on the number of shares that
a specified percentage of their annual basic pay could purchase, using the
stock price of TXU at or around the date of grant. For grants during the
periods May 19, 1998 through December 31, 1998 and May 19, 1998 through
March 31, 1999, the stock price of TXU at May 19, 1998 was utilized. There
were no grants between February 5, 1998 and May 18, 1998, inclusive.
Awards are subject to achieving certain performance criteria. There is a
deferral period from the end of the financial period in which the awards
were granted for which the participants must remain with the Company before
becoming vested in their awards. For the awards granted in 1998, the
deferral period for directors is one year. For the management group and
senior managers, one-half of the awards will vest on January 1, 2000, with
the balance of the awards vesting on January 1, 2001. For the awards
granted in 1999, the deferral period for directors is one year and for the
management group and senior managers is two years.
At the end of the deferral period, the Company shall pay to the
participant, in cash, an amount equal to the higher of the stock price of
TXU at the end of the deferral period, or a guaranteed price. The
guaranteed price is the stock price used to calculate the awards granted,
adjusted for interest at 6% compounded annually up to the date of payment.
The Company granted 145,878 awards with an exercise price of (pound)0 on
September 1, 1998, of which 1,785 lapsed due to participants leaving the
Company prior to December 31, 1998, with an additional 8,216 lapses in the
period from January 1, 1999 through March 31, 1999. Additionally, the
Company granted 178,276 awards with an exercise price of (pound)0 on
January 1, 1999. None of the 144,093 or 314,153 awards outstanding at
December 31, 1998 or March 31, 1998, respectively, were exercisable due to
the vesting criteria. The weighted average remaining contractual life of
awards outstanding at December 31, 1998 was 17 months and at March 31, 1999
was 23 months. At December 31, 1998 and March 31, 1999, the closing market
price of TXU Corp common stock was $46.69 ((pound)28.13) and $42.00
((pound)26.09), respectively, per share.
Compensation expense recognized under the plan for the periods ended
December 31, 1998 and March 31, 1999 were (pound)1 million and (pound)2
million, respectively. The Company applies Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its employee share plans. Had
compensation costs for the LTIP been determined in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", there would be no difference in the compensation
expense recognized.
15. Disposal and Acquisitions
On December 22, 1998, the Company disposed of Eastern Group Telecoms. The
Company recorded a gain relating to the disposal of (pound)13 million. In
consideration for the business, the Company received cash of (pound)60
million and an investment in the preferred stock of the purchaser, NTL
Inc., with a carrying value of (pound)22 million. The investment is not
traded on any stock exchange and is not convertible into cash until July
2000, but the value has been guaranteed by NTL Inc.
On December 19, 1998, the Company acquired two combined heat and power
companies from British Gas plc for total consideration of (pound)14
million. Citigen (London) Limited is a cogeneration company using two 16
megawatt gas diesel engines to supply electricity, district heating and
chilled water to customers in the City of London. BG Cogen Limited uses a
15 megawatt cogeneration plant to supply steam and electricity to
Millennium Inorganic Chemicals.
F-28
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. Dividend Restrictions
Certain debt instruments of the Company contain provisions that, under
certain conditions, restrict distributions on or acquisitions of common
stock. At December 31, 1998 and March 31, 1999 retained earnings was not
restricted as a result of such provisions.
17. Segments
The segments have been identified on the basis of the underlying nature of
the business and its customer base and the corresponding skill sets
required, e.g., engineering, portfolio management and customer services.
The energy retail business segment provides electricity and gas to United
Kingdom national domestic, industrial and commercial users. It also has
commenced retailing joint ventures in continental Europe. The energy
management and generation business segment manages an integrated portfolio
of contracts and physical gas and generation assets. The contracts include
supplying the energy retail business with electricity and gas as well as
contracts with third party energy retailers, traders and wholesalers. The
networks business segment owns and manages the electricity distribution
system and its principal customer base is energy retail and other
electricity suppliers. The other category consists of two operating
segments, metering and telecoms which fall below the quantitative
thresholds for determining reportable segments.
As set out below, contribution for each segment is defined as operating
profit on a UK GAAP basis before exceptional and extraordinary items, but
after a notional charge for the cost of capital. Capital/investment
expenditure includes all items of capital and investment expenditures
including the European equity investment, but the figure excludes proceeds
on the sale of investments. The cost of capital is calculated as 0.5% per
month on working capital and is eliminated on consolidation. Overhead
costs, such as those incurred by the Company at head office and core costs
related to information technology, are not allocated amongst the segments.
<TABLE>
<CAPTION>
Period from formation through Period from formation through
December 31, 1998 March 31, 1999
----------------------------- ------------------------------
Capital/ Capital/
investment investment
Contribution expenditure Contribution expenditure
------------ ----------- ------------ -----------
((pound)million) ((pound)million)
<S> <C> <C> <C> <C>
Energy retail (13) 21 (31) 22
Energy management and generation 121 61 264 99
Networks 100 82 157 109
Other 18 17 20 18
-------- -------- -------- --------
226 181 410 248
Cost of capital elimination 86 -- 118 --
Unallocated corporate costs (17) 214 (40) 229
-------- -------- -------- --------
Total (UK GAAP) 295 395 488 477
-------- -------- -------- --------
Purchase accounting and US GAAP
adjustments 57 -- 35 --
Unallocated restructuring costs (22) -- (22) --
Unallocated investment income 30 -- 30 --
-------- -------- -------- --------
Income before interest, income
taxes and minority interest 360 -- 531 --
======== ======== ======== ========
</TABLE>
F-29
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Segments (continued)
Revenues are attributed to countries based on location of customers. There
are no revenues for transactions with a single external customer that are
10% or more of the Company's revenue. The Pool is not considered by the
Company to be an external customer, as all electricity generated is sold
into the Pool and is subsequently repurchased from the Pool for resale.
Revenues billed by energy retail for the other segments are presented as
revenues of the other segments.
Period from Period from
formation through formation through
December 31, 1998 March 31, 1999
Revenues Revenues
-------- --------
((pound) million)
Energy retail 1,036 1,609
Energy management and generation 845 1,322
Networks 253 374
Other 31 33
------ ------
Total 2,165 3,338
====== ======
<TABLE>
<CAPTION>
Period from formation through Period from formation through
December 31, 1998 March 31, 1999
---------------------------------- ----------------------------------
Revenues Long-lived assets Revenues Long-lived assets
-------- ----------------- -------- -----------------
((pound) million)
<S> <C> <C> <C> <C>
United Kingdom 2,150 2,606 3,303 2,455
Other countries 15 70 35 61
------- -------- -------- -------
Total 2,165 2,676 3,338 2,516
======= ======== ======== =======
</TABLE>
18. Derivative and Financial Instruments
The Company uses derivative financial instruments for purposes other than
trading and does so to reduce its exposure to fluctuations in electricity
prices, gas prices, interest rates and foreign exchange rates. Derivative
financial instruments used by the Company include contracts for
differences, electricity forward agreements, interest rate swaps, interest
forward rate agreements, options, gas swaps futures and foreign exchange
forward contracts.
Electricity price risk management - Electricity forward contracts are
primarily used by the Company to hedge future changes in electricity
prices. Almost all electricity generated in England and Wales must be sold
to the Pool, and electricity suppliers must likewise generally buy
electricity from the Pool for resale to their customers. The Pool is
operated under a Pooling and Settlement Agreement to which all licensed
generators and suppliers of electricity in Great Britain are party. These
trading arrangements are currently under review by the United Kingdom
government.
The Company enters into electricity forward contracts to assist in the
management of its exposure to fluctuations in electricity pool prices. The
contracts bought and sold are contracts for differences (CfDs) and
electricity forward agreements (EFAs) that fix the price of electricity for
an agreed quantity and duration by reference to an agreed strike price.
EFAs are similar in nature to CfDs, except that they tend to last for
shorter time periods and are based on standard industry terms rather than
being individually negotiated. Long-term CfDs are in place to hedge a
portion of the electricity to be purchased through to 2009. Such CfDs
represent an annual commitment of approximately five terawatt hours (TWh),
declining on a linear basis to approximately two TWh by 2005 and finally
expiring in 2010. There are no similar long-term commitments under EFAs.
The impact of changes in the market value of these contracts, which serve
as hedges, is deferred until the related transaction is completed.
F-30
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Derivative and Financial Instruments (continued)
The fair value of outstanding CfDs and EFAs at December 31, 1998 and March
31, 1999 was (pound)61 million and (pound)48 million, respectively,
calculated as the difference between the expected value of the CfDs or
EFAs, based on their known strike price and known volume, and the current
market value, based on an estimate of forward prices for the CfD or EFA
term. It should be noted that the market for the CfDs and EFAs has not been
liquid to date and there is no readily identifiable market through which
the majority of CfDs or EFAs could be realized through an exchange. No
easily definable forward price curve exists for the duration and shape of
the CfDs or EFAs that would be agreed generally.
Gas swaps and futures - In the gas retail business, the Company sells fixed
price contracts to customers and supplies the customer through a portfolio
of gas purchase contracts and other wholesale contracts. The overall net
exposure of the Company to the gas spot market is managed by using gas
swaps and futures.
Interest rate management - Interest rate swaps and forward rate agreements
are used by the Company to convert between fixed rates and floating rates
as required. Gains and losses from interest rate swaps and forward rate
agreements are accrued over the contract period. At December 31, 1998 and
March 31, 1999, the Company held two interest rate swaps which convert
(pound)100 million of the (pound)350 million 8.375% bonds due 2004 into
floating rate debt; (pound)35 million is based on LIBOR and (pound)65
million is based on LIBOR less 0.7625%.
At December 31, 1998 and March 31, 1999, the Company had various interest
rate swaps as required by the Sterling Credit Agreement. The Sterling
Credit Agreement requires that one-half of the borrowings under these
facilities be swapped from a floating to a fixed interest rate with a
maturity of at least two years from July 28, 1998. The aggregate notional
amount of these interest rate swaps entered into is (pound)800 million,
with an average maturity of six years and average fixed rates of 6.58% and
6.54% at December 31, 1998 and March 31, 1999, respectively.
In addition, the Company has various other interest rate swaps on
subsidiary borrowings with a notional amount of (pound)48 million to swap
floating rate interest to fixed rates, a portion of which matures in 2002
and the remaining portion matures in 2008.
Forward rate agreements totalling (pound)531 million and (pound)355 million
for a maximum duration of less than one year to swap floating rate deposits
into fixed rates were outstanding at December 31, 1998 and March 31, 1999,
respectively.
Foreign currency risk management - The Company has exposure to foreign
currency movements and uses derivative financial instruments to manage this
exposure (principally on US$ denominated debt interest payments and
investments in European countries). The instruments used are forward
purchase contracts and options. The policy with regard to any such
exposures is to match assets owned in foreign countries with borrowings in
that same currency. Where there are firm commitments to purchase goods in a
foreign currency then forward contracts or options are used to fix the
exchange rate. At December 31, 1998, there were US$ options outstanding of
$10 million (at put rates of $1.57) and US$ options outstanding of $10
million (at call rates of $1.60). All of these contracts matured in the
period ended March 31, 1999.
The Company has entered into contracts to fix the exchange rate on the
interest payments to be made under the US$ denominated debt. For the $200
million 7.425% notes due 2017, the Company has entered into a contract
which sets the exchange rate between sterling and US$ at 1.605 over the
life of the debt. For the $300 million 7.55% notes due 2027, the Company
has entered into a contract which sets the exchange rate between sterling
and US$ at 1.625 over the life of the debt.
Concentrations and credit risk - The Company's financial instruments that
are exposed to concentrations of credit risk consist primarily of cash
equivalents, trade receivables and derivative contracts.
F-31
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Derivative and Financial Instruments (continued)
The Company only deposits cash with banks that have a rating in excess of
AA or invests in commercial paper from issuers with ratings of A1 or P1.
Maximum limits are set for each bank based on their ratings and also
maximum limits are set for each country.
The Company's trade receivables result primarily from its gas and
electricity retail operations and reflect a broad customer base including
industrial, commercial and domestic customers.
Credit risk relates to the risk of loss that the Company would incur as a
result of non-performance by counterparties to their respective derivative
instruments. The Company maintains credit policies with regard to its
counterparties that management believes significantly minimize overall
credit risk. The Company generally does not obtain collateral to support
the agreements but establishes credit limits and monitors the financial
viability of counterparties and believes its credit risk is minimal on
these transactions. The extent of this exposure varies with the prevailing
interest and currency rates and was not material throughout the period.
Approximately 54% by volume of the Company's CfDs and EFAs traded in the
periods ended December 31, 1998 and March 31, 1999 were contracted with two
primary counterparties. The risk of loss to the Company arising from
non-performance by these counterparties is considered unlikely.
Fair value of financial instruments - The carrying amount and fair value of
the material financial instruments used by the Company are as follows:
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
---------------------- ----------------------
((pound)million) ((pound)million)
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Assets
Other investments 233 233 284 284
Cash and cash equivalents 467 467 414 414
Restricted cash 717 717 730 730
Liabilities
Notes payable - banks (current) 238 238 53 53
Note payable to TXU 682 682 682 682
Total long-term debt, excluding capital leases 3,029 3,096 3,197 3,272
Short term loans on accounts receivable 300 300 300 300
Other financial instruments -
favorable/(unfavorable)
Interest rate swaps -- (31) -- (42)
Foreign exchange contracts -- (18) -- (21)
Gas swaps -- (2) -- --
CfDs and EFAs -- 61 -- 48
Financial guarantees and letters of credit -- (186) -- (194)
</TABLE>
F-32
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Derivative and Financial Instruments (continued)
The following methods and assumptions were used to determine the above fair
values:
(i) The fair value of other investments is estimated based on quoted
market prices where available and other estimates.
(ii) The carrying amounts of cash and cash equivalents, restricted cash,
notes payable - banks, short term loans on accounts receivable and the
notes payable to TXU approximate their fair values because of the
short maturity of these instruments.
(iii) The fair value of long term debt varies with market conditions and is
estimated based on current rates for similar financial instruments
offered to the Company.
(iv) The fair value of the interest rate swaps is based on the cancellation
value of each swap agreement independently calculated by reference to
the forward sterling interest rate curve for the unexpired portion of
the swap.
(v) The fair value of foreign exchange contracts is based upon valuations
provided by the counterparty.
(vi) The fair value of the gas swaps is based on the net present value of
discounted future cash flows in accordance with underlying gas forward
curves.
(vii) The fair value of the CfDs and EFAs is based upon a discounted cash
flow analysis using an estimate of forward prices in the Pool.
(viii) The fair value of financial guarantees and letters of credit is
based upon fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations
with the counterparties at the reporting date.
19. Subsequent Events
On May 13, 1999, TXU Eastern Funding Company issued US$1.5 billion
((pound)915 million) worth of Senior Notes which are guaranteed by the
Company in three tranches; US$350 million ((pound)214 million), 6.15% due
May 15, 2002, US$650 million ((pound)396 million), 6.45% due May 15, 2005,
and US$500 million ((pound)305 million), 6.75% due May 15, 2009. The
proceeds of this issuance were used to repay the note payable to TXU and to
reduce borrowings under the Sterling Credit Agreement and for other
corporate purposes. Shortly thereafter, the Company entered into various
interest rate and currency swaps that in effect changed the interest rate
on the borrowings from fixed to variable based on LIBOR, and fixed the
principal amount to be repaid in sterling.
On May 5, 1999, the Company announced it is to pay (pound)42 million for
a 36% interest in Savon Voima Oy (SVO). This agreement includes an
option which allows the majority shareholders of SVO to require the
Company to purchase the remaining 64% interest in SVO at prices
that are based upon a multiple of the original purchase price for the
first three years. After three years the purchase price is based
upon a calculation which considers SVO's results of operations, as
well as cash and cash equivalents and long-term debt balances on hand
at the date the option is exercised. The option may be exercised at
any time by the majority shareholders and does not expire.
On May 18, 1999, $198 million in letters of credit issued under the
Sterling Credit Agreement/Revolving Credit Facility matured and were not
renewed.
F-33
<PAGE>
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries (Successor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. Subsequent Events (continued)
Eastern has facilities with Citibank N.A. to provide financing through
trade accounts receivable whereby Eastern Electricity may sell up to
(pound)300 million of its electricity receivables and, beginning June 11,
1999, TXU Finance (No. 2) Limited may borrow up to an aggregate of (pound)
275 million, collateralized by additional receivables of Eastern
Electricity, through a short-term note issue arrangement. The program has
an overall program limit of (pound)550 million. Through March 31, 1999, the
electricity receivable financings were in the form of short-term loans
collateralized by Eastern's trade accounts receivable. Subsequent to March
31, 1999, the program was restructured so that a portion of the receivables
are sold outright rather than being used to collateralize short-term
borrowings. Eastern Electricity continually sells additional receivables to
replace those collected. At June 30, 1999, accounts receivable of Eastern
were reduced by (pound)255 million to reflect the sales of the receivables
under the new program. An additional (pound)45 million of receivables
remain as collateral for short-term loans. At June 30, 1999, TXU Finance
(No. 2) Limited had borrowed (pound)150 million through the note issue
arrangement. The borrowings by Eastern Electricity and TXU Finance (No. 2)
Limited bear interest at an annual rate based on commercial paper rates
plus 0.225%, which was 5.225% at June 30, 1999.
F-34
<PAGE>
PRICEWATERHOUSECOOPERS
- ------------------------------------------------------------------------------
PRICEWATERHOUSECOOPERS
No 1 London Bridge
London SE1 9QL
Telephone +44 (0) 171 939 3000
Facsimile +44 (0) 171 403 5265
Report of Independent Accountants
---------------------------------
To the Board of Directors and Shareholders of Eastern Group plc and Subsidiaries
In our opinion, the accompanying consolidated balance sheet and the related
statements of consolidated income, of comprehensive income, of common stock
equity and of cash flows present fairly, in all material respects, the financial
position of Eastern Group plc and Subsidiaries at March 3l, 1998, and the
results of their operations and their cash flows for the years ended March 31,
1997 and March 31, 1998 and for the period from April 1, 1998 through May 18,
1998 in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards in the United Kingdom
which do not differ significantly with those in the United States and which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers
London, England
April 26, 1999
PricewaterhouseCoopers is the successor partnership to the UK firms of Price
Waterhouse and Coopers & Lybrand. The principal place of business of
PricewaterhouseCoopers and its associate partnerships, and of Coopers & Lybrand,
is 1 Embankment Place, London WC2N 6NN. The principal place of business of Price
Waterhouse is Southwark Towers, 32 London Bridge Street, London SE1 9SY. Lists
of the partners' names are available for inspection at those places.
All partners in the associate partnerships are authorised to conduct business as
agents of, and all contracts for services to clients are with,
PricewaterhouseCoopers. PricewaterhouseCoopers is authorised by the Institute of
Chartered Accountants in England and Wales to carry on investment business.
F-35
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
CONSOLIDATED BALANCE SHEET
((pound) million)
<TABLE>
<CAPTION>
As of
March 31, 1998
--------------
<S> <C>
Assets
Property, plant and equipment, net 2,365
-----
Current assets
Cash and cash equivalents 714
Accounts receivable (net of allowance for uncollectable accounts of (pound)13 million) 529
Inventories
Materials and supplies 23
Fuel stock 100
Prepayments 4
ACT recoverable 22
Other current assets 3
-----
Total current assets 1,395
-----
Investments
Restricted cash 547
Other 42
-----
Total investments 589
-----
Deferred debits
Goodwill (net of accumulated amortization of (pound)82 million) 1,222
Prepayments for pensions 150
Other deferred debits 105
-----
Total deferred debits 1,477
-----
Total assets 5,826
=====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
CONSOLIDATED BALANCE SHEET
((pound) million)
As of
March 31, 1998
--------------
Capitalization and liabilities
Capitalization
Contributed capital 2,603
Retained deficit (794)
Accumulated other comprehensive loss (7)
------
Total common stock equity 1,802
------
Minority interest 6
------
Long-term debt, less amounts due currently 1,976
------
Total capitalization 3,784
------
Current liabilities
Notes payable - banks 57
Long-term debt due currently 228
Short-term loans on accounts receivable 300
Accounts payable 218
Taxes accrued 182
Interest accrued 39
Other current liabilities 292
------
Total current liabilities 1,316
------
Deferred credits and other noncurrent liabilities
Deferred income taxes, net 434
Other deferred credits and noncurrent liabilities 292
------
Total deferred credits and other noncurrent liabilities 726
------
Commitments and contingencies (Notes 11 and 12) --
Total capitalization and liabilities 5,826
======
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
STATEMENTS OF CONSOLIDATED INCOME
((pound) million)
<TABLE>
<CAPTION>
Period from
April 1, 1998
Year ended Year ended through
March 31, 1997 March 31, 1998 May 18, 1998
-------------- -------------- ------------
<S> <C> <C> <C>
Operating revenues 2,984 3,475 425
Costs and expenses
Purchased power 1,600 1,703 202
Gas purchased for resale 368 514 85
Operation and maintenance 557 806 123
Depreciation and amortization 161 185 26
------ ------ ------
Total operating expenses 2,686 3,208 436
------ ------ ------
Operating income (loss) 298 267 (11)
Other income - net 5 10 1
------ ------ ------
Income (loss) before interest, income taxes and minority
interest 303 277 (10)
Interest income 40 76 12
Interest expense, net of capitalized interest 128 202 28
------ ------ ------
Income (loss) before income taxes and minority interest 215 151 (26)
Income tax expense (benefit) 304 189 (5)
------ ------ ------
Loss before minority interest (89) (38) (21)
Minority interest (1) -- --
------ ------ ------
Net loss (90) (38) (21)
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
((pound) million)
<TABLE>
<CAPTION>
Period from
April 1, 1998
Year ended Year ended through
March 31, 1997 March 31, 1998 May 18, 1998
-------------- -------------- ------------
<S> <C> <C> <C>
Net loss (90) (38) (21)
Other comprehensive loss:
Unrealized loss on securities classified as available
for sale (5) (2) (3)
-------- -------- --------
Comprehensive loss (95) (40) (24)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY
((pound) million)
<TABLE>
<CAPTION>
Accumulated
other
Contributed Retained comprehensive
capital deficit income
------- ------- ------
<S> <C> <C> <C>
Balance at April 1, 1996 2,518 (326) --
Net loss for year ended March 31, 1997 -- (90) --
Cash dividends for the year ended March 31, 1997 -- (140) --
Tax relief received from Parent 68 -- --
Unrealized loss on securities classified as available for
sale for the year ended March 31, 1997 -- -- (5)
----- ----- -----
Balance at March 31, 1997 2,586 (556) (5)
----- ----- -----
Balance at April 1, 1997 2,586 (556) (5)
Net loss for the year ended March 31, 1998 -- (38) --
Cash dividends for the year ended March 31, 1998 -- (200) --
Tax relief received from Parent 17 -- --
Unrealized loss on securities classified as available for
sale for the year ended March 31, 1998 -- -- (2)
----- ----- -----
Balance at March 31, 1998 2,603 (794) (7)
----- ----- -----
Balance at April 1, 1998 2,603 (794) (7)
Net loss for the period from April 1, 1998 through May 18, 1998 -- (21) --
Unrealized loss on securities classified as available for
sale for the period from April 1, 1998 through May 18, 1998 -- -- (3)
----- ----- -----
Balance at May 18, 1998 2,603 (815) (10)
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
STATEMENTS OF CONSOLIDATED CASH FLOWS
((pound) million)
<TABLE>
<CAPTION>
Period from
April 1, 1998
Year ended Year ended through
March 31, 1997 March 31, 1998 May 18, 1998
-------------- -------------- ------------
<S> <C> <C> <C>
Cash flows - operating activities
Net loss (90) (38) (21)
Adjustments to reconcile net loss to cash provided by
operating activities:
Gain on disposal of assets (8) (5) --
Depreciation and amortization 161 185 26
Minority interest 1 -- --
Deferred income taxes 251 (24) (7)
Changes in operating assets and liabilities:
Accounts receivable (126) 78 65
Inventories (81) (25) 10
Prepayments and other assets (9) 8 (4)
Accounts payable 106 (82) 6
Interest accrued 35 4 27
Taxes accrued (53) 101 2
Other liabilities 105 139 (30)
------- ------- -------
Cash provided by operating activities 292 341 74
------- ------- -------
Cash flows - investing activities
Capital expenditures (204) (254) (51)
Proceeds from sales of assets 25 30 --
Investment in marketable securities (29) (3) (27)
Other investments (21) (7) --
------- ------- -------
Cash used in investing activities (229) (234) (78)
------- ------- -------
Cash flows - financing activities
Borrowings under long-term debt 692 240 --
Retirements of long-term debt (468) (215) --
Change in notes payable - banks (389) (4) 16
Receivable financing -- 300 --
Debt financing cost (11) -- --
Dividends paid (140) (200) --
------- ------- -------
Cash (used in) provided by financing activities (316) 121 16
------- ------- -------
Net change in cash and cash equivalents (253) 228 12
------- ------- -------
Cash and cash equivalents - beginning balance 739 486 714
------- ------- -------
Cash and cash equivalents - ending balance 486 714 726
------- ------- -------
Supplemental cash flow disclosures:
Cash paid for interest 93 198 5
Cash paid for income taxes 18 90 --
Non-cash transactions:
Record capital lease and related obligations 705 -- --
Consolidation of debt and related investment on
cross-border leases 408 139 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
The business and operations of Eastern Group plc and Subsidiaries (Eastern)
are divided into three principal segments, as follows:
(i) The energy retail business which supplies electricity and gas to
national domestic, industrial and commercial customers in the United
Kingdom;
(ii) The energy management and generation business which manages an
integrated portfolio of generation assets, physical gas assets and
contracts; and
(iii) The networks business which owns, manages and operates the
electricity distribution system.
These businesses are carried out primarily in the United Kingdom with
interests increasingly being developed throughout the rest of Europe.
Prior to May 19, 1998, Eastern was owned by The Energy Group PLC (TEG). On
May 19, 1998, TXU Acquisitions Limited, a subsidiary of TXU Corp, acquired
control of TEG (see Note 17).
2. Basis of Presentation and Significant Accounting Policies
The consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States (US GAAP).
Consolidation - The consolidated financial statements include the accounts
of Eastern and all majority owned subsidiaries. Minority interest
represents the minority shareholders' proportionate share in the equity or
income of Eastern's majority-owned subsidiaries.
All significant intercompany items and transactions have been eliminated in
consolidation. Investments in significant unconsolidated affiliates are
accounted for by the equity method.
Use of estimates - The preparation of Eastern's consolidated financial
statements, in conformity with US GAAP, requires management to make
estimates and assumptions about future events that affect the reporting and
disclosure of assets and liabilities at the balance sheet dates and the
reported amounts of revenue and expense during the period covered by the
consolidated financial statements. In the event estimates and/or
assumptions prove to be different from actual amounts, adjustments are made
in subsequent periods to reflect more current information.
Cash and cash equivalents - Cash equivalents consist of highly liquid
investments, which are readily convertible into cash and have maturities of
three months or less.
Accounts receivable - A provision for uncollectible accounts of (pound)1
million, (pound)11 million and (pound)2 million was recorded during the
years ended March 31, 1997 and 1998 and the period from April 1, 1998
through May 18, 1998, respectively. Eastern did not realize any material
recoveries during the years ended March 31, 1997 and 1998 or the period
from April 1, 1998 through May 18, 1998. Eastern wrote-off accounts
receivable of (pound)1 million, (pound)10 million and (pound)1 million
during the years ended March 31, 1997 and 1998 and the period from April 1,
1998 through May 18, 1998, respectively.
Inventories - Inventories consist of fuel stock, material and supplies, and
are stated at the lower of cost or net realizable value. The cost of
inventories is determined using a weighted average cost method.
F-42
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Basis of Presentation and Significant Accounting Policies (continued)
Capitalized interest - Interest is capitalized on major capital
expenditures during the period of construction.
Property, plant and equipment - Property, plant and equipment are stated at
cost less accumulated depreciation. The cost of additions, improvements,
and interest on construction are capitalized, while maintenance and repairs
are charged to expense when incurred.
Leased generating stations meeting certain criteria and related equipment
are capitalized and the present value of the related lease payments is
recorded as a liability. Depreciation of capitalized lease assets is
computed on the straight-line basis over the shorter of the estimated
remaining useful life of the asset or the lease term.
Depletion of gas reserves is charged on a unit-of-production basis, based
on an assessment of proven reserves. Depreciation of all other property,
plant and equipment is determined on the straight-line method over
estimated useful lives of the assets as follows:
Electricity generating station assets 30 years
Electricity generating station Shorter of lease period or
assets under capital lease estimated remaining useful life
Electricity distribution 40 years (3% per annum for first
system assets 20 years and 2% per annum for last
20 years)
Buildings Up to 60 years
Leasehold improvements Shorter of remaining lease term or
estimated useful life
Plant and equipment Up to 10 years
Customer contributions to the construction of electricity distribution
system assets are amortized to income over a forty-year period, at a rate
of 3% per year for the first 20 years and 2% per year for the last 20
years. The unamortized amount of these contributions is deducted from
property, plant and equipment.
Upon sale, retirement, abandonment or other disposition of property, the
cost and related accumulated depreciation are eliminated from the accounts
and any gain or loss is reflected in income.
The United Kingdom Government is entitled to claim a portion of any gain
realized by Eastern on certain property disposals made up to March 31,
2000. Provisions for such claims are made when an actual disposal occurs.
Provision is made for abandonment costs relating to gas fields. Such
provisions are determined in accordance with local conditions and
requirements, and on the basis of costs estimated at the respective balance
sheet date. These costs are expensed on a unit-of-production basis.
Valuation of long lived assets - Eastern periodically evaluates the
carrying value of long-lived assets to be held and used, including
goodwill, when events and circumstances warrant such a review. The carrying
value of a long-lived asset is considered impaired when the projected
undiscounted cash flows from such asset is separately identifiable and is
less than its carrying value. In that event, a loss is recognized based on
the amount by which the carrying value exceeds the fair market value of the
long-lived asset. Fair market value is determined primarily utilizing the
anticipated cash flows discounted at a rate commensurate with risk
involved.
Goodwill - Goodwill is capitalized and amortized over 40 years using the
straight-line method. Eastern reviews the goodwill recoverability period on
a regular basis. Amortization expense for each of the years ended March 31,
1997 and 1998 was (pound)33 million and for the period from April 1, 1998
through May 18, 1998 was (pound)4 million.
Derivative financial instruments - In order to qualify for hedge
accounting, the following criteria must be met: the item being hedged
exposes Eastern to price risk, it is probable that the hedge will
substantially offset this risk, and it has been designated as a hedge by
management.
F-43
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Basis of Presentation and Significant Accounting Policies (continued)
Gains and losses on hedges of existing assets or liabilities are included
in the carrying amounts of those assets or liabilities and are ultimately
recognized in income. Gains and losses related to qualifying hedges of firm
commitments or anticipated transactions are deferred and are recognized in
income or as adjustments of carrying amounts when the hedged transaction
occurs. The cash flows related to derivative financial instruments are
recorded in the same manner as the cash flow related to the item being
hedged. In the event that an overall analysis of the firm commitments being
hedged indicates that Eastern is in a net loss position, a provision is
made for these anticipated losses. Transactions that are entered into that
do not meet the criteria for hedge accounting are marked to market on the
balance sheet at the period end, and the unrealized gain or loss is
recognized in the Statement of Consolidated Income for that period.
Revenue recognition - Electricity and gas sales revenues are recognized
when services are provided to customers and include an estimate for
unbilled revenues, or the value of electricity and gas consumed by
customers between the date of their last meter reading and the period-end
date. Operating revenues are stated exclusive of value added tax, but
inclusive of the fossil fuel levy.
Restructuring costs - Restructuring costs relate to voluntary termination
benefits and are recorded in Operation and Maintenance expense in the
Statement of Consolidated Income in the period in which the employee
accepts the offer and the amount can be reasonably estimated. Eastern has
established voluntary retirement plans to progressively reduce manpower
levels.
Foreign currencies - Assets and liabilities of foreign subsidiaries are
translated at the exchange rate on the balance sheet date. Revenues, costs
and expenses are translated at average rates of exchange prevailing during
the period. Translation adjustments resulting from this process are charged
or credited to the cumulative currency translation adjustment account in
common stock equity. Gains and losses on foreign currency transactions are
included in the Statement of Consolidated Income.
Income taxes - Income tax expense includes United Kingdom and other
national income taxes. Eastern intends to reinvest the earnings of its
foreign subsidiaries into those businesses. Accordingly, no provision has
been made for taxes which would be payable if such earnings were
distributed to Eastern.
Advance Corporation Tax (ACT) recoverable represents the amount of tax paid
or payable on outgoing dividends paid and proposed which can be set off
against a corporation tax liability arising currently or in the future,
thereby reducing current tax expense.
Deferred income taxes are determined under the liability method. Deferred
income taxes represent liabilities to be paid or assets to be received in
the future and reflect the tax consequences on future years of temporary
differences between the tax bases of assets and liabilities and their
financial reporting amounts. Future tax rate changes would affect those
deferred tax liabilities or assets in the period when the tax rate change
is enacted. Future tax benefits, such as net operating loss carryforwards,
are recognized to the extent that realization of such benefits is more
likely than not.
Marketable securities - Eastern has classified all of its marketable
securities as available for sale. Available for sale securities are carried
at fair value with the unrealized gains and losses reported as a component
of accumulated other comprehensive income in common stock equity. Declines
in fair value that are other than temporary are reflected in the Statement
of Consolidated Income.
Appraisal and development expenditure of gas fields - Appraisal
expenditures are accounted for under the successful efforts method. General
seismic and other costs are expensed as incurred.
Ceiling test - The capitalized costs of gas fields under evaluation, under
development or in production are assessed each year on a field-by-field
basis. To the extent that the future net revenues from the remaining
commercial reserves, or, in the case of prospects under evaluation, the
estimated potential commercial reserves, are less than the net capitalized
costs of the field, a charge is made to the profit and loss account.
F-44
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Basis of Presentation and Significant Accounting Policies (continued)
New accounting standards - Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was to be effective for fiscal years beginning after June 15,
1999. This statement requires that all derivative financial instruments be
recognized as either assets or liabilities on the balance sheet at their
fair values and that accounting for the changes in their fair values is
dependent upon the intended use of the derivatives and their resulting
designations. The new standard will supersede or amend existing standards
that deal with hedge accounting and derivatives. Eastern has not determined
the effect that adopting this standard will have on its consolidated
financial statements.
The Emerging Issues Task Force (EITF) has issued No. 98-10 "Accounting for
Energy Trading and Risk Management Activities" which is effective for
fiscal years beginning after December 15, 1998. EITF 98-10 requires that
contracts for energy commodities which are entered into under trading
activities should be marked to market with the gains and losses shown net
in the income statement. As Eastern is not primarily involved in trading
activities, EITF 98-10 should not have a material impact on the
consolidated financial statements upon adoption.
3. Property, Plant and Equipment
Property, plant and equipment, stated at cost less accumulated
depreciation, consisted of:
March 31, 1998
((pound) million)
-----------------
Electricity distribution system 1,567
Electricity generating stations 1,154
Upstream gas assets 45
Other land and buildings 102
Plant and equipment 360
Accumulated depreciation (863)
--------
Net property, plant and equipment 2,365
========
Depreciation expense for the years ended March 31, 1997 and 1998 was
(pound)128 million and(pound)152 million, respectively, and for the period
from April 1, 1998 through May 18, 1998 was (pound)22 million.
Electricity generating stations and plant and equipment include assets
under capital leases as follows:
March 31, 1998
((pound) million)
-----------------
Cost 839
Less accumulated depreciation (126)
--------
Net book value 713
========
4. Restricted Cash
At March 31, 1998, (pound)408 million of deposits has been used to
cash-collateralize existing future lease obligations to certain banks
related to the funding of the leases of three power stations from National
Power PLC (Note 9). Additionally (pound)139 million at March 31, 1998 has
been used to cash-collateralize existing future lease obligations arising
from a cross-border leasing arrangement on two other power stations (Note
9).
F-45
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments
Marketable investments are classified as available for sale, and are
considered non-current based upon management's intentions in holding the
investments. Marketable investments consisted of:
Fair market Unrealized
March 31, 1997 Cost value gain/(loss)
-------- ----------- ----------
((pound)million)
SME 29 24 (5)
----- ----- -----
29 24 (5)
===== ===== =====
Fair market Unrealized
March 31, 1998 Cost value gain/(loss)
-------- ----------- ----------
((pound)million)
SME 25 18 (7)
HC 3 3 -
----- ----- -----
28 21 (7)
===== ===== =====
Fair market Unrealized
May 18, 1998 Cost value gain/(loss)
-------- ----------- ----------
((pound)million)
SME 35 25 (10)
HC 20 20 -
----- ----- -----
55 45 (10)
===== ===== =====
At March 31, 1998 Eastern held an 11.8% investment in Severomoravska
Energetika (SME), which is listed in the Czech Republic. During the period
from April 1, 1998 through May 18, 1998, Eastern's Investment in SME
increased to 16%. During the year ended March 31, 1998, Eastern acquired a
1.8% investment in Hidroelectrica del Cantabrico (HC), which is listed in
Spain. As Eastern does not have the ability to exercise significant
influence over either SME's or HC's operating and financial policies, these
investments have been accounted for as marketable securities and
accordingly have been marked to market at March 31, 1997 and 1998 and May
18, 1998.
There were no sales of marketable securities in the two year period ended
March 31, 1998, or from April 1, 1998 through May 18, 1998.
At March 31, 1998 Eastern held an additional (pound)21 million in other
investments.
6. Pensions
The majority of Eastern's employees are members of the Electricity Supply
Pension Scheme (ESPS) which provides pensions of a defined benefit nature
for employees throughout the England and Wales Electricity Supply Industry.
The ESPS operates on the basis that there is no cross-subsidy between
employers and the financing of Eastern's pension liabilities is therefore
independent of the experience of other participating employers. The assets
of the ESPS are held in a separate trustee-administered fund and consists
principally of United Kingdom and European equities, United Kingdom
property holdings and cash. The pension cost relating to the Eastern
portion of the ESPS is assessed in accordance with the advice of
independent qualified actuaries using the projected unit method. The
benefits under these plans are primarily based on years of service and
compensation levels as defined under the respective plan provisions.
The assets of the Electricity Supply Pension Scheme are held in a separate
trustee administered fund and consist principally of United Kingdom and
European equities, United Kingdom property holdings and cash.
F-46
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Pensions (continued)
Eastern has adopted SFAS No. 132, "Employer's Disclosure about Pensions and
other Post-retirement Benefits" for the year ended March 31, 1998.
Year ended
Change in benefit obligations March 31, 1998
- ----------------------------- --------------
((pound) million)
Benefit obligation at beginning of year 702
Service cost 9
Interest cost 53
Plan participants' contributions 7
Termination liability 15
Actuarial loss 100
Benefits paid (51)
------
Benefit obligation at end of year 835
======
Change in plan assets:
- ---------------------
Fair value of plan assets at beginning of year 874
Actual return on plan assets 285
Employer contribution 14
Plan participants' contributions 7
Benefits paid (51)
------
Fair value of plan assets at end of year 1,129
======
Funded Status:
- -------------
Funded status 294
Unrecognized net actuarial gain (151)
Unrecognized prior service cost 7
------
Prepayments for pensions 150
======
F-47
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Pensions (continued)
Weighted average assumptions:
<TABLE>
<CAPTION>
Period from
April 1, 1998
Year ended Year ended through
March 31, 1997 March 31, 1998 May 18, 1998
-------------- -------------- ------------
% % %
<S> <C> <C> <C>
Expected long-term rate of return on assets 8.5 7.0 7.0
Rate of salary increases 5.0 4.0 4.0
Discount rate 8.0 7.0 6.5
</TABLE>
Components of net periodic pension benefit:
<TABLE>
<CAPTION>
Period from
April 1, 1998
Year ended Year ended through
March 31, 1997 March 31, 1998 May 18, 1998
-------------- -------------- ------------
((pound) million)
<S> <C> <C> <C>
Service cost-benefits earned during the period 9 9 1
Interest cost on projected benefit obligations 58 53 7
Expected return on plan assets (75) (69) (10)
Net amortization and deferral -- 1 --
------ ------ ------
Net periodic benefit (8) (6) (2)
====== ====== ======
</TABLE>
During 1997 and 1998 special retirement programs were offered to encourage
early retirements among certain employees which resulted in additional
pension cost of (pound)12 million and (pound)15 million in the years ended
March 31, 1997 and 1998, respectively.
7. Taxation
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Period from
April 1, 1998
Year ended Year ended through
March 31, 1997 March 31, 1998 May 18, 1998
-------------- -------------- ------------
((pound) million)
<S> <C> <C> <C>
Current:
United Kingdom 53 213 2
------- ------ ------
Deferred:
United Kingdom 251 (24) (7)
------- ------ ------
Total income tax expense/(benefit) 304 189 (5)
======= ====== ======
</TABLE>
F-48
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Taxation (continued)
Income/(loss) before income taxes is as follows:
<TABLE>
<CAPTION>
Period from
April 1, 1998
Year ended Year ended through
March 31, 1997 March 31, 1998 May 18, 1998
-------------- -------------- ------------
((pound) million)
<S> <C> <C> <C>
United Kingdom 212 157 (27)
Other countries 3 (6) 1
------ ------ ------
Total income/(loss) before income taxes and
minority interest 215 151 (26)
====== ====== ======
</TABLE>
Significant components of Eastern's deferred tax assets and liabilities at
March 31, 1998 are as follows:
As at
March 31, 1998
--------------
((pound) million)
Deferred tax assets
Tax loss carry forwards (1)
Leased assets (450)
Other (98)
-------
Total deferred tax assets (549)
Valuation allowance for deferred tax assets 165
-------
Net deferred tax assets (384)
-------
Deferred tax liabilities
Excess of book value over taxation value of fixed assets 274
Leased assets 507
Other 37
-------
Total deferred tax liabilities 818
-------
Net deferred tax liabilities 434
=======
All of the net deferred tax liabilities are non-current.
The recognized deferred tax asset is based upon the expected future
utilization of net operating loss carryforwards and the reversal of other
temporary differences. For financial reporting purposes, Eastern has
recognized a valuation allowance for those benefits for which realization
does not meet the more likely than not criteria. The valuation allowance
has been recognized in respect of leased assets. Eastern continually
reviews the adequacy of the valuation allowance and is recognizing these
benefits only as reassessments indicate that it is more likely than not
that the benefits will be realized. The valuation allowance increased by
(pound)18 million in the year ended March 31, 1998.
F-49
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Taxation (continued)
United Kingdom income tax expense at the statutory tax rate (33% at March
31, 1997 and 31% at March 31, 1998 and May 18, 1998) is reconciled below to
the actual income tax expense:
<TABLE>
<CAPTION>
Period from
April 1, 1998
Year ended Year ended through
March 31, 1997 March 31, 1998 May 18, 1998
-------------- -------------- ------------
((pound) million)
<S> <C> <C> <C>
Tax at United Kingdom statutory rate 71 47 (8)
Windfall tax -- 112 --
Non-deductible goodwill 10 10 1
Effect of tax rate on United Kingdom dividends (2) (2) --
Movement in valuation allowance 147 18 2
Leasing transaction 93 -- --
Tax rate change (13) -- --
Profit on disposal taxed at lower rates (5) (1) --
Non-deductible expenses 2 3 --
Other 1 2 --
---- ---- ----
Income tax expense/ (benefit) 304 189 (5)
==== ==== ====
</TABLE>
For the year ended March 31, 1998, a windfall tax was levied on Eastern
according to a formula contained in the UK Finance (No. 2) Act 1997. The
liability to the tax was assessed at (pound)112 million of which half was
paid on December 1, 1997 and the balance was paid on December 1, 1998.
As at March 31, 1998 Eastern had net operating loss carryforwards of
(pound)1 million that are available to offset future taxable income. The
net operating loss carryforwards have no expiration date.
The tax effect of components included in accumulated other comprehensive
income was a benefit of (pound)2 million in the year ended March 31, 1997,
a benefit of (pound)1 million in the year ended March 31, 1998 and a
benefit of (pound)1 million for the period from April 1, 1998 through May
18, 1998.
8. Related Party Transactions
At March 31, 1998 Eastern was owed(pound)0.4 million by TEG, which arose
from payments of salary expenses by Eastern on behalf of TEG.
F-50
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Notes Payable and Long-term Debt
Weighted average interest rate at March 31, 1998 on notes payable to banks
was 13.2%.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, 1998
--------------
((pound) million)
<S> <C>
Notes and Bonds:
(pound)350 million 8.375% bonds due 2004 350
(pound)200 million 8.5% bonds due 2025 200
(pound)200 million 8.75% bonds due 2012 200
Other:
Rent factoring loans (weighted average interest rate of 7.35%, due 1999-2001) 804
Other unsecured loans, due in instalments 8.9% - 18.3% 50
Capital leases 461
Cross-border leases 139
-------
Total long-term debt 2,204
Less current portion 228
-------
Long-term debt, less amounts due currently 1,976
=======
</TABLE>
(pound)100 million of the (pound)350 million 8.375% bonds included in
long-term debt has been converted into floating rate debt by way of
interest rate swaps, which expire in the year 2004.
Rent factoring loans - Certain subsidiaries of Eastern entered into an
agreement with commercial banks whereby future intra-group rental payments
receivable were assigned to these banks in return for a capital sum.
(pound)408 million of the capital sum has been deposited to cash
collateralize existing future lease obligations to certain banks related to
the funding of the leases of three power stations leased from National
Power.
On December 17, 1997 a subsidiary of Eastern issued a (pound)21 million
floating rate (18.26% at March 31, 1998) bond in the Czech Republic.
Long-term debt balances are denominated in the following currencies:
March 31, 1998
--------------
((pound) million)
Sterling 2,044
United States dollars 139
Other 21
-------
Total long-term debt 2,204
=======
There was no capitalized interest for the year ended March 31, 1998, or for
the period from April 1, 1998 through May 18, 1998. Capitalized interest
for the year ended March 31, 1997 was (pound)11 million.
F-51
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Notes Payable and Long-term Debt (continued)
Long-term debt, excluding capital lease balances, is repayable as follows:
Year Ending
March 31
--------
1999 213
2000 225
2001 242
2002 127
2003 21
Thereafter 915
-------
1,743
Capital leases 461
-------
Total long-term debt 2,204
=======
Capital lease obligations - As at March 31, 1998, future minimum lease
payments for assets under capital leases, together with the present value
of minimum lease payments, were:
Year Ending
March 31
--------
((pound) million)
1999 16
2000 16
2001 17
2002 542
2003 17
Thereafter 98
--------
Total future minimum lease payments 706
Less amounts representing interest (245)
--------
Present value of future minimum lease payments 461
--------
Current 15
Non-current 446
--------
Total 461
========
Substantially all of the capital lease obligations relate to coal-fired
power stations. Additional payments of approximately (pound)6 per megawatt
hour (indexed from 1996 prices) linked to output levels from the stations
are payable for the first seven years of their operation by Eastern
(operations commenced in 1996).
The lease agreement for three of the coal-fired power stations contains a
purchase option of(pound)1 in 2046. The lease is for a total of ninety-nine
years.
Cross-border leases - The debt arising on the cross-border leases is fully
collaterized by restricted cash on deposit (see Note 4). Certain
subsidiaries of Eastern have entered into cross-border lease transactions
in respect of two power stations that are wholly owned by Eastern. Eastern
has retained control of the power stations and their output and is
responsible for their operations.
F-52
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Notes Payable and Long-term Debt (continued)
Eastern's debt agreements contain certain covenants with which they must
comply, including leverage ratios, levels of net assets and interest cover
covenants. At March 31, 1998, Eastern was in compliance with all covenants.
10. Lines of Credit and Other Credit Facilities
Credit facility - At March 31, 1998 Eastern had a five year committed
revolving credit borrowing facility amounting to (pound)350 million with
interest based on LIBOR plus 0.23% which at March 31, 1998 was 7.86%.
Promissory note program - Eastern has a one year promissory note program
issued within the Czech Republic which has been utilized to fund its
investment in SME and Teplarny Brno a.s. The note bears interest at an
annual rate of PRIBOR plus 0.7% which at March 31, 1998 was 18.3%.
Short-term loan on accounts receivable - Eastern has facilities with a
financial institution whereby it may, from time to time, borrow funds from
the financial institution. Outstanding borrowings under the agreements may
not exceed certain levels and are collateralized by portions of Eastern's
trade accounts receivable. At March 31, 1998, Eastern had borrowed
(pound)300 million under these facilities. The loan bears interest at an
annual rate based upon commercial paper rates plus 0.225% which at March
31, 1998 was 7.6%.
11. Commitments
Eastern evaluates its position relative to asserted and unasserted claims,
loss-making purchase commitments or future commitments and makes provisions
as needed.
Eastern's investment in Svartisen (the offtake generated by water rights in
hydro-electric power plants in Norway) requires coverage of approximately
31.2% of the costs incurred in relation to the operation of the power
plant, as well as a portion of the maintenance costs, property tax, and
feeding costs (defined as fixed charges such as connection and capacity
charges and volume related charges such as an energy charge) for 55 years,
beginning in 1998. The electricity generated from the hydro-electric plants
will be sold into the Norwegian power pool, from which Eastern will receive
income.
Gas take-or-pay contracts - Eastern is a party to various types of
contracts for the purchase of gas. Almost all include "take-or-pay"
obligations under which the buyer agrees to pay for a minimum quantity of
gas in a year. In order to help meet the expected needs of its wholesale
and retail customers, Eastern has entered into a range of gas purchase
contracts. As at March 31, 1998, the commitments under long-term gas
purchase contracts amounted to an estimated (pound)2.8 billion, covering
periods up to 16 years forward. Management does not consider it likely, on
the basis of Eastern's current expectations of demand from its customers as
compared with its take-or-pay obligations under such purchase contracts,
that any material payments will become due from Eastern for gas not taken.
F-53
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Commitments (continued)
Rental commitments - The future minimum rental commitments under
non-cancellable operating leases were as follows:
Year ending
December 31
-----------
Period from May 19, 1998 through December 31, 1998 34
1999 53
2000 36
2001 37
2002 34
2003 30
Thereafter 27
------
Total 251
======
The operating lease commitments relate to coal-fired power stations.
Additional variable payments of approximately (pound)6 per megawatt hour
(indexed to 1996 prices) linked to output levels from these stations are
payable through 2000, the first four years of the lease agreement, by
Eastern.
Rental expense for operating leases amounted to (pound)49 million and
(pound)77 million for the years ended March 31, 1997 and 1998,
respectively. Rental expense for operating leases for the years ended March
31, 1997 and March 31, 1998 include (pound)32 million and (pound)42
million, respectively, of minimum lease payments and (pound)17 million and
(pound)35 million, respectively, of variable lease payments, based on
output. Rental expense for operating leases amounted to (pound)10 million
for the period ended May 18, 1998. Rental expense for operating leases
during the period to May 18, 1998 includes (pound)6 million of minimum
lease payments and (pound)4 million of variable lease payments, based upon
output.
12. Contingencies
Eastern is subject to business risks that are actively managed against
exposures.
In February 1997, the official government representative of pensioners
(Pensions Ombudsman) made a determination against the National Grid Company
plc (National Grid) and its group trustees with respect to complaints by
two pensioners in National Grid's section of the ESPS relating to the use
of the pension fund surplus resulting from the March 31, 1992 actuarial
valuation of the National Grid section to meet certain costs arising from
the payment of pensions on early retirement upon reorganization or
downsizing. These determinations were set aside by the High Court on June
10, 1997 and the arrangements made by National Grid and its group trustees
in dealing with the surplus were confirmed. The two pensioners have now
appealed against this decision and judgment has now been received although
a final order is awaited. The appeal was allowed endorsing the Pensions
Ombudsman's determination that the corporation was not entitled to
unilaterally deal with any surplus. If a similar complaint were to be made
against Eastern in relation to its use of actuarial surplus in its section
of the ESPS, it would vigorously defend the action, ultimately through the
courts. However, if a determination were finally to be made against it and
upheld by the courts, Eastern could have a potential liability to repay to
its section of the ESPS an amount estimated by Eastern to be up to
(pound)45 million (exclusive of any future applicable interest charges).
General - In addition to the above, Eastern is involved in various legal
and administrative proceedings arising in the ordinary course of its
business. Eastern believes that all such lawsuits and resulting claims
would not have a material effect on its financial position, results of
operation or cash flows.
F-54
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Employee Share Plans
TEG had the following employee share plans in which Eastern's employees
participated for the two year period ended March 31, 1998 and for the
period from April 1, 1998 through May 18, 1998:
(a) The Energy Group Sharesave Scheme which was available to the United
Kingdom-based employees of Eastern and those directors who devoted
more than 25 hours a week to their duties. Employees who participated
in this scheme had to enter into a monthly savings contract, for
either a three or five year period. The exercise price for the three
year Sharesave Scheme was based on a 15% discount of the TEG stock
price on February 25, 1997 (date of original grant) and the five year
Sharesave Scheme exercise price was based on a 20% discount.
(b) The Energy Group Executive Share Option Scheme which was administered
by the Remuneration Committee of the Board of Directors of TEG (the
Remuneration Committee) was available at its discretion to employees
and those directors who devote more than 25 hours a week to their
duties. Eligible participants under this plan were granted options to
acquire shares with an exercise price equal to the February 25, 1997
(date of grant) TEG stock price, which were not exercisable for three
years.
(c) The Energy Group Long-term Incentive Plan operated in conjunction with
Eastern's Employee Benefit Trust. The plan was supervised and
administered by the Remuneration Committee. The Plan could be made
available to all employees and directors at the discretion of the
Remuneration Committee, but it was in practice limited to the
executive directors and certain senior executives of Eastern. Awards
under this plan required a certain level of achievement of total
shareholder return, normally calculated over three years, before they
vested.
The movements in share options outstanding during the year ended March 31,
1998 and the period ended May 18, 1998 were:
<TABLE>
<CAPTION>
Weighted
average As at As at As at
fair value Exercise March 31 March 31, Exercise/ May 18,
of options price 1997 Exercised Lapsed Granted 1998 Lapsed Granted 1998
---------- ----- ---- --------- ------ ------- ---- ------ ------- ----
(pence) (pence)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Executive
Share Options 73 547 774,416 10,958 38,353 -- 725,105 -- -- 725,105
Sharesave
Scheme - 3 year 109.8 465 19,455 -- -- 233,466 252,921 -- 29,183 282,104
Sharesave
Scheme - 5 year 133.3 438 73,254 -- -- 879,052 952,306 -- 36,627 988,933
Long-term
Incentive Plan 465 -- 486,926 -- 33,951 -- 452,975 -- -- 452,975
</TABLE>
No options lapsed or were exercised prior to March 31, 1997.
With the exception of the Sharesave Schemes, the options listed above were
all granted between February 25, 1997 and March 31, 1997. The granted
options for the Sharesave Schemes reflect additional amounts saved by
participants during the respective period.
Since May 18, 1998 all options or awards then outstanding under the
employee share plans described in (a) to (c) above have, as a consequence
of the takeover of Eastern by TXU Corp (see Note 17), either been
exercised, waived or surrendered for a cash cancellation payment by TXU
Corp or lapsed.
Eastern recorded compensation expense relating to the employee share plans
of (pound)0.1 million in the year to March 31, 1997, (pound)2 million in
the year to March 31, 1998 and (pound)0.3 million in the period from April
1, 1998 to May 18, 1998.
Eastern determined the potential impact of SFAS No. 123, "Accounting For
Stock-Based Compensation" with regard to the recognition of compensation
expense. Under SFAS 123, compensation expense is
F-55
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Employee Share Plans (continued)
determined based upon the fair value at the grant date for awards. Had
compensation expense for Eastern share option schemes been determined
based upon the methodology prescribed under SFAS 123, Eastern's loss
would not have been affected in the year ended March 31, 1997, would have
been (pound)500,000 lower in the year ended March 31, 1998 and would have
been (pound)125,000 lower in the period ended May 18, 1998. The fair
value of the options granted are estimated using the Black Scholes
model.
The following weighted-average assumptions were assumed in determining the
fair value of options for the Executive Share Option Scheme: exercise price
is equal to the fair value of the stock on the grant date; risk-free
interest rate is 5.31%; expected lives of 2 years and remaining contract
life of 5.5 years; expected volatility of 27.3% and a dividend yield of
5.48%. The same assumptions were used in determining the compensation cost
as of the grant date for the Long-term Incentive Plan and the Sharesave
Schemes for the risk free interest rate, expected volatility and dividend
yield. For the 5 year Sharesave Scheme the exercise price is 80% of the
stock price at date of grant and a contract life of 4.3 years. For the 3
year Sharesave Scheme the exercise price is 85% of the stock price at date
of grant and a contract life of 2.3 years. For the Long-term Incentive Plan
the exercise price is nil and the expected life is 3 years.
14. Dividend Restrictions
Certain debt instruments of Eastern contain provisions that, under certain
conditions, restrict distributions on or acquisitions of common stock. At
March 31, 1998 retained earnings were not restricted as a result of such
provisions.
15. Segmental Information
The segments have been identified on the basis of the underlying nature of
the business and its customer base and the corresponding skill sets
required, e.g., engineering, portfolio management and customer services.
The energy retail business segment provides electricity and gas to United
Kingdom national domestic, industrial and commercial users. It also has
commenced retailing joint ventures in continental Europe. The energy
management and generation business segment manages an integrated portfolio
of contracts and physical gas and generation assets. The contracts include
supplying the energy retail business with electricity and gas as well as
contracts with third party energy retailers, traders and wholesalers. The
networks business segment owns and manages the electricity distribution
system and its principal customer base is energy retail and other
electricity suppliers. The other category consists of two operating
segments, metering and telecoms which fall below the quantitative
thresholds for determining reportable segments.
As set out below, contribution for each segment is defined as operating
profit on a UK GAAP basis before exceptional and extraordinary items, but
after a notional charge for the cost of capital. Capital/investment
expenditure includes all items of capital and investment expenditures
including the European equity investment. The cost of capital is calculated
as 0.5% per month on working capital and is eliminated on consolidation.
Overhead costs, such as those incurred by Eastern at head office and core
costs related to information technology are not allocated among the
segments.
F-56
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Segmental Information (continued)
<TABLE>
<CAPTION>
Period from April 1,
Year ended March 31, 1998 through May 18, 1998
------------------------------------------------------- --------------------------
1997 1998
-------------------------- ---------------------------
Capital/ Capital/ Capital/
Investment Investment Investment
Contribution expenditure Contribution expenditure Contribution expenditure
------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Energy retail (8) 16 (52) 42 (5) 6
Energy management and
generation 103 60 180 44 (13) 6
Networks 165 147 189 120 21 31
Other -- -- -- 32 (3) 35
--------- --------- --------- --------- --------- ---------
260 223 317 238 -- 78
Cost of capital elimination 151 -- 125 -- 17 --
Unallocated corporate costs (40) 31 (11) 26 (28) --
--------- --------- --------- --------- --------- ---------
Total (UK GAAP) 371 254 431 264 (11) 78
--------- --------- --------- --------- --------- ---------
Purchase accounting and
US GAAP adjustments (61) -- (70) -- -- --
Unallocated contract costs -- -- (68) -- -- --
Unallocated restructuring
costs (20) -- (20) -- -- --
Unallocated investment
income 13 -- 4 -- 1 --
--------- --------- --------- --------- --------- ---------
Income (loss) before
interest, income
taxes and minority
interest 303 -- 277 -- (10) --
========= ========= ========= ========= ========= =========
</TABLE>
Revenues are attributed to countries based on location of customers. There
are no revenues for transactions with a single external customer that are
10% or more of Eastern's revenue. The electricity trading market in England
and Wales (the Pool) is not considered by Eastern to be an external
customer, as all electricity generated is sold into the Pool and is then
repurchased from the Pool for subsequent resale. Revenues billed by energy
retail for the other segments are presented as revenues of the other
segments.
<TABLE>
<CAPTION>
Revenues for
Revenues for the from
year ended March 31, April 1, 1998
-------------------------------- through
1997 1998 May 18, 1998
------------- --------------- ----------------
((pound)million) ((pound)million) ((pound)million)
<S> <C> <C> <C>
Energy retail 1,568 1,655 205
Energy management and generation 952 1,337 165
Networks 420 414 53
Other 44 69 2
------- ------- ------
Total 2,984 3,475 425
======= ======= ======
</TABLE>
F-57
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Segmental Information (continued)
<TABLE>
<CAPTION>
Revenues for
the period
Revenues for the from
year ended March 31, April 1, 1998
-------------------------------- through
1997 1998 May 18, 1998
------------- --------------- ----------------
((pound)million) ((pound)million) ((pound)million)
<S> <C> <C> <C>
United Kingdom 2,966 3,447 422
Other countries 18 28 3
------- ------- ------
Total 2,984 3,475 425
======= ======= ======
</TABLE>
Long-lived
assets at
March 31, 1998
--------------
((pound) million)
United Kingdom 2,314
Other countries 51
-------
Total 2,365
=======
16. Derivative and Financial Instruments
Eastern uses derivative financial instruments for purposes other than
trading and does so to reduce its exposure to fluctuations in electricity
prices, gas prices, interest rates and foreign exchange rates. Derivative
financial instruments used by Eastern include contracts for differences,
electricity forward rate contracts, interest rate swaps, interest forward
rate agreements, options, gas swaps futures and foreign exchange forward
contracts.
Electricity price risk management - Electricity forward contracts are
primarily used by Eastern to hedge future changes in electricity prices.
Almost all electricity generated in England and Wales must be sold to the
Pool, and electricity suppliers must likewise generally buy electricity
from the Pool for resale to their customers. The Pool is operated under a
Pooling and Settlement Agreement to which all licensed generators and
suppliers of electricity in Great Britain are party. These trading
arrangements are currently under review by the United Kingdom government.
Eastern enters into electricity forward contracts to assist in the
management of its exposure to fluctuations in electricity pool prices. The
contracts bought and sold are contracts for differences (CfDs) and
electricity forward agreements (EFAs) that fix the price of electricity for
an agreed quantity and duration by reference to an agreed strike price.
EFAs are similar in nature to CfDs, except that they tend to last for
shorter time periods and are based on standard industry terms rather than
being individually negotiated. Long-term CfDs are in place to hedge a
portion of the electricity to be purchased through to 2009. Such CfDs
represent an annual commitment of approximately five terawatt hours (TWh),
declining on a linear basis to approximately two TWh by 2005 and finally
expiring in 2010. There are no similar long-term commitments under EFAs.
The impact of changes in the market value of these contracts, which serve
as hedges, is deferred until the related transaction is completed.
F-58
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. Derivative and Financial Instruments (continued)
The fair value of outstanding CfDs and EFAs at March 31, 1998 was (pound)29
million, calculated as the difference between the expected value of the
CfDs or EFAs, based on their known strike price and known volume, and the
current market value, based on an estimate of forward prices for the CfD or
EFA term. It should be noted that the market for the CfDs and EFAs has not
been liquid to date and there is no readily identifiable market through
which the majority of CfDs or EFAs could be realized through an exchange.
No easily definable forward price curve exists for the duration and shape
of the CfDs or EFAs that would be agreed generally.
Gas swaps and futures - In the gas retail business, Eastern sells fixed
price contracts to customers and supplies the customer through a portfolio
of gas purchase contracts and other wholesale contracts. The overall net
exposure of Eastern to the gas spot market is managed by using gas swaps
and futures.
Interest rate management - Interest rate swaps and forward rate agreements
are used by Eastern to convert between fixed rates and floating rates as
required. Gains and losses from interest rate swaps and forward rate
agreements are accrued over the contract period. The interest rate swaps
held by Eastern as at March 31, 1998 are comprised of two swaps to convert
(pound)100 million of the (pound)350 million 8.375% bonds due 2004 into
floating rate debt; (pound)35 million is based on LIBOR and (pound)65
million is based on LIBOR less 0.7625%.
Forward rate agreements totalling (pound)865 million for a maximum duration
of one year to swap floating rate deposits into fixed rates were
outstanding at March 31, 1998.
Foreign currency risk management - Eastern has exposure to foreign currency
movements and uses derivative financial instruments to manage this exposure
(principally investments in European countries). The instruments used are
forward purchase contracts and options. The policy with regard to any such
exposures is to match assets owned in foreign countries with borrowings in
that same currency. Where there are firm commitments to purchase goods in a
foreign currency then forward contracts or options are used to fix the
exchange rate. There were no material foreign exchange forward contracts
outstanding at March 31, 1998.
Concentrations and credit risk - Eastern's financial instruments that are
exposed to concentrations of credit risk consist primarily of cash
equivalents, trade receivables and derivative contracts.
Eastern only deposits cash with banks that have a rating in excess of AA or
invests in commercial paper from issuers with ratings of A1 or P1. Maximum
limits are set for each bank based on their ratings and also maximum limits
are set for each country.
Eastern's trade receivables result primarily from its gas and electricity
retail operations and reflect a broad customer base including industrial,
commercial and domestic customers.
Approximately 38 per cent by volume of all of Eastern's CfDs and EFAs in
the year ended March 31, 1998 were contracted with two primary
counterparties.
Credit risk relates to the risk of loss that Eastern would incur as a
result of non-performance by counterparties to their respective derivative
instruments. Eastern maintains credit policies with regard to its
counterparties that management believes significantly minimize overall
credit risk. Eastern generally does not obtain collateral to support the
agreements but establishes credit limits and monitors the financial
viability of counterparties and believes its credit risk is minimal on
these transactions. The extent of this exposure varies with the prevailing
interest and currency rates and was not material throughout the periods
presented.
F-59
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. Derivative and Financial Instruments (continued)
At March 31, 1998, no single bank was party to more than (pound)100 million
nominal value of such agreements. Eastern believes the risk of
nonperformance by counterparties is minimal.
Fair value of financial instruments
The carrying amounts and fair values of the material financial instruments
of Eastern are as follows:
<TABLE>
<CAPTION>
As at March 31, 1998
------------------------
Carrying Fair
amount value
-------- -----
((pound) million)
<S> <C> <C>
Assets
Other investments 42 42
Restricted cash investments 547 547
Cash and equivalents 714 714
Liabilities
Notes payable - banks 57 57
Short-term loans on accounts receivable 300 300
Total long-term debt, excluding capital leases 1,743 1,827
Other financial instruments - favorable/(unfavorable)
Interest rate swaps -- 11
Foreign exchange contracts -- (1)
Gas swaps -- 21
CfDs and EFAs -- 29
Financial guarantees and letters of credit -- (2)
</TABLE>
The following methods and assumptions were used to determine the above fair
values:
(i) The fair value of fixed asset investments is estimated based on quoted
market prices where available and other estimates;
(ii) The carrying amounts of current asset investments, short-term
deposits, cash and bank overdrafts, etc. approximate their fair values
because of the short maturity of these instruments;
(iii) The fair value of the investment bonds is based on their quoted
mid-market prices and excludes the value of the interest rate swaps;
(iv) The fair value of the interest rate swaps is based on the cancellation
value of each swap quoted by the relevant bank counterparty;
(v) The fair value of foreign exchange contracts is based upon valuations
provided by the counterparty;
(vi) The fair value of the gas swaps is based on the net present value of
discounted future cash flows in accordance with the underlying gas
forward curve;
(vii) The fair value of the CfDs and EFAs is based upon a discounted cash
flow analysis using an estimate of forward prices in the Pool;
(viii) The fair value of financial guarantees and letters of credit is
based upon fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations
with the counterparties at the reporting date.
F-60
<PAGE>
Eastern Group plc and Subsidiaries (Predecessor Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Subsequent Events
As of May 19, 1998, TXU Acquisitions Limited (TXU Acquisitions), a wholly
owned subsidiary of TXU Corp, acquired control of TEG. This business
combination was accounted for as a purchase. During the period between
February 5, 1998 and May 18, 1998, TXU Acquisitions had acquired a 22%
interest in TEG. Substantially all of TEG's continuing operations are
conducted through Eastern. The acquisition of TEG by TXU Acquisitions
resulted in the replacement of the five year committed revolving credit
facility, amounting to (pound)350 million, with revolving borrowing
facilities of (pound)700 million, of which (pound)250 million is a stand
alone facility for the exclusive use of Eastern and a revolving credit
facility under which the current holding company of Eastern may borrow up
to (pound)450 million for general corporate purposes.
F-61
<PAGE>
PRICEWATERHOUSECOOPERS
- ------------------------------------------------------------------------------
PRICEWATERHOUSECOOPERS
No 1 London Bridge
London SE1 9QL
Telephone +44 (0) 171 939 3000
Facsimile +44 (0) 171 403 5265
Report of Independent Accountants
---------------------------------
To the Board of Directors and Shareholders of Energy Group Overseas B.V.
In our opinion, the accompanying balance sheet and the related statements of
income, of comprehensive income, of common stock equity and of cash flows
present fairly, in all material respects, the financial position of Energy Group
Overseas B.V. at March 3l, 1998 and the results of its operations and its cash
flows for the period from formation (October 8, 1997) to March 31, 1998 and from
April 1, 1998 to May 18, 1998 in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of Overseas' management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards in the
United Kingdom which do not differ significantly with those in the United States
and which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers
London, England
April 26, 1999
PricewaterhouseCoopers is the successor partnership to the UK firms of Price
Waterhouse and Coopers & Lybrand. The principal place of business of
PricewaterhouseCoopers and its associate partnerships, and of Coopers & Lybrand,
is 1 Embankment Place, London WC2N 6NN. The principal place of business of Price
Waterhouse is Southwark Towers, 32 London Bridge Street, London SE1 9SY. Lists
of the partners' names are available for inspection at those places.
All partners in the associate partnerships are authorised to conduct business as
agents of, and all contracts for services to clients are with,
PricewaterhouseCoopers. PricewaterhouseCoopers is authorised by the Institute of
Chartered Accountants in England and Wales to carry on investment business.
F-62
<PAGE>
Energy Group Overseas B.V.
BALANCE SHEET
((pound) thousand)
<TABLE>
<CAPTION>
As of
March 31, 1998
--------------
<S> <C>
Current Assets:
Cash and cash equivalents 5
Interest receivable 10,049
Unamortized debt issue costs 2,552
Prepaid expenses 2
-------
12,608
-------
Long-term loan to Related Party Obligor 297,053
-------
Total assets 309,661
=======
Current Liabilities:
Interest payable 9,883
Corporation tax 55
Accrued expenses 1
-------
9,939
Long-term Debt:
Guaranteed Notes (net of unamortized discount of (pound)576) 296,477
Unearned income related to amortization of discount and debt issue costs 3,128
-------
299,605
-------
Common Stock Equity:
Common stock 13
Retained earnings 104
Accumulated other comprehensive income --
-------
117
-------
Total liabilities and common stock equity 309,661
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
Energy Group Overseas B.V.
STATEMENTS OF INCOME
((pound) thousand)
<TABLE>
<CAPTION>
Period from Period from
formation through April 1 through
March 31, 1998 May 18, 1998
-------------- ------------
<S> <C> <C>
Financial income/(charges)
Interest expense on Guaranteed Notes (10,099) (3,209)
Interest income from related party 10,268 3,263
Amortization of discount (13) (4)
Amortization of debt issue costs (48) (15)
Amortization income charged to Related Party Obligor 61 19
------- -------
169 54
------- -------
General and administrative expenses (6) (5)
------- -------
Profit before taxation 163 49
Tax expense (59) (18)
------- -------
Net income 104 31
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
Energy Group Overseas B.V.
STATEMENTS OF COMPREHENSIVE INCOME
((pound) thousand)
Period from Period from
formation through April 1 through
March 31, 1998 May 18, 1998
-------------- ------------
Net income 104 31
Other comprehensive income:
Cumulative translation adjustment -- 3
----- -----
Comprehensive income 104 34
===== =====
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
Energy Group Overseas B.V.
STATEMENTS OF COMMON STOCK EQUITY
((pound) thousand)
<TABLE>
<CAPTION>
Accumulated other
Retained comprehensive
Common stock earnings income
------------ -------- ------
<S> <C> <C> <C>
Balance at October 8, 1997 -- -- --
Stock (40,000 shares) issued 13 -- --
Net income for the period from formation through
March 31, 1998 -- 104 --
Cumulative translation adjustment -- -- --
------- ------- -------
Balance at March 31, 1998 13 104 --
======= ======= =======
Balance at April 1, 1998 13 104 --
Net income for the period from April 1 through -- 31 --
May 18, 1998
Cumulative translation adjustment -- -- 3
------- ------- -------
Balance at May 18, 1998 13 135 3
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
Energy Group Overseas B.V.
STATEMENTS OF CASH FLOWS
((pound) thousand)
<TABLE>
<CAPTION>
Period from Period from April
formation through 1 through
March 31, 1998 May 18, 1998
-------------- ------------
<S> <C> <C>
Cash flows - operating activities:
Net income 104 31
Change in interest receivable (10,268) (3,262)
Change in prepaid expenses (2) --
Change in interest payable 10,099 (8,064)
Change in corporation tax payable 59 18
Change in accrued expenses 1 4
--------- ---------
Total cash flow used by operating activities (7) (11,273)
--------- ---------
Cash flows - investing activities -- --
Cash flows - financing activities:
Issuance of common stock: 13 --
Proceeds from Guaranteed Note offering 305,765 --
Long term loan to Related Party Obligor (305,765) --
Proceeds on loan from Related Party Obligor -- 11,272
--------- ---------
Total cash flow from financing activities 13 11,272
--------- ---------
Effect of exchange rate changes on cash (1) --
--------- ---------
Net change in cash and cash equivalents 5 (1)
Cash and cash equivalents - beginning balance -- 5
--------- ---------
Cash and cash equivalents - ending balance 5 4
========= =========
Supplemental cash flow disclosures:
Cash paid for interest -- 11,272
Cash paid for income taxes -- --
</TABLE>
The accompanying notes are an integral part of these financial statements
F-67
<PAGE>
Energy Group Overseas B.V.
NOTES TO THE FINANCIAL STATEMENTS
1. Description of business and summary of significant accounting policies
General -- Energy Group Overseas B.V. (Overseas) is a private limited
liability company established in Amsterdam on October 8, 1997. Overseas, a
consolidated subsidiary of The Energy Group (TEG), issued on October 10,
1997 US$ 500 million aggregate principal amount of notes guaranteed by TEG
(Guaranteed Notes).
The Financial Statements have been prepared in conformity with accounting
principles generally accepted in the United States (US GAAP).
Foreign currencies -- All assets and liabilities expressed in currencies
other than US Dollars (US$), Overseas' functional currency, have been
translated into US Dollars at the rates of exchange approximating those at
the date of the transactions. Resulting exchange differences are recognized
in the profit and loss account. The financial statements have been
translated from US Dollars to British pounds sterling ((pound)) utilizing
the exchange rate prevailing at the period end for the balance sheet and at
the average rate for the period for all profit and loss accounts. Any
difference in the translation process has been recorded as accumulated
other comprehensive income in the common stock equity section of the
balance sheet.
Amortization of debt issue costs -- The discount and debt issue costs
relating to the issuance of the Guaranteed Notes have been deferred and are
being amortized on a straight line basis over the life of the debt, which
does not differ significantly from the interest method.
Use of estimates -- The preparation of Overseas' financial statements, in
conformity with US GAAP, requires management to make estimates and
assumptions about future events that affect the reporting and disclosure of
assets and liabilities at the balance sheet dates and the reported amounts
of revenue and expense during the period covered by the financial
statements. In the event estimates and/or assumptions prove to be different
from actual amounts, adjustments are made in subsequent periods to reflect
more current information.
Cash and cash equivalents -- Cash equivalents consist of highly liquid
investments, which are readily convertible into cash and have maturities of
three months or less.
Income taxes -- Deferred income taxes are determined under the liability
method. Deferred income taxes represent liabilities to be paid or assets to
be received in the future and reflect the tax consequences on future years
of temporary differences between the tax bases of assets and liabilities
and their financial reporting amounts. Future tax rate changes would affect
those deferred tax liabilities or assets in the period when the tax rate
change is enacted.
Future tax benefits, such as net operating loss carryforwards, are
recognized to the extent that realization of such benefits is more likely
than not.
Dividends -- Dutch law prescribes that no dividends can be declared until
all losses, if any, have been recovered.
2. Guaranteed Notes
On October 10, 1997, Overseas issued US$ 500 million aggregate principal
amount of Guaranteed Notes. The Guaranteed Notes were issued in two series;
US$ 200 million 7.375% Notes due 2017 and US$ 300 million Notes 7.50% due
2027. The Guaranteed Notes are unconditionally guaranteed by TEG. Interest
is payable semi-annually in arrears on April 15 and October 15 in each
year, beginning April 1998. No principal payments on either series are due
until the Guaranteed Notes are due.
F-68
<PAGE>
Energy Group Overseas B.V.
NOTES TO THE FINANCIAL STATEMENTS (continued)
3. Common stock equity
The authorized share capital of Overseas consists of 200,000 ordinary
shares of NLG 1 each. As at March 31, 1998, 40,000 shares ((pound)13,000)
were issued and fully paid up. All shares are held by a wholly owned
subsidiary of TEG.
4. Related party transactions
At March 31, 1998, Overseas had a long-term loan to a wholly-owned
subsidiary of TEG (Related Party Obligor) of (pound)297,053,000. The
long-term loan balance equals the principal amount of the Guaranteed Notes.
Overseas had interest receivable from the Related Party Obligor relating to
the long-term loan of (pound)10,049,000 at March 31, 1998. Interest income
of (pound)10,268,000 and (pound)3,263,000 for the periods ended March 31,
1998 and May 18, 1998, respectively, was attributable to interest earned on
the long-term loan to the Related Party Obligor. Additional funding in the
amount of (pound)11,272,000 was received from the Related Party Obligor in
April of 1998.
Overseas will at all times earn a net spread of 12.5 basis points between
the rate Overseas pays on the Guaranteed Notes and the rate Overseas
charges the Related Party Obligor.
Additionally, the Related Party Obligor has agreed to discharge and
indemnify Overseas for the costs incurred by Overseas in issuing the
Guaranteed Notes. The amortization charges shown in the statement of income
are directly offset by the amortization income charged to the Related Party
Obligor. The (pound)3,128,000 balance at March 31, 1998 represents the
remaining unamortized discount and debt issue costs which will be
recognized in the statement of income over the life of the Guaranteed
Notes.
5. Taxes
All profit before tax is taxed in The Netherlands.
A minimum taxable income, calculated as the 12.5 basis point spread between
interest income and interest expense, must be utilized for determination of
income tax expense if it exceeds Overseas' pre-tax income.
During the period from April 1, 1998 through May 18, 1998, additional tax
expense was incurred as the minimum taxable income exceeded actual pre-tax
income. Any benefit from additional tax expense relating to the minimum
taxable income can be carried forward for a three year period. Overseas has
provided for a full valuation reserve against the deferred tax asset of
(pound)2,000 at May 18, 1998 as it is more likely than not that the benefit
will not be recognized.
During the period ended March 31, 1998, the Dutch statutory rate for income
under NGL 100,000 was decreased by 1% from 36% for income earned through
December 31, 1997 to 35% for income earned on or after January 1, 1998.
There was no change in the statutory rate for income over NGL 100,000.
Period from Period from
formation April 1, 1998
through through
March 31, 1998 May 18, 1998
-------------- ------------
((pound) thousand)
Tax at Dutch statutory rate on pre-tax income 59 16
Movement on valuation allowance -- 2
------ ------
Tax expense 59 18
====== ======
F-69
<PAGE>
Energy Group Overseas B.V.
NOTES TO THE FINANCIAL STATEMENTS (continued)
6. Fair value of financial instruments
The carrying amount and fair value of the material financial instruments
used by Overseas are as follows:
As of March 31, 1998
-----------------------------
Carrying Fair
amount value
-------- -------
((pound) thousand)
Guaranteed Notes 296,477 306,388
Long-term loan to Related Party Obligor 297,053 306,981
The fair value of the Guaranteed Notes and the long-term loan to the
Related Party Obligor varies with market conditions and is estimated based
on trading levels at March 31, 1998.
The carrying amounts of all other assets and liabilities approximate their
fair values because of the short maturity of these instruments.
7. Subsequent events
On May 19, 1998 TXU Acquisitions Limited (TXU Acquisitions), a wholly-owned
subsidiary of Texas Utilities Company, now doing business as TXU Corp,
acquired control of TEG. On October 9, 1998, due to a downgrading of the
credit rating on the Guaranteed Notes, the interest rate on both series of
Guaranteed Notes increased by five basis points. Overseas will continue to
maintain its 12.5 basis point spread. In October 1998, in connection with a
restructuring of TEG and its subsidiaries, Overseas and its direct holding
company were sold to another wholly-owned subsidiary of TXU Acquisitions
and that subsidiary assumed the obligations of the Related Party Obligor
under the long-term intercompany loan. In addition, TXU Eastern Holdings
Limited, an indirect 90% holding company of TXU Acquisitions, guaranteed
the Guaranteed Notes.
F-70
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Trustees of TXU Europe Capital I
We have audited the accompanying balance sheet of TXU Europe Capital I
(the "Trust") as of November 22, 1999 (date of incorporation). This balance
sheet is the responsibility of the Trust's management. Our responsibility is to
express an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of the Trust as of November 22, 1999, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
November 22, 1999
Dallas, Texas
F-71
<PAGE>
BALANCE SHEET OF
TXU EUROPE CAPITAL I
November 22, 1999
-----------------
Assets...........................................$ 0
===
Trust Originated Preferred Securities............$ 0
===
NOTES TO BALANCE SHEET OF TXU EUROPE CAPITAL I
TXU Europe Capital I (the "Trust") is a statutory business trust formed
on November 22, 1999 under the laws of the State of Delaware for the exclusive
purposes of (i) issuing Trust Originated Preferred Securities ("TOPrS")
representing undivided beneficial ownership interests in the assets of the
Trust, (ii) purchasing Preferred Partnership Securities (the "Preferred
Partnership Securities") representing the limited partnership interests of TXU
Europe Funding I, L.P. (the "Partnership") with the proceeds from the sale of
the TOPrS, and (iii) engaging in only those other activities necessary or
incidental thereto. The Trust has a perpetual existence, subject to certain
termination events as provided in the Declaration of Trust under which it was
formed. Subsequent to November 22, 1999, the Trust intends to issue and sell its
TOPrS in a public offering. No TOPrS have been issued as of November 22, 1999.
The proceeds from the Trust's sale of the TOPrS will be used to
purchase the Partnership Preferred Securities from the Partnership. Holders of
the TOPrS will have limited voting rights and will not be entitled to vote to
appoint, remove or replace, or to increase or decrease the number of, Trustees,
which voting rights are vested exclusively in the holder of a control
certificate.
TXU Europe Limited (the "Company") will be obligated to pay
compensation to the underwriters of the offering of the TOPrS. The Company
will pay all fees and expenses related to the organization and operations of
the Trust (including any taxes, duties, assessments or governmental charges of
whatever nature (other than withholding taxes) imposed by the United States of
any other domestic taxing authority upon the Trust) and the offering of the
TOPrS and be responsible for all debts and other obligations of the Trust
(other than the TOPrS). The Company will also agree to indemnify the trustees
and certain other persons.
F-72
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the General Partner and Initial Limited Partner of TXU Europe Funding I, L.P.
We have audited the accompanying balance sheet of TXU Europe Funding I,
L.P. (the "Partnership") as of November 22, 1999 (date of incorporation). This
balance sheet is the responsibility of the Partnership's management. Our
responsibility is to express an opinion on this balance sheet based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of the Partnership as of November 22, 1999, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
November 22, 1999
Dallas, Texas
F-73
<PAGE>
BALANCE SHEET OF
TXU EUROPE FUNDING I, L.P.
BALANCE SHEET
NOVEMBER 22, 1999
Assets................................................................$ 0
======
Partnership Securities
Limited partner interest................................... $ 85
General partner interest................................... 15
------
$ 100
Less: Receivables from partners for subsribed partnershp interests ... (100)
------
Partnership Equity.................................................... 0
======
NOTES TO BALANCE SHEET OF TXU EUROPE FUNDING I, L.P.
TXU Europe Funding I, L.P. (the "Partnership") is a limited partnership
that was formed under the Delaware Revised Uniform Limited Partnership Act on
November 22, 1999, for the exclusive purposes of purchasing certain eligible
debt instruments of TXU Europe Funding ("Funding") and one or more subsidiaries
of TXU Europe Limited (the "Company") with the proceeds from the sale of
Preferred Partnership Securities (the "Preferred Partnership Securities") to TXU
Europe Capital I (the "Trust") and a capital contribution from the Company in
exchange for the general partnership interest in the Partnership (collectively,
the "Partnership Proceeds").
Except as provided in the forms of Amended and Restated Limited
Partnership Agreement and Preferred Partnership Securities Guarantee Agreement,
and as otherwise provided by law, the holders of the Preferred Partnership
Securities will have no voting rights.
The Partnership Proceeds will be used initially to purchase debt
instruments from Funding and one or more eligible subsidiaries of the Company,
and other eligible debt securities. The Partnership will have a perpetual
existence subject to certain termination events. The Company serves as the sole
general partner of the Partnership. The Company, in its capacity as general
partner of the Partnership, has agreed to pay all fees and expenses related to
the organization and operations of the Partnership (including any taxes, duties,
assessments or government charges of whatever nature (other than withholding
taxes) imposed by the United States or any other domestic taxing authority upon
the Partnership) and the offering of the Preferred Partnership Securities and be
responsible for all debts and other obligations of the Partnership (other than
with respect to the Preferred Partnership Securities). The General Partner will
agree to indemnify certain officers and agents of the Partnership.
F-74
<PAGE>
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) ((POUND) MILLION)
SEPTEMBER 30, 1999
(UNAUDITED)
ASSETS
Property, plant and equipment, net 2,678
----------
Current assets
Cash and cash equivalents 361
Accounts receivable (net of allowance
for uncollectible accounts) 318
Inventories 130
Other current assets 108
----------
Total current assets 917
----------
Investments
Restricted cash 724
Other 279
----------
Total investments 1,003
----------
Other Assets
Goodwill (net of accumulated
amortization: (pound)116 million) 3,408
Prepayments for pensions 255
Deferred debits 168
----------
Total other assets 3,831
----------
TOTAL ASSETS 8,429
==========
See Notes to Condensed Consolidated Financial Statements.
F-75
<PAGE>
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) ((POUND) MILLION, EXCEPT FOR NUMBER OF SHARES AND PAR VALUE)
SEPTEMBER 30, 1999
---------------------
(UNAUDITED)
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock (authorized - 3,000,000,000
shares at US$1 par and 100 deferred
shares at (pound)1 par; outstanding -
2,455,705,299 shares and 100 deferred
shares issued and outstanding) 1,467
Retained earnings 147
Accumulated other comprehensive loss (7)
--------
Total common stock equity 1,607
Minority interest 197
Long-term debt, less amounts due currently 4,495
--------
TOTAL CAPITALIZATION 6,299
--------
Current liabilities
Notes payable - banks 64
Long-term debt due currently 383
Short-term loans 93
Accounts payable 411
Taxes accrued 203
Other current liabilities 242
--------
Total current liabilities 1,396
--------
Deferred credits and other noncurrent liabilities
Deferred income taxes 368
Provision for unfavorable contracts 226
Other deferred credits and noncurrent liabilities 140
--------
Total deferred credits and noncurrent liabilities 734
--------
Contingencies (Note 8) -
TOTAL CAPITALIZATION AND LIABILITIES 8,429
========
See Notes to Condensed Consolidated Financial Statements.
F-76
<PAGE>
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED) ((POUND) MILLION)
SUCCESSOR PREDECESSOR
---------------------------------- ------------
PERIOD FROM PERIOD FROM
FORMATION JANUARY 1,
NINE MONTHS THROUGH 1998
ENDED SEPTEMBER 30, THROUGH
SEPTEMBER 30, 1999 1998 MAY 18, 1998
------------------ ------------ ------------
Operating revenues 2,686 939 1,563
------------------ ------------ ------------
Costs and expenses
Purchased power 1,162 420 743
Gas purchased for resale 602 154 281
Operation and maintenance 385 228 375
Depreciation and other 119 53 73
amortization
Amortization of goodwill 64 31 -
------- ------- --------
Total operating expenses 2,332 886 1,472
------- ------- --------
Operating income 354 53 91
Other income - net 5 28 1
------- ------- --------
Income before interest, 359 81 92
income taxes and
minority interest
Interest income 46 46 35
Interest expense 259 174 76
------- ------- --------
Income (loss) before income 146 (47) 51
taxes and
minority interest
Income tax expense (benefit) 68 (19) 35
------- ------- --------
Income (loss) before minority 78 (28) 16
interest
Minority interest 7 (3) -
------- ------- --------
Net income (loss) 71 (25) 16
======= ======= ========
See Notes to Condensed Consolidated Financial Statements.
F-77
<PAGE>
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)
((POUND) MILLION)
SUCCESSOR PREDECESSOR
----------------------------- ------------
PERIOD FROM
NINE PERIOD FROM JANUARY 1,
MONTHS FORMATION 1998
ENDED THROUGH THROUGH
SEPTEMBER 30, SEPTEMBER 30, MAY 18,
1999 1998 1998
------------- ------------- ------------
Net income (loss) 71 (25) 16
Other comprehensive income
Net change during period:
Unrealized gain (loss)
on securities
classified as available
for sale 1 (8) (4)
Currency translation
adjustments - - -
------- ------- ------
Comprehensive income (loss) 72 (33) 12
======= ======= ======
See Notes to Condensed Consolidated Financial Statements.
F-78
<PAGE>
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
((POUND) MILLION)
PERIOD FROM
NINE PERIOD FROM JANUARY 1,
MONTHS FORMATION 1998
ENDED THROUGH THROUGH
SEPTEMBER 30, SEPTEMBER 30, MAY 18,
1999 1998 1998
------------- ------------- ------------
OPERATING ACTIVITIES
Net income (loss) 71 (25) 16
Adjustments to reconcile net
income (loss) to cash provided
by operating activities:
Depreciation and amortization 183 83 73
Deferred income taxes 45 7 (43)
Minority interest 7 (3) -
Changes in operating assets
and liabilities 216 53 109
Other (75) (103) (1)
------------- ------------- ------------
Cash provided by operating
activities 447 12 154
------------- ------------- ------------
INVESTING ACTIVITIES
Acquisition of TEG (net of
cash acquired of
(pound)2,011 - (1,432)
Capital expenditures (286) (117) (112)
Investments (61) (20) (30)
Other - - 3
------------- ------------- ------------
Cash used in investing
activities (347) (1,569) (139)
------------- ------------- ------------
FINANCING ACTIVITIES
Net borrowings under the:
Senior notes 921 - -
Term facility 750 - -
Revolving credit facility 240 - -
Acquisition facility - 1,656 -
Interim facility - 243 -
Other long-term debt 115 - 6
Issuance of common stock to parent - 1,467 -
Retirements of:
Acquisition facility (750) - -
TXU Corp note payable (682) - -
Revolving credit facility (109) -
Other long-term debt (307) (109) (50)
Change in notes payable - banks (376) 40 21
Receivable financing - - 150
Change in minority interest - 166 -
Debt financing cost (8) (36) -
Dividends paid - - (100)
------------- ------------- ------------
Cash provided by (used in)
financing activities (206) 3,427 27
------------- ------------- ------------
Net change in cash and cash
equivalents (106) 1,870 42
------------- ------------- ------------
Cash and cash equivalents -
beginning balance 467 - 684
------------- ------------- ------------
Cash and cash equivalents -
ending balance 361 1,870 726
============= ============= ============
NON-CASH TRANSACTIONS:
Issuance of loan notes - 85 -
Advances from TXU Corp - 844 -
Cross border lease financing - (163) -
See Notes to Condensed Consolidated Financial Statements.
F-79
<PAGE>
TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ACQUISITIONS
Acquisition of The Energy Group PLC by TXU Corp
TXU Europe Limited, formerly known as TXU Eastern Holdings Limited was
incorporated as a private limited company on February 5, 1998. Through a series
of restructurings and capital transactions subsequent to its formation, TXU
Europe Limited became an indirect, wholly owned subsidiary of Texas Utilities
Company, which is doing business as TXU Corp (TXU). TXU Europe Limited is a
holding company that owns 90% of the outstanding common stock of TXU Finance
(No. 2) Limited (TXU Finance) which in turn owns 100% of the common stock of TXU
Acquisitions Limited (TXU Acquisitions). On May 19, 1998, TXU Acquisitions
gained control of The Energy Group PLC (TEG), the former holding company of TXU
Europe Group plc (formerly Eastern Group plc), after all conditions to its offer
for all of the ordinary shares of TEG were satisfied or waived. Immediately
before such acquisition, subsidiaries of TEG completed the sale of TEG's former
coal and power trading interests in the United States (US) and Australia
(Peabody Sale).
TXU Europe Limited's acquisition of TEG through TXU Acquisitions was accounted
for as a purchase in accordance with US generally accepted accounting
principles. Accordingly, the results of operations of TXU Europe Limited and
other subsidiaries of TEG acquired by TXU Europe Limited have been consolidated
into the results of operations of TXU Europe Limited since acquisition on
May 19, 1998. The total purchase consideration for the TEG businesses acquired
was approximately L 4.4 billion. At the date of the acquisition, TEG had assets
of L 6.0 billion, including cash of L 2.0 billion, and liabilities of
L 4.5 billion, including debt of L 2.9 billion. The excess of the purchase
consideration plus acquisition costs over the net fair value of tangible and
identifiable intangible assets acquired and liabilities assumed resulted in
goodwill of L 3.5 billion, which is being amortized over 40 years. From March
1998 to May 18, 1998, TXU Europe Limited, through TXU Acquisitions, had acquired
an equity interest in TEG of approximately 22%, resulting in the recognition of
equity income of L 2 million, which is reflected in "Other Income-net" in the
Condensed Statement of Consolidated Income.
On November 9, 1999, name changes were announced for certain subsidiaries within
TXU Europe Limited to reflect the increasing importance of European investments.
Eastern Group plc was renamed TXU Europe Group plc (TXU Europe Group) and its
subsidiary, Eastern Generation Limited, was renamed TXU Europe Power Limited.
TXU Europe Group's subsidiary, Eastern Power & Energy Trading Limited, will be
renamed TXU Europe Energy Trading Limited by January 2000. TXU Europe Group's
retail and networks businesses will continue operating under the Eastern brand
name.
For financial reporting purposes, TXU Europe Group is considered the predecessor
company to TXU Europe.
In September 1999, TXU Europe Limited announced that it was forming a joint
venture with certain shareholders of Pohjolan Voima Oy (PVO), Finland's second
largest electricity generator. As part of the transaction, TXU Europe Limited
contributed approximately L 200 million for an 81% ownership interest in
the joint venture company on November 5, 1999. The joint venture will acquire
rights to the output from approximately 600 megawatts (MW) of PVO's thermal
generating capacity. The transaction consists of the purchase by the joint
venture company of "C" class PVO shares, equal to 15% of PVO, and most of a
wholesale trading business owned by the industrial shareholders of PVO. TXU
Europe Limited's interests in Finland also include the previously announced
agreement to acquire a 36% stake in Savon Voima Oy, Finland's seventh largest
electricity distributor.
2. SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements of TXU Europe Limited have been
prepared in accordance with US generally accepted accounting principles and on
the same basis as the audited financial statements as of and for the period
F-80
<PAGE>
TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
from formation through December 31, 1998, included in the Registration Statement
(Nos. 333-82307 and 333-82307-01) on Form S-4 filed by TXU Europe Limited and
its subsidiary, TXU Eastern Funding Company, under the Securities Act of 1933
with the Securities and Exchange Commission and declared effective on
November 9, 1999. In the opinion of TXU Europe Limited's management, all
adjustments (consisting of only normal recurring accruals) necessary for a fair
presentation of the results of operations and financial position have been
included herein. 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 Securities and Exchange Commission.
TXU Europe Limited defers the effect of changes in the market value of
derivative financial instruments for contracts for differences and electricity
forward agreements, which are used to hedge firm commitments to the period when
the related transaction is completed. In the event that an overall analysis of
the firm commitments being hedged indicates that TXU Europe Limited is in a net
loss position, a provision is made for these anticipated losses. Transactions
that are entered into that do not meet the criteria for hedge accounting are
marked to market on the balance sheet at period end, and the unrealized gain or
loss is recognized in income for that period.
3. SHORT-TERM FINANCING
REVOLVING CREDIT AGREEMENT -- Eastern Electricity has a separate revolving
credit facility of up to L 250 million, terminating March 2, 2003, which
provides for short-term borrowings to be used for Eastern Electricity's general
corporate purposes. No borrowings were outstanding at September 30, 1999 under
this facility.
PROMISSORY NOTE PROGRAM -- TXU Europe Limited has a one-year promissory note
program issued within the Czech Republic, which has been utilized to fund its
investments in Severomoravska Energetika a.s., a Czech electricity distribution
and supply company, and Teplarny Brno a.s. , a Czech district heating and
generation company. At September 30, 1999, L 62 million was outstanding under
the promissory note program. The interest rate on the note was reset in August
1999 and bears interest at an annual rate based on PRIBOR plus 0.7% which was
7.34% at September 30, 1999.
ACCOUNTS RECEIVABLE -- TXU Europe Group has facilities with Citibank N.A. to
provide financing through trade accounts receivable whereby Eastern Electricity
may sell up to L 300 million of its electricity receivables and, beginning June
11, 1999, TXU Finance may borrow up to an aggregate of L 275 million, which for
accounting purposes is collateralized by additional receivables of Eastern
Electricity, through a short-term note issue arrangement. The program has an
overall program limit of L 550 million.
Consistent with US generally accepted accounting principles, through March 31,
1999, the electricity receivable financings were in the form of short-term loans
collateralized by Eastern Electricity's trade accounts receivable. Subsequent to
March 31, 1999, the program was restructured so that a portion of the
receivables are sold outright rather than being used to collateralize short-term
borrowings. Eastern Electricity continually sells additional receivables to
replace those collected. At September 30, 1999, accounts receivable of Eastern
Electricity of L 207 million had been sold under the new program. An additional
L 93 million of receivables remain as collateral for short-term loans. The
borrowings by Eastern Electricity bear interest at an annual rate based on
commercial paper rates plus 0.225%, which was 5.3% at September 30, 1999.
4. LONG-TERM DEBT
LINES OF CREDIT -- At September 30, 1999, TXU Europe Limited and TXU Finance had
a joint sterling-denominated line of credit with a group of banking institutions
under a credit facility agreement (Sterling Credit Agreement). The Sterling
Credit Agreement, as amended in March 1999, provides for borrowings of up to
L 1.275 billion and has two facilities: a L 750 million term facility which
will terminate on March 2, 2003 and a L 525 million revolving credit facility
which has a L 200 million 364-day tranche (Tranche A) and a L 325 million
tranche which terminates March 2, 2003 (Tranche B). TXU Europe Limited and TXU
Finance currently are the only permitted borrowers under the amended Sterling
Credit Agreement. The amended Sterling Credit Agreement allows for borrowings
in various currencies with interest rates based on the prevailing
rates in effect in the countries in which the borrowings originate. As of
September 30, 1999, L 750 million of borrowings were outstanding under the term
facility at an interest rate of 5.98%, and approximately L 182 million of non-UK
borrowings were outstanding under Tranche B at a weighted average interest rate
of 5.59%.
F-81
<PAGE>
TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In May 1999, a subsidiary of TXU Europe Limited issued US$1.5 billion (L 921
million) of Senior Notes in three series: US$350 million (L 215 million) at
6.15% due May 15, 2002; US$650 million (L 399 million) at 6.45% due May 15,
2005; and US$500 million (L 307 million) at 6.75% due May 15, 2009. The proceeds
of this issuance were used to reduce indebtedness incurred in connection with
the acquisition of TEG, to reduce borrowings under the Sterling Credit Agreement
and for other corporate purposes. Shortly thereafter, TXU Europe Limited entered
into various interest rate and currency swaps that in effect changed the
interest rate on the borrowings from fixed to variable based on LIBOR and fixed
the principal amount to be repaid in sterling. The fair value of the new Senior
Notes was US$1.4 billion (L 0.9 billion) at September 30, 1999.
On October 14, 1999, TXU Europe Limited entered into additional swaps that in
effect changed the interest rate on the borrowings to a fixed rate payable in
sterling.
On October 5, 1999, a subsidiary of TXU Europe Limited issued L 77 million in
Norwegian bonds due October 5, 2029, at a fixed rate of 7.25%. The net proceeds
were used to pay down a portion of the Tranche B borrowings which had been used
to finance certain asset purchases in Norway. On November 8, 1999, TXU Europe
Limited borrowed approximately L 200 million on the Tranche B facility. The net
proceeds were used to finance the acquisition of the interest in the PVO joint
venture.
5. SEGMENTS
<TABLE>
<CAPTION>
NINE MONTHS PERIOD FROM FORMATION PERIOD FROM JANUARY 1,
ENDED THROUGH 1998 THROUGH
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 MAY 18, 1998
-------------------------- -------------------------- --------------------------
REVENUES CONTRIBUTION REVENUES CONTRIBUTION REVENUES CONTRIBUTION
-------- ------------ -------- ------------- -------- -------------
(POUND MILLION) (POUND MILLION) (POUND MILLION)
<S> <C> <C> <C> <C> <C> <C>
Energy retail 1,197 (48) 456 (34) 628 (26)
Energy management and generation 1,167 171 320 22 764 91
Networks 317 127 140 50 168 76
Other 5 2 23 6 3 (2)
Cost of capital elimination - 103 - 46 - 50
Unallocated corporate costs - (50) - (64) - (42)
----- --- --- --- ----- ---
Total (UK GAAP) 2,686 305 939 26 1,563 147
----- --- --- --- ----- ---
Purchase accounting and US GAAP
adjustments - 54 - 55 - (55)
----- --- --- --- ----- ---
Income before interest, income
taxes and minority interest - 359 - 81 - 92
===== === === === ===== ===
</TABLE>
As set out above, contribution is defined as operating and other income
after a notional charge for the cost of capital.
6. DERIVATIVE INSTRUMENTS
TXU Europe Limited is exposed to a number of different market risks including
changes in gas and electricity prices, interest rates and foreign currency
exchange rates. TXU Europe Limited has developed a control framework of
policies and procedures to monitor and manage the exposures arising from
volatility in these markets. To implement these policies and procedures, TXU
Europe Limited enters into various derivative instruments for hedging purposes.
Both the energy management and the treasury operations make use of those
instruments, but only well understood derivative instruments are authorized for
use.
F-82
<PAGE>
TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
TXU Europe Limited enters into derivative instruments, including options, swaps,
futures and other contractual commitments to manage market risks related to
changes in interest rates, foreign currency exchange rates and commodity
prices. TXU Europe Limited's participation in derivative transactions has
primarily been designated for hedging purposes and is not held or issued for
trading purposes. TXU Europe Limited's energy marketing activities in Europe,
through Eastern Power & Energy Trading Limited (EPET), are currently being
expanded with the relocation of EPET's primary operations to Geneva,
Switzerland, and are still in the process of being developed. Energy trading
activity for the periods ended September 30, 1999 is not material.
INTEREST RATE RISK MANAGEMENT -- At September 30, 1999, TXU Europe Limited had
various interest rate swaps in effect with an aggregate notional amount of
US$1.5 billion (L 921 million) that convert the fixed rate Senior Notes to
floating rate based on LIBOR. These swaps mature on the dates of the underlying
notes, have a weighted average pay rate of 5.99% and had a fair value of L 15
million at September 30, 1999. TXU Europe Limited also had various other
interest rate swaps as required by the Sterling Credit Agreement and to hedge
certain of its borrowings from a variable to a fixed rate. The aggregate
notional amount of these interest rate swaps was L 848 million with an average
maturity of six years and an average fixed rate of 6.7%. Forward rate agreements
totaling L 195 million for a maximum duration of less than one year to swap
floating rate deposits into fixed rates were outstanding at September 30, 1999.
In October 1999, TXU Europe Limited entered into an interest rate swap to
convert a notional amount of L 250 million of variable rate debt to a weighted
average fixed rate of 6.39%.
FOREIGN CURRENCY RISK MANAGEMENT -- TXU Europe Limited has currency swaps
which effectively fix the principal amount of the US$1.5 billion of Senior Notes
to be repaid in sterling. In August 1999, TXU Europe Limited entered into a
forward foreign currency contract to acquire US$200 million and US$300 million
in October 2017 and October 2027, respectively, for approximately L 218 million
to settle the original US dollar-denominated debt of TEG. The difference between
the forward rate and the spot rate at inception of the contract (a foreign
currency gain of approximately L 92 million) will be amortized to income over
the life of the contract. At September 30, 1999, TXU Europe Limited had various
other foreign currency swaps, options and exchange contracts in effect, the
terms and amounts of which had not significantly changed from December 31, 1998.
7. REGULATION AND RATES
Electricity distribution and supply businesses in England and Wales are subject
to price controls. The regulation of distribution and supply charges is
currently subject to review by the Office of Gas and Electricity Markets
covering England, Wales and Scotland (OFGEM). Since the implementation of the
initial price controls in 1990, there have been two reviews of the supply price
control, effective for the periods from April 1, 1994 to March 31, 1998 and from
April 1, 1998 to March 31, 2000. These reviews have resulted in reduced
distribution and supply prices, but because related costs have also been
reduced, the effect on TXU Europe Limited has not been material. On August 12,
1999, OFGEM issued a draft report, adjusted on October 8, 1999, proposing a
range of substantial revenue reductions for the distribution businesses of all
regional electricity companies in the UK. OFGEM also issued its proposed price
adjustments for the electricity supply business on October 8, 1999. The final
OFGEM report is expected at the end of November 1999 and both the distribution
and supply price adjustments are expected to become effective April 1, 2000. TXU
Europe Limited is analyzing the draft proposals and cannot predict at this time
either the final price adjustments that will be applicable to TXU Europe Group
or the ultimate impact of such adjustments on TXU Europe Limited's financial
position, results of operations or cash flows.
8. CONTINGENCIES
In February, 1997 the official government representative of pensioners (Pensions
Ombudsman) made final determinations against the National Grid Company plc
(National Grid) and its group trustees with respect to complaints by two
pensioners in National Grid's section of the Electric Supply Pension Scheme
(ESPS) relating to the use of the pension fund surplus resulting from the
March 31, 1992 actuarial valuation of the National Grid section to meet certain
costs arising from the payment of pensions on early retirement upon
reorganization or downsizing. These determinations were set aside by the High
Court on June 10, 1997, and the arrangements made by National Grid and its group
trustees in dealing with the surplus were confirmed. The two pensioners have
F-83
<PAGE>
appealed this decision and judgment has now been received. The appeal endorsed
the Pensions Ombudsman's determination that the corporation was not entitled to
unilaterally deal with any surplus. National Grid has announced their intention
to appeal to the House of Lords, although no formal application has been made.
If a similar complaint were to be made against TXU Europe Group in relation to
its use of actuarial surplus in its section of the ESPS, it would vigorously
defend the action, ultimately through the courts. However, if a determination
were finally to be made against it and upheld by the courts, TXU Europe Group
could have a potential liability to repay to its section of the ESPS an amount
estimated by TXU Europe Group to be up to L 45 million (exclusive of any future
applicable interest charges).
TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
On May 19, 1998 a complaint was filed by Optimum Solutions Limited against
National Grid, Yorkshire Electricity Group plc, Eastern Electricity and Logica
Plc. Yorkshire Electricity and Eastern Electricity are both members of the
electricity trading market in England and Wales (the Pool). Optimum Solutions
Limited alleges breach of confidence in respect of information supplied in the
context of the development of the trading arrangements for the 1998
liberalization of electricity supply in England and Wales, or Trading
Arrangements. Optimum Solutions Limited requests an unspecified amount of
damages related to breach of contract, an unspecified amount of equitable
compensation for misuse of the confidential information and return of material
alleged to contain confidential information. It is alleged that the Pool has
made use of the confidential information in the development of the Trading
Arrangements and that Eastern Electricity made use of it in using the system
developed by the Pool for trading purposes. The action against Eastern
Electricity is being strenuously defended. TXU Europe Limited cannot predict the
outcome of this proceeding.
In November 1998, five complaints were filed against subsidiaries of TXU
Europe Limited by five of their former sales agencies. The agencies claim a
total of L 104 million arising from the summary termination for the claimed
fundamental breach of their respective contracts in April 1998. The five
agencies are claiming damages for failure to give reasonable notice for
compensation under the UK Commercial Agents Regulations 1994. These actions are
all being defended strenuously, and counterclaims have been filed. TXU Europe
Limited cannot predict the outcome of these claims and counterclaims.
On January 25, 1999, the Hindustan Development Corporation issued proceedings
in the Arbitral Tribunal in Delhi, India against TEG claiming damages of US$413
million (L 253 million) for breach of contract following the termination of a
Joint Development Agreement dated March 20, 1997 relating to the construction,
development and operation of a lignite based thermal power plant at Barsingsar,
Rajasthan. TXU Europe Limited is vigorously defending this claim. TXU Europe
Limited cannot predict the outcome of this proceeding.
GENERAL -- In addition to the above, TXU Europe Limited and its subsidiaries are
involved in various legal and administrative proceedings arising in the ordinary
course of its business. TXU Europe Limited believes that all such lawsuits and
resulting claims would not have a material effect on its financial position,
results of operation or cash flows.
FINANCIAL GUARANTEES -- TEG has guaranteed up to US$110 million (L 67 million
at September 30, 1999) of certain liabilities that may be incurred and payable
by the purchasers of the US and Australian coal businesses and US energy
marketing operations sold in the Peabody Sale with respect to the Peabody
Holding Company Retirement Plan for Salaried Employees, the Powder River Coal
Company Retirement Plan and the Peabody Coal United Mine Workers Association
Retirement Plan, subject to certain specified conditions.
TEG entered into various guarantees of obligations of affiliates of its
former subsidiary, Citizens Power LLC, arising under power purchase agreements
and note purchase agreements in connection with various Citizens Power energy
restructuring projects, as well as various indemnity agreements in connection
with such projects. TXU Europe Limited and TEG continue to be the guarantor or
the indemnifying party, as the case may be, under these various agreements. In
connection with the acquisition, letters of credit were issued under the
Sterling Credit Facility in the amount of US$198 million (L 125 million) to
support certain debt financings associated with these restructuring projects.
The letters of credit matured in May 1999 and were not renewed.
As a consequence of a restructuring whereby a subsidiary of TXU Acquisitions
transferred TXU Europe Group to another wholly-owned subsidiary of TXU
Acquisitions, TXU Europe Limited and certain other affiliated UK
F-84
<PAGE>
TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
subsidiaries of TXU may be required to make certain adjustments to the
guarantees. The Directors of TXU Europe Limited do not currently expect this to
have a material adverse impact on TXU Europe Limited.
F-85
<PAGE>
TXU EUROPE LIMITED (FORMERLY KNOWN AS TXU EASTERN HOLDINGS LIMITED)
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
As of May 19, 1998, TXU Acquisitions Limited (TXU Acquisitions), an
indirect wholly-owned subsidiary of Texas Utilities Company (now doing business
as and referred to herein as TXU Corp), acquired control of The Energy Group PLC
(now known as Energy Holdings (No. 3) Limited) (TEG). TXU Europe Limited
(formerly known as TXU Eastern Holdings Limited) (the Company), an indirect
wholly-owned subsidiary of TXU Corp, indirectly owns 90% of TXU Acquisitions,
and another indirect wholly-owned subsidiary of TXU Corp owns the remaining
10%.
Immediately prior to the purchase of TEG by TXU Acquisitions, subsidiaries
of TEG completed the sale of TEG's US and Australian coal businesses and US
energy marketing operations (Peabody Sale). The TEG businesses acquired,
exclusive of those operations sold in the Peabody Sale, are referred to as the
"TEG Businesses Acquired", and include Eastern Group plc (Eastern) and Energy
Group Overseas B.V., a finance subsidiary (Overseas).
The following unaudited condensed combined pro forma statement of income
for the year ended December 31, 1998 (the Pro Forma Statement of Income) has
been prepared from, and should be read in conjunction with, the historical
consolidated financial statements and notes thereto of the Company, Eastern and
Overseas included elsewhere in this prospectus. The Pro Forma Statement of
Income assumes that the acquisition of the TEG Businesses Acquired occurred
on January 1, 1998. The historical information included in the Pro Forma
Statement of Income has been prepared in accordance with US GAAP.
The acquisition of TEG by TXU Acquisitions was accounted for as a purchase.
The Pro Forma Statement of Income includes the effects of fair value and
purchase accounting adjustments.
The Pro Forma Statement of Income combines the unaudited historical
condensed statements of consolidated income of Eastern and Overseas for the
three months ended March 31, 1998 and the audited historical statements of
consolidated income (loss) of Eastern and Overseas for the period from April 1,
1998 to May 18, 1998 with the audited historical statement of consolidated
income of the Company for the period from formation to December 31, 1998 and
gives effect to the pro forma adjustments described in the Notes hereto. The pro
forma adjustments reflect estimates made by the Company and assumptions it
believes to be reasonable. The Pro Forma Statement of Income includes an
estimate of the financing charge as if the acquisition financing had been in
place for the whole period. The pro forma information has not taken into account
any significant changes in future operating activities that may occur as a
result of the acquisition.
P-1
<PAGE>
TXU EUROPE LIMITED (FORMERLY KNOWN AS TXU EASTERN HOLDINGS LIMITED)
The Unaudited Condensed Combined Pro Forma Statement of Income is provided
for illustrative purposes only and does not purport to represent what the actual
results of operations would have been if the purchase had occurred on January 1,
1998, nor is it necessarily indicative of future operating results.
<TABLE>
<CAPTION>
TEG Business Acquired The Company
--------------------------------- --------------------------------------------------
Historical Historical Pro Forma
--------------------------------- ------------ -------------------------------
Period from
Three Month Period from Formation to Year ended
ended April 1 to May December 31, Pro forma December 31,
March 31, 1998 18, 1998 1998 Adjustments 1998
-------------- -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues 1,100 425 2,165 0 3,690
Costs and expenses 996 436 1,851 (101)(a) 3,182
------ ------ ------ ------ ------
Operating income (loss) 104 (11) 314 101 508
Other income (deductions) 4 1 46 (20)(b) 31
Interest income 23 12 64 (24)(c) 75
Interest expense (60) (31) (269) (56)(d) (416)
------ ------ ------ ------ ------
Income (loss) before income
taxes 71 (29) 155 1 198
Income tax expense
(benefit) 30 (6) 67 -- 91
------ ------ ------ ------ ------
Income (loss) before
minority interest 41 (23) 88 1 107
Minority interest -- -- 11 2(e) 13
------ ------ ------ ------ ------
Net income (loss) 41 (23) 77 (1) 94
====== ====== ====== ====== ======
</TABLE>
See Notes to Unaudited Condensed Combined Pro Forma Statement of Income.
P-2
<PAGE>
TXU EUROPE LIMITED (FORMERLY KNOWN AS TXU EASTERN HOLDINGS LIMITED)
NOTES TO UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF INCOME
The amounts for the TEG Businesses Acquired are comprised of the following:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998 Period from April 1 through May 18, 1998
------------------------------------------- ------------------------------------------
Eastern Overseas Other(1) Total Eastern Overseas Other(1) Total
------- -------- -------- ----- ------- -------- -------- -----
((pound) million)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues 1,100 -- -- 1,100 425 -- -- 425
Operating expenses 996 -- -- 996 436 -- -- 436
------ ------ ------ ------ ------ ------ ------ ------
Operating income
(loss) 104 -- -- 104 (11) -- -- (11)
Other income 4 -- -- 4 1 -- -- 1
Interest income 23 6 (6) 23 12 3 (3) 12
Interest expense (54) (6) -- (60) (28) (3) -- (31)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss)
before income taxes 77 -- (6) 71 (26) -- (3) (29)
Income tax expense
(benefit) 32 -- (2) 30 (5) -- (1) (6)
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) 45 -- (4) 41 (21) -- (2) (23)
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
(1) Other represents the elimination of intercompany interest income on a
long-term loan between Overseas and another subsidiary of TEG.
Summary of Pro Forma Adjustments:
(a) Costs and expenses
((pound) million)
(1) Unfavorable electricity and gas contracts (29)
(2) Fair value of leased assets (10)
(3) Leases (86)
(4) Goodwill amortization 24
------
Total (101)
(1) Represents reversal of operating expenses, primarily for electricity and gas
purchases, recorded by Eastern, to the extent that a liability for the present
value of unfavorable commitments, obligations and contracts is made in purchase
accounting.
(2) Represents impact of purchase accounting adjustments relating to the
fair value of leased assets.
(3) Represents impact of purchase accounting adjustments relating to the
establishment of long-term debt associated with payments, both fixed and those
considered virtually certain, under the lease terms ((pound)61 million) and
adjustment for the amortization of operating lease payments and capitalized
leases over the revised estimated economic life of power plants under
lease ((pound)25 million). Alternative operating methodologies
employed by TXU Corp extend the estimated economic life of the plants by ten
years.
(4) Goodwill recorded by the Company from the acquisition totals approximately
(pound)3.5 billion. Annual amortization over the 40-year life is (pound)88
million of which (pound)52 million was recorded during the period from May 19 to
December 31, 1998. The net pro forma amortization for the period to acquisition
is (pound)36 million which is (pound)24 million greater than amortization
recorded by Eastern of (pound)12 million.
P-3
<PAGE>
TXU EUROPE LIMITED (FORMERLY KNOWN AS TXU EASTERN HOLDINGS LIMITED)
NOTES TO UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF INCOME
(CONTINUED)
(b) Other income/deductions
((pound) million)
(1) Equity in net income of TEG (2)
(2) Earnings on portion of Peabody Sale
proceeds invested in tax efficient scheme (18)
-----
Total (20)
=====
(1) Represents reversal of equity in net income of TEG of(pound)2 million
recorded by the Company for its approximate 22% interest for the period March
through May 18, 1998.
(2) Represents reversal of earnings of (pound)18 million recorded by the Company
on the portion of the Peabody Sale proceeds invested in a short-term investment.
These proceeds have been used to reduce Acquisition debt for the entire period
presented in the pro forma statement of income.
((pound) million)
(c) Interest income (24)
=====
Represents reversal of interest earnings on the remaining Peabody Sale
proceeds invested in cash. These proceeds have been used to reduce Acquisition
debt for the entire period presented in the pro forma statement of income.
(d) Interest expense
((pound) million)
(1) Interest and fees on Acquisition debt (50)
(2) Interest on unfavorable commitments,
obligations and unfavorable contracts (8)
(3) Amortization of discount on fair value
of debt at acquisition 2
------
Total (56)
======
(1) The annual pro forma interest expense on debt issued in the
acquisition is (pound)120 million consisting of interest on the Acquisition
facility of (pound)55 million (calculated based on the fixed interest rate
of 7.8% paid by the Company pursuant to a related interest rate swap), on
the intercompany note to TXU Corp of (pound)59 million (calculated at the
actual fixed interest rate of 6.7%) and on loan notes of (pound)6 million
(calculated based upon an assumed interest rate of 7.2%). Interest on the
loan notes is paid at a variable rate based on LIBOR minus .5%. A 1/8%
variance of the interest rate on the loan notes would change the annual
interest by (pound)0.1 million. Pro forma annual amortization of financing
fees on the Acquisition debt is (pound)12 million. Interest and other
charges incurred for the period from formation to December 31, 1998 total
(pound)82 million. The net pro forma increase in interest expense is
(pound)50 million.
(2) Represents pro forma annual interest on the present value of
unfavorable commitments, obligations and unfavorable contracts of (pound)13
million, less (pound)12 million incurred for the period to
December 31, 1998 plus (pound)7 million on imputed interest for a capital
lease.
(3) Represents amortization of fair value adjustment to debt at
acquisition of (pound)2 million.
(e) Represents minority interest on net earnings of TEG Businesses Acquired and
pro forma adjustments.
The Company's total investment to acquire TEG was (pound)4,448 million.
P-4
<PAGE>
TXU EUROPE LIMITED (FORMERLY KNOWN AS TXU EASTERN HOLDINGS LIMITED)
NOTES TO UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF INCOME
(CONTINUED)
((pound) million)
The investment was funded as follows:
Borrowings repaid with cash from Peabody Sale received by TEG 1,314
prior to the Acquisition
Proceeds from common stock issued to TXU Corp 1,467
Borrowings under Acquisition facilities 700
Note issued to TXU Corp for TEG ordinary shares acquired by 882
TXU Corp in the Share Alternative
Loan notes 85
------
Total 4,448
======
TXU Corp issued 37,316,884 shares of TXU Corp common stock which TXU
Acquisitions offered to TEG shareholders as part of its Share Alternative.
105,117,980 of TEG ordinary shares outstanding were tendered by TEG shareholders
and exchanged for TXU Corp common stock. TXU Acquisitions acquired the shares of
TXU Corp common stock from TXU Corp by the issuance of an intercompany note for
(pound)882 million bearing interest at 6.7% per annum.
P-5
<PAGE>
================================================================================
6,000,000 Preferred Trust Securities
TXU EUROPE CAPITAL I
9 3/4% Trust Originated Preferred Securities SM ("TOPrS SM")
Liquidation Amount $25 per TOPrS
guaranteed to the extent described in this prospectus by
TXU EUROPE LIMITED
--------------
PROSPECTUS
--------------
MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
MORGAN STANLEY DEAN WITTER
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES
SALOMON SMITH BARNEY
BNY CAPITAL MARKETS, INC.
BANC OF AMERICA SECURITIES LLC
BANC ONE CAPITAL MARKETS, INC.
CIBC WORLD MARKETS
CREDIT SUISSE FIRST BOSTON
FIRST UNION SECURITIES, INC.
FLEETBOSTON ROBERTSON STEPHENS
TD SECURITIES (USA) INC.
UTENDAHL CAPITAL PARTNERS, L.P.
February 24, 2000
================================================================================
