10-Q 1 txueurocap1_10q0812.txt FORM 10Q (TXUEUROCAP1) - 08/12/02 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q () QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 -- OR -- ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-15709-01 TXU EUROPE CAPITAL I I.R.S. Employer Identification Delaware Business Trust No. 75 - 6578216 Energy Plaza, 1601 Bryan Street, Dallas, Texas 75201-3411 (214) 812-4600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- --------- TABLE OF CONTENTS -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION PAGE ---- ITEM 1. FINANCIAL STATEMENTS Statements of Income - Three months and six months ended June 30, 2002 and 2001.............................. 2 Statements of Cash Flows - Six months ended June 30, 2002 and 2001............. 3 Balance Sheets - June 30, 2002 and December 31, 2001................. 4 Notes to Financial Statements....................... 5 Independent Accountants' Reports.................... 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................... 8 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 8 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................... 9 SIGNATURES............................................................. 10 1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TXU EUROPE CAPITAL I STATEMENTS OF INCOME (UNAUDITED)

See Notes to Financial Statements. 2 TXU EUROPE CAPITAL I STATEMENTS OF CASH FLOWS (UNAUDITED)

See Notes to Financial Statements. 3 TXU EUROPE CAPITAL I BALANCE SHEETS

See Notes to Financial Statements. 4 TXU EUROPE CAPITAL I NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS 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 purpose of (i) issuing 9 3/4% Trust Originated Preferred Securities (Preferred Trust Securities) representing undivided beneficial ownership interest in the assets of the Trust, (ii) purchasing 9.75% Preferred Partnership Securities (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 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 Amended and Restated Trust Agreement. The proceeds from the Trust's sale of the Preferred Trust Securities were used to purchase the Preferred Partnership Securities from the Partnership. Holders of the Preferred Trust Securities have limited voting rights and are not 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 ultimate parent of the Trust and the general partner of the Partnership, has paid 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 is responsible for all debts and other obligations of the Trust (other than the Preferred Trust Securities). TXU Europe Limited has also agreed to indemnify the trustees and certain other persons. During the period ended June 30, 2002, no payments were made by TXU Europe Limited for expenses on behalf of the Trust. 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 periods 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. INVESTMENTS - The investment in Preferred Partnership Securities represents a limited partnership interest in the Partnership and is recorded at cost. As of June 30, 2002, the fair value of the investment approximates its carrying value. Income on the Preferred Partnership Securities is accrued when earned. COMPREHENSIVE INCOME - Comprehensive income consists only of net income. INCOME TAXES - The Trust does not incur any income tax liabilities. Such liabilities are incurred directly by the security holders. Therefore no provision for income taxes has been provided. 5 TXU EUROPE CAPITAL I NOTES TO FINANCIAL STATEMENTS 3. INVESTMENT IN PREFERRED PARTNERSHIP SECURITIES The Trust holds $150 million of 9.75% Preferred Partnership Securities, $25 liquidation preference per security. The distribution payment dates and redemption provisions of the Preferred Partnership Securities, which are redeemable after March 2, 2005 at the option of TXU Europe Limited, the general partner of the Partnership, correspond to the distribution payment dates and redemption provisions of the Preferred Trust Securities. Upon any redemption of the Preferred Partnership Securities, the Preferred Trust Securities will be redeemed. TXU Europe Limited has guaranteed, on a subordinated basis, the payment of distributions by the Partnership on the Preferred Partnership Securities if, as, and when declared out of funds legally available and payments upon liquidation of the Partnership or the redemption of the Preferred Partnership Securities to the extent of funds legally available. 4. STOCKHOLDERS' EQUITY On March 2, 2000, the Trust issued to investors 6,000,000 units of 9 3/4% Preferred Trust Securities for an aggregate of $150 million. The Preferred Trust Securities have a liquidation preference of $25 per unit. The Preferred Trust Securities are subject to mandatory redemption upon payment of the Preferred Partnership Securities. Distributions on the Preferred Trust Securities are cumulative from the date of original issue (March 2, 2000) and are payable quarterly in arrears on each March 31, June 30, September 30 and December 31, commencing June 30, 2000, at an annual rate of 9.75% of the stated liquidation amount per annum. Distributions not paid on the scheduled payment date will accumulate and compound quarterly at a rate per annum equal to 9.75%. Holders of the Preferred Trust Securities have no voting rights. The Trust uses distributions it receives on the Preferred Partnership Securities to make cash distributions on the Preferred Trust Securities. Distributions on the Preferred Trust Securities were made on March 28, 2002 and July 1, 2002. TXU Europe Limited has guaranteed, on a limited basis, the payment in full of all distributions and other payments on the Preferred Trust Securities to the extent that the Trust has funds legally available. TXU Europe Limited has also issued guarantees of the Preferred Partnership Securities and the junior subordinated debentures held by the Partnership. These guarantees are subordinated to all other unsubordinated liabilities of TXU Europe Limited. 5. OTHER On May 11, 2001, TXU Europe Group plc deposited cash with the trustee under the indenture pursuant to which its subordinated debentures were issued in order to satisfy its obligations with respect to the payment of principal and interest on the subordinated debentures and to discharge the indenture. TXU Europe Group plc also irrevocably authorized the trustee to redeem the subordinated debentures on March 2, 2005. The trustee will hold the cash deposited in trust to pay principal and interest when due through the redemption date. TXU Europe Group plc has agreed to pay to the trustee any shortfall if the deposited cash, together with any earnings thereon, is insufficient to pay any principal, interest or other amounts that may become due on the subordinated debentures. 6 INDEPENDENT ACCOUNTANTS' REPORT To the Trustees of TXU Europe Capital I: We have reviewed the accompanying balance sheet of TXU Europe Capital I (the Trust) as of June 30, 2002, and the related statements of income for the three month and six month periods ended June 30, 2002 and 2001 and cash flows for the six month period ended June 30, 2002 and 2001. These financial statements are the responsibility of the Trust's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the balance sheet of the Trust as of December 31, 2001, and the related statements of income, cash flows and stockholders' equity for the year then ended (not presented herein); and in our report, dated January 31, 2002, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying balance sheet as of December 31, 2001, is fairly stated in all material respects in relation to the balance sheet from which it has been derived. DELOITTE & TOUCHE London, England August 13, 2002 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Trust's activities are limited to issuing securities and investing the proceeds as follows: The Trust exists for the exclusive purpose of (i) issuing a control certificate, which entitles the holder to administrative and appointment powers with respect to the Trust, 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 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 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 and other eligible subsidiaries of TXU Europe Limited and certain other eligible debt securities 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). Since the Trust was organized on November 22, 1999, its activities, as specified in its Amended and Restated Trust Agreement, have been limited to the issuance of $150 million of 9 3/4% Preferred Trust Securities and the investing of the proceeds in the Preferred Partnership Securities, and the accrual and payment of distributions on the Preferred Trust Securities in accordance with their terms. The Partnership initially invested the Partnership Proceeds in subordinated debentures of TXU Eastern Funding Company and TXU Europe Group plc, both subsidiaries of TXU Europe Limited, and in short-term commercial paper securities. The subordinated debentures held by the Partnership are guaranteed by TXU Europe Limited on a subordinated basis. On May 11, 2001, TXU Europe Group plc deposited cash with the trustee under the indenture pursuant to which its subordinated debentures were issued in order to satisfy its obligations with respect to the payment of principal and interest on the subordinated debentures and to discharge the indenture. TXU Europe Group plc also irrevocably authorized the trustee to redeem the subordinated debentures on March 2, 2005. The trustee will hold the cash deposited in trust to pay principal and interest when due through the redemption date. TXU Europe Group plc has agreed to pay to the trustee any shortfall if the deposited cash, together with any earnings thereon, is insufficient to pay any principal, interest or other amounts that may become due on the subordinated debentures. Distributions on the Preferred Trust Securities were made on March 28, 2002 and July 1, 2002. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required hereunder is not significantly different from the information as set forth in Item 7A. Quantitative and Qualitative Disclosures About Market Risk included in the 2001 Form 10-K and is therefore not presented herein. 8 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits filed as a part of Part II are: 99(a) Principal Executive Officer Certification 99(b) Principal Financial Officer Certification (b) Reports on Form 8-K filed since March 31, 2002, are as follows: None 9 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned hereunto duly authorized. TXU EUROPE CAPITAL I By: /s/ Kirk Oliver ---------------------------------- Name: Kirk Oliver Title: Administrative Trustee By: /s/ Tony Horton ---------------------------------- Name: Tony Horton Title: Administrative Trustee Date: August 14, 2002 10

TXU EUROPE CAPITAL I 10-Q