<PAGE>

===============================================================================

               UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

                                   FORM 10-K
                                     ____

        [X]   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--
       [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

<TABLE>
<CAPTION>
Commission            Exact Name of Registrant as Specified in its Charter;              I.R.S. Employer
File Number        Address of Principal Executive Offices; and Telephone Number         Identification No.
-----------------------------------------------------------------------------------------------------------
<S>                <C>                                                             <C>
333-82307-01                         TXU EUROPE LIMITED                                    98-0188080
                                     The Adelphi
                                     1-11 John Adam Street
                                     London, England WC2N 6HT
                                     011-44-207-879-8081

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
                                    Preferred Securities                                  Exchange
-----------------------------------------------------------------------------------------------------------
</TABLE>

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  x   No
                                                     ---     ---

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 TXU Europe Limited Common Stock held by non-
affiliates:  None

Common Stock outstanding at March 17, 2000:  2,455,705,299 shares, at US$1 par
value and 100 deferred shares at (Pounds)1 par value

TXU Europe Limited meets the conditions set forth in General Instructions (I)
(1) (a) and (b) of Form 10-K and is therefore filing this report with the
reduced disclosure format.

DOCUMENTS INCORPORATED BY REFERENCE:   None
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
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                                                                                        Page
                                    PART I
<S>        <C>                                                                          <C>
Item 1.    BUSINESS....................................................................   1

           LEGAL ENTITIES
             Summary Corporate Structure...............................................   1
             TXU Europe Limited........................................................   1
             TXU Europe Group plc......................................................   2
           INDUSTRY BACKGROUND.........................................................   2
           TXU EUROPE GROUP BUSINESS OVERVIEW..........................................   9
           OPERATING SEGMENTS..........................................................  11
             Energy Management and Generation..........................................  11
             Energy Retail.............................................................  16
             Networks..................................................................  18
             Other.....................................................................  20
           UK REGULATORY MATTERS.......................................................  21
           ENVIRONMENTAL MATTERS.......................................................  24

Item 2.    PROPERTIES..................................................................  26

Item 3.    LEGAL PROCEEDINGS...........................................................  26

Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................  27


                                    PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
           STOCKHOLDER MATTERS.........................................................  28

Item 6.    SELECTED FINANCIAL DATA.....................................................  28

Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS.......................................................  28

Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................  28

Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................  28

Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
           AND FINANCIAL DISCLOSURE....................................................  28


                                   PART III

Item 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........................  30

Item 11.   EXECUTIVE COMPENSATION......................................................  30

Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............  30

Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................  30


                                    PART IV

Item 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.............  31


APPENDIX A - Financial Information of TXU Europe Limited and Subsidiaries

APPENDIX B - Exhibits

</TABLE>

                                       i
<PAGE>

                                    PART I

Item 1.  BUSINESS

                                LEGAL ENTITIES
                                --------------

                          SUMMARY CORPORATE STRUCTURE

             Texas Utilities Company (doing business as TXU Corp.)

     TXU Europe Limited                  TXU Finance (No.2) Holdings Inc.

           TXU Eastern Funding Company

           TXU Finance (No.2 ) Limited (10% owned by TXU Finance (No.2)
           Holdings Inc.)

           TXU Europe Group plc (Predecessor Company)

                 Eastern Energy Limited

                 TXU Europe Power Limited (formerly Eastern Generation Limited)

                 Eastern Electricity plc

                 Eastern Natural Gas Limited

                 TXU Europe Energy Trading Limited (formerly Eastern Power and
                 Energy Trading)



                              TXU EUROPE LIMITED

     TXU Europe Limited, formerly TXU Eastern Holdings Limited, is a private
limited company incorporated under the laws of England and Wales on February 5,
1998.  TXU Europe Limited 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, distribution and sale of natural gas;
energy marketing; and telecommunications, retail energy services, international
gas operations, power development and other businesses, 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.  In May 1998, TXU Acquisitions Limited
(TXU Acquisitions) , a wholly-owned subsidiary of TXU Finance, gained control of
The Energy Group PLC (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 Limited accounted for its acquisition of TEG as a purchase.
Purchase accounting adjustments, including goodwill, are reflected in the
financial statements of TXU Europe Limited and its subsidiaries for the period
subsequent to May 19, 1998.  The financial statements of TXU Europe Group for
the periods ended before May 19, 1998 included in this report were prepared
using  TXU Europe Group's historical basis of accounting and are designated
herein as "Predecessor".  The comparability of the operating results for

                                       1
<PAGE>

the Predecessor and the periods subsequent to May 19, 1998 are affected by the
purchase accounting adjustments, including the amortization of goodwill over a
period of forty years.

     TXU Eastern Funding Company (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.  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.


                             TXU EUROPE GROUP plc

     TXU Europe Limited's major business operations are conducted through the
following subsidiaries of TXU Europe Group:

  .  TXU Europe Energy Trading Limited (formerly Eastern Power and Energy
     Trading Limited), or TXU Europe Energy Trading, which coordinates and
     manages for TXU Europe Group and for other parties the price and volume
     risks associated with generation, upstream gas assets, and electricity and
     gas retail businesses;

  .  Eastern Electricity plc, or Eastern Electricity, one of the largest
     distributors and retailers of electricity in the UK, and Eastern Energy
     Limited, which supplies electricity outside the authorized area served by
     Eastern Electricity;

  .  Eastern Natural Gas Limited, or Eastern Natural Gas, one of the largest
     retail suppliers of natural gas in the UK; and

  .  TXU Europe Power Limited (formerly Eastern Generation Limited), or TXU
     Europe Power, one of the largest generators of electricity 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 segment.
Energy Retail and Energy Management and Generation comprise TXU Europe Group's
energy business. The distribution business is treated as the Networks segment
for reporting purposes.


                              INDUSTRY BACKGROUND
                              -------------------

General

     Traditionally, the electric industry in the UK, including distribution,
transmission and generation, has been 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 British Gas plc (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.

                                       2
<PAGE>

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 (National Grid).  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 terrawatt hours (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% and the output from
pumped storage, oil, gas (other than combined cycle gas turbine power stations)
and interconnectors had declined to 12% while the percentage generated by
nuclear power stations had increased to 27% and combined cycle gas turbine power
stations accounted for 27%.  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 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.

                                       3
<PAGE>

     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 kilowatts (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 kilowatt hours per year (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
OPERATING SEGMENTS -- "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 OPERATING SEGMENTS -- "Networks Regulation; Distribution
Price Regulation" determines the maximum distribution revenue which a public
electricity supply license holder may earn from charges made to its own
electricity supply business and other electricity suppliers for use of its
distribution network.

     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
(Electricity Act) described below under OPERATING SEGMENTS -- "Energy
Regulation; Electricity Retailing" 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.

                                       4
<PAGE>

     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 (OFGEM) 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% for the
next four years, adjusted for inflation. TXU Europe Limited and TXU Europe Group
estimate that the effect on revenue will be a reduction of about (Pounds)73
million for the year ending December 31, 2000 and of about (Pounds)100 million
for the year ending December 31, 2001.  The net impact on TXU Europe Limited is
less than these reductions, as a portion of the reduction is a pass through of
costs to the energy retail business. In addition, on October 8, 1999, OFGEM
issued proposed price adjustments for the electricity supply businesses.  The
final report of OFGEM 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 (Pounds)15 million.  See OPERATING SEGMENTS-- "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 are being 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.

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 the
Office of Electricity Regulation covering England, Wales and Scotland.  Since
June 17, 1999, the merged office has been known as OFGEM.

     The Director General of Electricity Supply's functions under the
Electricity Act include:

  .  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;

  .  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;

  .  Enforcing compliance with license conditions;

                                       5
<PAGE>

  .  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;

  .  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;

  .  Determining disputes between electricity licensees and customers; and

  .  Setting standards of performance for electricity licensees.

     The term "supply" as used in the context of the Electricity Act covers both
distribution and supply retail 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
became 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:

  .  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;

  .  To promote efficiency and economy on the part of licensed electricity
     suppliers and the efficient use of electricity supplied to consumers;

  .  To promote research and development by persons authorized by license to
     generate, transmit or supply electricity;

  .  To protect the public from the dangers arising from the generation,
     transmission or supply of electricity; and

  .  To secure the establishment and maintenance of machinery for promoting the
     health and safety of workers in the electricity industry.

     The UK Secretary of State for Trade and Industry and the Director General
of Electricity Supply also have a duty to take into account the effect on the
physical environment of activities connected with the generation, transmission
or supply of electricity.

     In performing their duties to protect the interests of consumers in respect
of prices and other terms of supply, the UK Secretary of State for Trade and
Industry and the Director General of Electricity Supply are required to take
into account in particular the interests of consumers in rural areas.  In
performing their duties to protect the interests of consumers in respect of the
quality of electricity supply services, they are required to take into account
in particular the interests of those who are disabled or of pensionable age.

     The Electricity Act requires the Director General of Electricity Supply and
the UK Secretary of State for Trade and Industry to carry out their functions in
the manner each considers is best calculated to ensure that all reasonable
demands for electricity will be satisfied, that license holders will be able to
finance their licensed activities and that will promote competition in the
generation and supply of electricity.

Government Review of Utility Regulation

     On June 30, 1997, the UK government announced its intention to conduct a
comprehensive review of the regulatory framework governing the electricity
distribution and supply businesses in England and Wales, as

                                       6
<PAGE>

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:

  .  The retention of the current distribution price control formula as the
     basis for price regulation;

  .  Increased transparency and consistency of regulations;

  .  The separate licensing of the distribution and supply businesses of the
     regional electricity companies; and

  .  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:

  .  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.

  .  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.

  .  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.

  .  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.

                                       7
<PAGE>

     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
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 Limited or TXU Europe Group.

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 is equivalent 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 is equivalent 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:

  .  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;

  .  A "gas supplier's license," which is required to supply gas to customers;
     and

  .  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.

                                       8
<PAGE>

     In addition, the exploration for and production of gas in the North Sea is
subject to license by the Department of Trade and Industry.

     BG plc is required to provide fair access to its network to all shippers of
gas, who pay charges determined by the amount of capacity they have reserved on
the system's entry and exit points and commodity charges based on the amount of
gas actually transmitted.

     Shippers and suppliers obtain natural gas directly from offshore fields, in
which they may own equity interests, from wholesalers, or from both.  There are
various types of contracts for the purchase of gas, but most of these currently
relate directly to physical volumes to be delivered into the UK gas supply
network.  Many of these include "take or pay" obligations, under which the buyer
agrees to pay for a minimum quantity of gas in a year, although the amount it
takes in any specific time period can vary according to its need.  Gas can be
purchased for delivery from one day to several years ahead.

     Shippers in the gas industry have financial incentives to ensure that they
have sufficient gas, within limited tolerances, to meet the needs of their
suppliers and customers on a daily basis.  Failure to do so could result in
additional costs being incurred.  Fluctuations in demand are met by altering the
quantity of gas taken from fields, by adjusting wholesale purchase contracts and
the use of storage.  Demand may also be limited by interrupting supplies to
interruptible customers.  Any excess or shortfall in supply has to be sold to,
or bought from, the network operator at prices determined each day under an
agreed pricing formula.



                      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 a range of European 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 current 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:

  .  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, upstream gas assets, and
     electricity and gas retail businesses;

  .  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 2.9 million electricity customers of Eastern Electricity and
     Eastern Energy Limited and approximately 805,000 customers of Eastern
     Natural Gas as of December 31, 1999; and

  .  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
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

                                       9
<PAGE>

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.

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 business and one of the largest supply
businesses 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 other 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. The variety of
physical and financial resources and customers in TXU Group's energy business
provides flexibility to respond more quickly to structural changes in energy
markets in the United Kingdom.

     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:

  .  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;

  .  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;

  .  Manages purchases from the Pool for TXU Europe Group and others;

  .  Manages TXU Europe Group's contracts for differences and electricity
     forward agreements;

  .  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; and

  .  Leverages TXU Europe Group's strong asset and customer positions in
     structuring deals that manage price and volume risks for counterparties,
     both generators and retailers.

     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

                                       10
<PAGE>

TXU Europe Group additional opportunities to develop its customer base. TXU
Europe Group will also continue to improve operational efficiency in its
businesses.

     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.  Historically, TXU Europe has established positions in the
European market through joint ventures and contracts.  At December 31, 1999,
approximately $800 million was invested in continental Europe. 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 applying skills learned
in the UK market, in partnership with local management and fellow stakeholders,
and additionally 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.

     On March 13, 2000, TXU Europe Limited's wholly-owned subsidiary, TXU Europe
(Espana) S.L., announced its intention to make a cash offer to acquire all the
shares of Hidroelectrica del Cantabrico, S.A.(Hidrocantabrico) that TXU Europe
Limited does not currently own.  Hidrocantabrico is a vertically integrated
Spanish energy company.



                              OPERATING SEGMENTS
                              ------------------

     TXU Europe Limited's principal business operations are energy business and
electricity networks. However, in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an
Enterprise and Related Information" TXU Europe Limited has identified three
reportable operating segments.

     The segments have been identified on the basis of the operations managed,
the underlying nature of the business and its customer base and the
corresponding necessary skill sets, e.g., engineering, portfolio management and
customer services.

     Energy Management and Generation 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.

     Energy Retail Segment - Provides electricity and gas to United Kingdom
residential, industrial and commercial users.  It also has commenced retailing
joint ventures in continental Europe.

     Together, the Energy Management and Generation and Energy Retail Segments
comprise TXU Europe Group's  energy business.

     Networks Segment - Owns and manages the electricity distribution system and
its principal customer base is energy retail and other electricity suppliers.

     Other - Consists of two operating segments, metering (to be sold) and
telecommunications (sold in 1998) which fall below the quantitative thresholds
for determining reportable segments.

     Financial information required hereunder is set forth in Note 18 to
Consolidated Financial Statements included in Appendix A to this report.


                   ENERGY MANAGEMENT AND GENERATION SEGMENT

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

                                       11
<PAGE>

in the UK. TXU Europe Power also owns Nedalo BV, a leading manufacturer of small
electrical combined heat and power plants, which are those with generation
capacity of less than 1.5 MW, in Europe, and as of March 1, 2000 owns all of
Nedalo (UK) Limited, the largest supplier of small electrical combined heat and
power plants 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.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
                                                    Installed
                                                    Capacity        Date of earliest
Plant                 Type                             MW            commissioning
------------------------------------------------------------------------------------
<S>                   <C>                           <C>             <C>
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
                                                    =========
</TABLE>

(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 PLC (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 (Pounds)737 million, of which (Pounds)337
million was paid at commencement of the leases.  The balance is payable in 2001.
Further payments of approximately (Pounds)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 (Pounds)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 generally accepted
accounting principles in the US (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 plc
(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 (Pounds)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 (Pounds)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

                                       12
<PAGE>

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.

     The power station at Peterborough was developed and built as a joint
venture between TXU Europe Group and Hawker Siddeley Power (Peterborough)
Limited (Hawker Siddeley) 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 by TXU Europe
Group.

     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, TXU Europe Power
     ------------------------------
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 UK.  As of March 1, 2000, TXU Europe Power owns 100% of Nedalo UK,
     ---------
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 60 MW of
small scale combined heat and power equipment is expected to be installed in the
UK in 2000, and Nedalo UK has approximately 70% of the UK market.

Non-UK Generation Facilities

     Czech Republic.  TXU Europe Group has an interest of approximately 84% in
     --------------
Teplarny Brno, a district heating and generation company based in Brno, the
second largest city in the Czech Republic. At December 31, 1999 exchange rates,
the value of TXU Europe's investment was (Pounds)22 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 (Pounds)32 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 (Pounds)62 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 Pohjolan Voima
Oy (PVO), Finland's second largest electricity generator.  As part of the
transaction, TXU Europe Limited contributed approximately (Euro)300 million
((Pounds)190 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.

     The Netherlands.  On March 1, 2000, TXU Europe Power acquired Nedalo BV for
     ---------------
(Pounds)4.5 million, including the remaining 25% of Nedalo (UK) Limited it did
not already own. Nedalo BV is a leading

                                       13
<PAGE>

manufacturer of small scale combined heat and power plant, with sales across
Europe and in the USA, and has approximately 28% of this market.

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. The total estimated cost of the construction is
(Pounds)117 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.

     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. In April 1999, TXU Europe Group announced
that a one MW wind turbine in Northern Ireland had successfully completed tests
and had begun generating electricity. 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 12MW 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:

  .  Reform of the electricity trading arrangements in England and Wales;

  .  Seeking practical opportunities for divestment of assets by major coal-
     fired generators;

  .  Moving forward with competition in electricity supply for all customers;

  .  Separating supply and distribution in electricity markets;

  .  Revising its policy relating to the construction of new gas-fired
     generation facilities;

  .  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.

                                       14
<PAGE>

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:

  .  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

  .  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:

  .  Managing its portfolio of contracts for differences;

  .  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

  .  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.

                                       15
<PAGE>

     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
(Pounds)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 (Pounds)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 (Pounds)102
million. At December 31, 1999, the carrying value of these assets was (Pounds)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
(Pounds)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 (Pounds)124 million.  This agreement also
provides for TXU Europe Group to acquire an additional 47MW of hydropower in
Norway.

     On March 13, 2000, TXU Europe (Espana) S.L., a subsidiary of TXU Europe
Limited, announced its intention to make a cash offer to acquire all of the
shares of Hidroelectrica del Cantabrico, S.A. (Hidrocantabrico) that TXU Europe
Limited does not already own. Hidrocantabrico is a vertically integrated Spanish
energy company. The offer is subject to a number of conditions, including,
among others, authorization by the CNMV, or Spanish Securities Exchange,
approval by European Union competition authorities and TXU Europe Limited
acquiring sufficient shares such that it would hold at least 51% of
Hidrocantabrico after the transaction is completed. The transaction is expected
to close in the second quarter of 2000.

     TXU Europe Limited's offer of (Euro)21.25 per share values the equity of
Hidrocantabrico at 2.4 billion ((Pounds) 1.47 billion). If the offer becomes
unconditional, TXU Europe Limited intends to finance the acquisition through
bank borrowings and the issuance of preferred securities to its parent company,
TXU International Holdings Limited. TXU International Holdings Limited intends
to fund the purchase of the TXU Europe Limited preferred securities though bank
borrowings guaranteed by TXU Corp.

     TXU Europe Limited had previously created a 50/50 joint venture trading
company with Hidrocantabrico, Synergia Trading S.A., covering the Iberian
peninsula.

     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
Europe Limited views the arrangement 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 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.

     In September 1999, the energy management business established an office in
Geneva, Switzerland, which will coordinate European energy management and
development projects.


                             ENERGY RETAIL SEGMENT

     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

                                       16
<PAGE>

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 Electricity'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.
In addition, Eastern Energy Limited had approximately 182,000 customers.

     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 805,000 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 has resulted in the closure of two
principal offices with the loss of 300 permanent and 200 temporary positions.
TXU Europe Group is seeking  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 industrial and
commercial UK electricity market. TXU Europe Group estimates that this
represents a market size of approximately (Pounds)6 billion per year based upon
electricity prices at that date.  In addition, TXU Europe Group estimates that
more than 85% of such customers' 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 ended March 31, 1999.  TXU Europe Group competes in the competitive
market 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 a more
selective basis. Although this may reduce market share, it will have a positive
effect on profits.

     Competition has now 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 182,000 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 (trading as British Gas) 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.

                                       17
<PAGE>

                               NETWORKS SEGMENT

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 33 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 132 kilovolts (kV).  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 for which this 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:

<TABLE>
<CAPTION>
                                    Overhead lines           Underground Cables
        Operating voltage        (Circuit Kilometers)       (Circuit Kilometers)
        -----------------        --------------------       --------------------
        <S>                      <C>                        <C>
          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
                                        ======                      ======
</TABLE>

     In addition to the circuits referred to above, TXU Europe Group's
distribution facilities also include:

<TABLE>
<CAPTION>
                                                            Aggregate capacity
        Transformers                    Number              (mega volt amperes)
        ------------                    ------              -------------------
        <S>                             <C>                 <C>
          132kV...............             230                      13,306
          33kV................             869                      10,360
          11kV................          61,406                      14,719
                                        ------                      ------
            Total.............          62,505                      38,385
                                        ======                      ======
</TABLE>


                                       18
<PAGE>

<TABLE>
<CAPTION>
                                                             Aggregate capacity
        Substation                      Number               (mega volt amperes)
        ----------                      ------               -------------------
        <S>                             <C>                  <C>
          132kV.....................        99                      13,306
          33kV......................       437                      10,360
          11kV......................    61,828                      14,719
                                        ------                      ------
            Total...................    62,364                      38,385
                                        ======                      ======
</TABLE>

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,
                                                       -------------------------------------------------
                                                          1999                 1998               1997
                                                       ---------            ---------          ---------
<S>                                                    <C>                  <C>                <C>
Numbers of customers connected at year end
------------------------------------------
Residential.........................................   2,957,943            2,891,970          2,868,090
Commercial, Industrial and Other....................     268,208              263,502            254,245
                                                       ---------            ---------          ---------
Total...............................................   3,226,151            3,155,472          3,122,335
                                                       =========            =========          =========

Electricity distributed (GWh)
-----------------------------
Residential.........................................      13,786               12,946             13,390
Commercial, Industrial and Other....................      18,914               18,830             18,160
                                                       ---------            ---------          ---------
Total...............................................      32,700               31,776             31,550
                                                       =========            =========          =========
</TABLE>


System Performance

     The performance of all UK distribution networks is monitored and publicly
reported upon annually by OFGEM. 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 (percentage of supply restorations achieved
within 3 hours). During the year ended March 31, 1999, Eastern Electricity
achieved the highest performance of all public electricity supply license
holders (PES) for reliability, the second highest performance for quality of
service, the third highest performance for availability, and the fourth highest
performance for security. Indeed, for this particular regulatory year, Eastern
Electricity achieved its highest ever overall quality of supply performance and
was the only PES to achieve a "top four" position in each of the above key
measures. During 1999, OFGEM undertook analysis to compare the quality of supply
performance of all key PESs using a hybrid measure of incorporating degree of
improvement as well as absolute performance. On this basis, OFGEM ranked Eastern
Electricity second overall for security and fourth 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.

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

                                       19
<PAGE>

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.

     In support of TXU Europe Group's European integrated energy business
concept, the electricity networks business may evaluate growth opportunities
that enhance value.

     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 has
been submitted to OFGEM.  The joint venture will begin operations once this
clearance is 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 Electricity 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 (Pounds)31 million in 2000.  Discussions are ongoing with the
unions representing certain members of the Networks workforce concerning their
transfer to the joint venture company.  TXU Europe Limited is unable to
determine the ultimate outcome of these discussions.

     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 OFGEM.

Czech Republic

     TXU Europe Group directly owns approximately 16% of 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 in Europe.

Finland

     TXU Europe Group announced in May 1999 that it had agreed to make an
investment in Savon Voima Oy (SVO), a regional electricity distributor in
central Finland.  The investment was a purchase of approximately 40% of SVO's
share capital for a purchase price of approximately (Pounds)40 million.  The
purchase was 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

     In December 1998, TXU Europe Group sold its wholly-owned subsidiary,
Eastern Group Telecoms Limited, to NTL Incorporated for (Pounds)91 million.  TXU
Europe Group's current strategic plan does not focus on telecommunications
activities.

Employees

     At December 31, 1999, TXU Europe Limited and its subsidiaries had
approximately 6,300 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.

     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

                                       20
<PAGE>

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

                                       21
<PAGE>

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 of Electricity Supply has
proposed that these restrictions should cease one year after the introduction of
the New Electricity Trading Arrangements (NETA). TXU Europe Group has played an
active part in these discussions and accepted the Director General of
Electricity Supply's proposals on February 7, 2000. However, five generators
rejected the proposals and the matter has been referred to the UK Competition
Commission. TXU Europe Group does not anticipate that these new proposals will
have a material adverse effect on its revenues.

     The implementation of NETA, 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. OFGEM 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,  OFGEM issued proposed price adjustments for the
electricity supply businesses.  The final report of  OFGEM 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 (Pounds)15 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, a public gas transporter's license and a
gas operator's license.

                                       22
<PAGE>

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.

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:

  .  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.

  .  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 .

  .  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 OFGEM 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%
beginning April 1, 2000 with further annual reductions of 3% for the next four
years, adjusted for inflation. TXU Europe Limited and TXU Europe Group estimate
that the effect on revenues will be a reduction of about (Pounds)73 million for
the year ending December 31, 2000 and of about (Pounds)100 million for the year
ending December 31, 2001. The net impact on TXU Europe Limited is less than
these reductions, as a portion of the reduction is a pass through of costs to
the energy retail business.

     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.

                                       23
<PAGE>

     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.

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 became 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.



                             ENVIRONMENTAL MATTERS
                             ---------------------

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 UK
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 UK 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

                                       24
<PAGE>

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.

     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.  The UK government is
proposing to introduce a tax on the business use of energy in order to reduce
energy consumption. TXU Europe Group is unable to predict what impact the
implementation of the Kyoto Protocol will have on it.

     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
(Pounds)43 million in 2000, (Pounds)50 million in 2001, (Pounds)40 million in
2002, and (Pounds)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

                                       25
<PAGE>

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.


Item 2.  PROPERTIES

     The principal properties owned or occupied by TXU Europe Limited's
businesses, other than its distribution properties,  are as follows:

<TABLE>
<CAPTION>
                                                                                                         Site Area (acres
                                                                           Term of                         except where
           Property                    Owner/Leaseholder      Interest      Lease      Principal Use        indicated)
----------------------------------   --------------------   -----------   --------   -----------------   ----------------
<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
Wherstead Park, Wherstead, Ipswich   Eastern Electricity     Freehold        --      Offices              80,000 sq. ft.
Russell House                        Eastern Electricity     Freehold        --      Offices              94,500 sq. ft.
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              54,000 sq. ft.
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 more information concerning TXU Europe Group's UK generating stations,
see -- OPERATING SEGMENT - "Energy Management and Generation Segment".


Item 3.  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.

     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 certain costs arising from the payment of
pensions on early retirement upon reorganization or downsizing.  These
determinations were set aside by the High Court on June 10, 1997, and the
arrangements made by National Grid and its group trustees in dealing with the
surplus were confirmed.  The two pensioners appealed this decision to the Court
of Appeal, and judgment was received. The judgement endorsed the Pensions
Ombudsman's determination that the corporation was not entitled to unilaterally
deal with any surplus. National Grid has made an appeal to the House of Lords,
which appeal is not likely to be heard until the fourth quarter 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

                                       26
<PAGE>

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 (Pounds)45
million, exclusive of any future applicable interest charges.

     On January 25, 1999, the Hindustan Development Corporation issued
proceedings in the Arbitral Tribunal in Delhi, India against TEG claiming
damages of US$413 million for breach of contract following the termination of a
Joint Development Agreement dated March 20, 1997 relating to the construction,
development and operation of a lignite based thermal power plant at Barsingsar,
Rajasthan.  TXU Europe 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
(Pounds)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.


Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

                                       27
<PAGE>

                                    PART II


Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

All of TXU Europe Limited's outstanding share capital is held indirectly by TXU
Corp.


Item 6.  SELECTED FINANCIAL DATA

The information required hereunder for TXU Europe Limited is set forth under
Selected Financial Data included in Appendix A to this report.


Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The information required hereunder for TXU Europe Limited is set forth under
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Appendix A to this report.


Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required hereunder for TXU Europe Limited is set forth under
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Appendix A to this report.


Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required hereunder for TXU Europe  Limited is set forth under
Statement of Responsibility, Independent Auditors' Reports, Statements of
Consolidated Income, Statements of Consolidated Comprehensive Income, Statements
of Consolidated Cash Flows, Consolidated Balance Sheets, Statements of
Consolidated Common Stock Equity and Notes to Consolidated Financial Statements
as included in Appendix A to this report.


Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

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

                                       28
<PAGE>

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.

                                       29
<PAGE>

                                   PART III


Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Item 10 is not presented herein as TXU Europe Limited meets the conditions set
forth in General Instruction (I) (1) (a) and (b).


Item 11.  EXECUTIVE COMPENSATION

Item 11 is not presented herein as TXU Europe Limited meets the conditions set
forth in General Instruction (I) (1) (a) and (b).


Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Item 12 is not presented herein as TXU Europe Limited meets the conditions set
forth in General Instruction (I) (1) (a) and (b).



Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Item 13 is not presented herein as TXU Europe Limited meets the conditions set
forth in General Instruction (I) (1) (a) and (b).

                                       30
<PAGE>

                                    PART IV
<TABLE>
<CAPTION>

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<S>                                                                                      <C>
(A)  Documents filed as part of this report:
                                                                                         Page
     Financial Statements (included as Appendix A to this report):

           Selected Financial Data                                                       A-2

           Management's Discussion and Analysis of Financial Condition and
           Results of Operations                                                         A-4

           Statement of Responsibility                                                   A-18

           Independent Auditors' Reports                                                 A-19

           Statements of Consolidated Income                                             A-22

           Statements of Consolidated Comprehensive Income                               A-23

           Statements of Consolidated Cash Flows                                         A-24

           Consolidated Balance Sheets                                                   A-26

           Statements of Consolidated Common Stock Equity                                A-28

     Notes to Consolidated Financial Statements                                          A-29

</TABLE>

     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.

     (b)   Reports on Form 8-K:

           Reports on Form 8-K filed since September 30, 1999, are as follows:

                 Date of Report        Item Reported
                 --------------        -------------

                 March 13, 2000        Item 5. Other Events

     (c)   Exhibits:

Included in Appendix B to this report.

                                       31
<PAGE>

                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, TXU Europe Limited  has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                         TXU Europe Limited

Date:  March 24, 2000
                                         By        /s/ Philip G Turberville
                                            ----------------------------------
                                            Name:  Philip G Turberville
                                            Title: Principal Executive Officer
                                                   and Director


   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 and in the capacities and on the date indicated.


         Signatures                       Title                       Date
         ----------                       -----                       ----

        /s/ Erle Nye              Chairman and Director
-----------------------------
         (Erle Nye)

  /s/ Philip G Turberville        Principal Executive
-----------------------------     Officer and Director
   (Philip G Turberville)

      /s/ Paul C Marsh            Principal Financial Officer
-----------------------------     and Director
       (Paul C Marsh)

     /s/ Derek C Bonham           Director
-----------------------------
      (Derek C Bonham)                                           March 24, 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)

   /s/ Howard C Goodbourn         Principal Accounting
-----------------------------     Officer
    (Howard C Goodbourn)

                                       32
<PAGE>

                                                                      Appendix A

TXU EUROPE LIMITED AND SUBSIDIARIES

INDEX TO  FINANCIAL INFORMATION
December 31, 1999

<TABLE>
<CAPTION>
                                                                                         Page
<S>                                                                                      <C>
Selected Financial Data - Consolidated Financial and Operating
 Statistics............................................................................  A- 2
Management's Discussion and Analysis of Financial Condition and Results
 of Operations.........................................................................  A- 4
Statement of Responsibility............................................................  A- 18
Independent Auditors'/Accountants' Reports.............................................  A- 19

Financial Statements:

   Statements of Consolidated Income...................................................  A- 22
   Statements of Consolidated Comprehensive Income.....................................  A- 23
   Statements of Consolidated Cash Flows...............................................  A- 24
   Consolidated Balance Sheets.........................................................  A- 26
   Statements of Consolidated Common Stock Equity......................................  A- 28
   Notes to Consolidated Financial Statements..........................................  A- 29

</TABLE>

                                     A - 1
<PAGE>

                      TXU EUROPE LIMITED AND SUBSIDIARIES

                            SELECTED FINANCIAL DATA

                       CONSOLIDATED FINANCIAL STATISTICS

     TXU Europe Limited, formerly TXU Eastern Holdings Limited, a private
limited company incorporated under the laws of England and Wales on February 5,
1998 (Formation), is an indirect wholly-owned subsidiary of Texas Utilities
Company (doing business as TXU Corp.).  On May 19, 1998, TXU Europe Limited
obtained control of The Energy Group PLC (TEG), the former holding company of
TXU Europe Group plc, formerly Eastern Group plc, (TXU Europe Group).  At the
same time, TEG disposed of its United States (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 99% of TXU Europe Limited's assets as of
December 31, 1998 and generated 100% of TXU Europe Limited's operating revenues
for the year ended December 31, 1998.  The principal difference between the
results of operations of TXU Europe Group and the results of operations of the
continuing businesses of TEG is the interest expense associated with $500
million of debt securities issued by Energy Group Overseas, B.V., (Overseas), a
financing subsidiary of TXU Europe Limited.  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.  Since May 19, 1998, TXU Europe Limited has
accounted for TEG and TXU Europe Group as consolidated subsidiaries.

     The selected financial data of TXU Europe Limited and Predecessor have been
derived from the audited financial statements of TXU Europe Limited and TXU
Europe Group and have been prepared in accordance with US generally accepted
accounting principles (GAAP).

<TABLE>
<CAPTION>
                                                                                         Predecessor
                                                                      ---------------------------------------------------
                                                        Period from
                                                         Formation      Period from
                                         Year Ended       Through      April 1, 1998
                                        December 31,    December 31,   Through May 18,     Year Ended       Year Ended
                                            1999            1998            1998          March 31, 1998   March 31, 1997
                                      ---------------   ------------  ----------------    ---------------  --------------
                                                                     ((Pounds) million)
<S>                                   <C>               <C>           <C>                 <C>              <C>
Total assets - end of year                  8,807           8,529                               5,826            5,422
                                      ---------------   ------------                      ---------------  --------------
Capitalization - end of year
  Long-term debt and other
    Obligations, less amounts due
     currently                              4,531           3,629                               1,976            1,837
  Notes payable to TXU Corp.                    -             682                                   -                -
  Minority interest                           243             190                                   6               19
  Common stock equity                       1,673           1,535                               1,802            2,025
                                      ---------------   ------------                      ---------------  --------------
        Total                               6,447           6,036                               3,784            3,881
                                      ---------------   ------------                      ---------------  --------------
Operating revenues                          3,753           2,165             425               3,475            2,984
Operating income (loss)                       543             314             (11)                267              298
Net income (loss)                             138              77             (21)                (38)             (90)
Net interest expense                          284             205              16                 126               88

Ratio of earnings to fixed charges            1.8             1.5             0.1                 1.7              2.5

</TABLE>

                                     A - 2
<PAGE>

OPERATING STATISTICS

<TABLE>
<CAPTION>


                                                                                      Period From
                                                                                       Formation                Period From
                                                            Year Ended                  Through               January 1, 1998
                                                           December 31,               December 31,            Through May 18,
                                                               1999                      1998                      1998
                                                          -------------              -------------            --------------
<S>                                                       <C>                        <C>                      <C>
SALES VOLUMES
Electric (gigawatt-hours) - (GWh):
     Industrial and commercial                                19,698                     15,459                    7,593
     Residential                                              16,726                      7,826                    6,501
                                                          -------------              -------------            --------------
          Total electric                                      36,424                     23,285                   14,094
                                                          =============              =============            ==============

    Units distributed (GWh)                                   33,120                     19,249                   13,002
                                                          =============              =============            ==============

    Gas (billion cubic feet) - (Bcf):
     Industrial and commercial                                    77                         51                       49
     Residential                                                  49                         21                        6
                                                          -------------              -------------            --------------
          Total gas                                              126                         72                       55
                                                          =============              =============            ==============

    Wholesale energy sales:
     Electricity generated and sold to the Pool (GWh)         78,950                     51,060                   31,122
                                                          =============              =============            ==============
     Gas (Bcf)                                                   447                        148                       77
                                                          =============              =============            ==============

------------------------------------------------------------------------------------------------------------------------------
    CUSTOMERS (end of period & in thousands)
     Electric                                                  2,931                      3,211
     Gas                                                         805                        777
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                     A - 3
<PAGE>

                      TXU EUROPE LIMITED AND SUBSIDIARIES

                    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.  For financial
reporting purposes, TXU Europe Group is considered to be the predecessor company
to TXU Europe Limited.  TXU Europe Group constituted 99% of TXU Europe Limited's
assets as of December 31, 1999 and generated 100% of TXU Europe Limited's
operating revenues for the year ended December 31, 1999.

Acquisition of The Energy Group PLC (TEG) 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 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 TEG, the former holding company of TXU Europe Group, after all
conditions to its offer for all of the ordinary shares of TEG 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,  (Peabody Sale).  The adjusted
gross consideration for the Peabody Sale was (Pounds)1.3 billion.

   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 (Pounds)4.4 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 (Pounds)3.5 billion, which is being amortized over 40
years. The process of determining the fair value of assets acquired, liabilities
assumed and contingencies existing at the acquisition date of TEG was completed
in 1999 and resulted in an increase in goodwill of approximately (Pounds)263
million over the preliminary allocation primarily due to refinement of
estimates.  See Note 1 to Consolidated Financial Statements.  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 (Pounds)2 million for that period, which is reflected in "Other
Income- net".

Name Changes

   On November 9, 1999, name changes were announced for certain subsidiaries of
TXU Europe Limited to reflect the increasing importance of European investments.
Eastern Group plc was renamed TXU Europe Group plc,  and its subsidiary, Eastern
Generation Limited, was renamed TXU Europe Power Limited.  TXU Europe Group's
subsidiary, Eastern Power & Energy Trading Limited, was renamed TXU Europe
Energy Trading Limited  (TXU Europe Energy Trading) in January 2000. TXU Europe
Group's retail and networks businesses will continue operating under the Eastern
brand name.

Other Acquisitions/Business Expansion

   On November 5, 1999, TXU Europe Limited formed 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 (Euro)300 million (Pounds)190 million) for an 81% ownership
interest in the joint venture company,

                                     A - 4
<PAGE>

TXU Nordic Energy. TXU Nordic Energy acquired Class "C" Shares of PVO, which
entitle TXU Nordic Energy to the output from approximately 584 megawatts (MW) of
PVO's thermal generating capacity and most of a wholesale trading business owned
by the industrial shareholders of PVO. TXU Nordic Energy's interest in the Class
"C" shares is equal to approximately a 14.7% ownership of PVO. The acquisition
of the interest in PVO resulted in goodwill of approximately (Pounds)36 million
on the basis of preliminary estimates of fair values, which will be amortized
over 40 years. 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.

   Also in December 1999, TXU Europe Limited completed a previously announced
agreement to acquire an approximate 40% interest in Savon Voima Oy (SVO),
Finland's seventh largest electricity distributor, for approximately (Pounds)40
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 plc (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 has been submitted to the Office of Gas and
Electricity Market covering England, Wales and Scotland (OFGEM).  The joint
venture will begin operations once this clearance is 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
Electricity 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 the joint venture, TXU Europe
Limited is expected to record a restructuring charge of approximately (Pounds)31
million in 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  OFGEM. Discussions are ongoing with the unions
representing certain members of the networks workforce concerning their transfer
to the joint venture company.  TXU Europe Limited is unable to determine the
ultimate outcome of these discussions.

   In December 1999, TXU Europe Limited announced it will import electricity
from Russia as part of an arrangement between PVO and the Russian national
utility RAO UES (UES).  The portion 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 400MW that will be imported by PVO from UES.
Under the arrangement, which lasts until 2004, UES will sell 667 million
kilowatt hours (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, had raised its stake in the Johnston Gas Field
in the North Sea to 64.2% and had 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 of natural gas with average daily production
of 62 million cubic feet.

   On March 13, 2000, TXU Europe (Espana) S.L., a subsidiary of TXU Europe
Limited, announced its intention to make a cash offer to acquire all of the
shares of Hidroelectrica Del Cantabrico, SA (Hidrocantabrico) that TXU Europe
Limited does not currently own.  Hidrocantabrico is a vertically integrated
Spanish energy company.  The

                                     A - 5
<PAGE>

offer is subject to a number of conditions, including, among others,
authorization by the CNMV, or Spanish Securities Exchange, approval by European
Union competition authorities and TXU Europe acquiring sufficient shares such
that it would hold at least 51% of Hidrocantabrico after the transaction is
completed. The transaction is expected to close in the second quarter of 2000.

   TXU Europe Espana's offer of (Euro)21.25 per share values the equity of
Hidrocantabrico at (Euro)2.4 billion  ($2.3 billion). If the offer becomes
unconditional, TXU Europe Limited intends to finance the acquisition through
bank borrowings and the issuance of preferred securities to its parent company,
TXU International Holdings.  TXU International Holdings intends to finance the
purchase of the TXU Europe Limited preferred securities through bank borrowings
guaranteed by TXU Corp.


Results of Operations

   The business operations of TXU Europe Group were not significantly changed as
a result of the purchase  of TEG by TXU Acquisitions.  For purposes of the
discussion of operating revenues for the year ended December 31, 1999 compared
with the year ended December 31, 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 December
31, 1998.  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 adjustments and financing costs of the
acquisition.

Segments

   TXU Europe Limited's principal business operations are the energy business
and electricity networks of TXU Europe Group.  In accordance with Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an
Enterprise and Related Information", TXU Europe Limited has identified three
reportable operating business segments. TXU Europe Group's energy business
comprises the Energy Retail and the Energy Management and Generation segments.
The Energy Retail business segment provides electricity and gas to United
Kingdom (UK) residential, 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 in the UK and continental Europe.  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 for the authorized area in the UK and its principal customer base is
Energy Retail and other electricity suppliers.

Energy
------

   TXU Europe Group has achieved growth in energy operations in recent years
through:

   .  adding to TXU Europe Group's energy asset base assets, including three
      power stations leased from National Power PLC (National Power) in June
      1996 and two power stations leased from PowerGen plc (PowerGen) in June
      and July 1996, which increased TXU Europe Group's generation capacity by
      almost 6,000 MW, and the acquisition of North Sea gas assets in 1998 and
      1999;

   .  expanding retail sales in markets opened to competition; and

   .  developing energy management activities to optimize the portfolio of
      physical assets and supply contracts.

   Prior to September 1998, 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 100 kilowatts (kW).  Because
this franchise market for electricity sales became fully deregulated in the
period from September 1998 to 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 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.

                                     A - 6
<PAGE>

   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.  On
October 8, 1999, OFGEM issued proposed price adjustments for the electricity
supply businesses.  The final report of OFGEM 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 (Pounds)15 million.

   In December 1999, following extensive consultation with the industry, the
Director General of Electricity Supply (Director General) 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 wholesale prices ensure that their prices closely reflect
their costs and that they do not take unfair advantage of any imperfections in
the operation of wholesale markets. The Director General has proposed that these
restrictions should cease one year after the introduction of the New Electricity
Trading Arrangements currently under development. TXU Europe Limited has played
an active part in these discussions and accepted the Director General's
proposals on February 7, 2000.  However, five generators rejected the proposals
and the matter has been referred to the UK Competition Committee.  TXU Europe
Limited does not anticipate that these new proposals will have a material
adverse effect on its revenues.

   The implementation of the new electricity trading 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.

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 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 OFGEM
in 1994 and 1995 established the current distribution price control formula.  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% for the next four years, adjusted for inflation.  The allowed
revenues will be calculated from a formula to be provided by OFGEM in the near
future.  However, TXU Europe Limited and TXU Europe Group estimate that the
effect on revenues will be a reduction of about (Pounds)73 million for the year
ending December 31, 2000 and about (Pounds)100 million for the year ending
December 31, 2001. The net impact on  TXU Europe Limited is less than these
reductions, as a portion of the reduction is a pass through of costs to the
energy retail business.

Volume Transactions

   TXU Europe Group's retail sales and units distributed through the network
were as follows:

<TABLE>
<CAPTION>

                                                        Period From       Period From                 Year
                                                         Formation         January 1,                 Ended
                                        Year ended        Through           through                 March 31,
                                       December 31,      December 31,        May 18,       --------------------------
                                           1999             1998              1998              1998         1997
                                     ----------------  --------------    --------------    --------------------------
<S>                                  <C>               <C>               <C>               <C>              <C>
Retail sales (units sold):
   Electricity (GWh)............           36,424           23,285            14,094           35,920       32,546

   Gas (Bcf)....................              126               72                55              126          127
Network sales
   (GWh distributed)............           33,120           19,249            13,002           31,776       31,550
</TABLE>

                                     A - 7
<PAGE>

Revenues by Segment:

   The following tables set out the revenues by segment of TXU Europe Limited
and TXU Europe Group for the periods indicated:

<TABLE>
<CAPTION>


                                                            TXU Europe Limited                  TXU Europe Group (Predecessor)
                                                   ------------------------------------    --------------------------------------
                                                                            From               From
                                                                          Formation         January 1            Year Ended
                                                      Year Ended           Through           Through              March 31,
                                                     December 31,        December 31,        May 18,      -----------------------
                                                         1999                1998             1998*          1998          1997
                                                   ----------------    ----------------    -----------    ---------     ---------
                                                                               ((Pounds) million)
<S>                                                <C>                 <C>                 <C>            <C>           <C>
Revenues:
   Energy retail...........................               1,548               1,036             628          1,655         1,568
   Energy management and generation........               1,759                 845             764          1,337           952
                                                   ----------------    ----------------    -----------    ---------     ---------
        Energy - Total                                    3,307               1,881           1,392          2,992         2,520
 Networks..................................                 428                 253             168            414           420
 Other.....................................                  18                  31               3             69            44
                                                   ----------------    ----------------    -----------    ---------     ---------
                                                          3,753               2,165           1,563          3,475         2,984
                                                   ================    ================    ===========    =========     =========
</TABLE>
* Unaudited

Operating Results

Year ended December 31, 1999 compared with year ended December 31, 1998

Revenues
--------


   Energy retail - Revenues from the energy retail operations for 1999 were
(Pounds)1.5 billion compared with revenues for 1998 of (Pounds)1.7 billion.
Volumes in the gas residential market increased in 1999 as a result of this
market being fully opened to competition.  Electricity volumes have decreased
due to the loss of industrial and commercial customers in the October 1999
contract round (the period of renegotiation of significant numbers of contracts)
and loss of customers in the ex-franchise market.  Prices in the industrial and
commercial sector, however, have improved.  In December 1999, TXU Europe Group's
volume in this market decreased as a result of a policy to accept business on a
more selective basis.  Although this may reduce market share, it is expected to
have a positive effect on profits.

   Energy management and generation - Revenues from the energy management and
generation operations in 1999 were (Pounds)1.8 billion compared with (Pounds)1.6
billion for 1998.  Increased operating volumes in the gas portfolio have
increased revenue partially offset by lower revenues in the electricity
portfolio due to lower time-weighted Pool purchase prices (weighted for time of
day sales) and reduced volumes.

   Networks - Revenues from the networks business for 1999 were (Pounds)428
million compared with (Pounds)421 million for 1998.  Units distributed in 1999,
in gigawatt hours (GWh), increased by approximately 3% from 1998 and regulated
prices increased slightly from April 1999.

   Other - Other revenues were (Pounds)18 million in 1999, relating primarily to
the metering business.  In 1998, other revenues were (Pounds)34 million and
included, in addition to metering revenues, revenues from the telecommunications
business which was sold in December 1998 and revenues from the modular building
business operated by Rollalong Limited, which was sold in February 1999.

Operating income
----------------

   Operating income of TXU Europe Limited for the year ended December 31, 1999
of (Pounds)543 million consisted of (Pounds)3.8 billion of operating revenues
offset by costs and expenses of (Pounds)3.2 billion.  Costs and expenses
included

                                     A - 8
<PAGE>

(Pounds)2.2 billion for energy purchased for resale and fuel consumed,
(Pounds)706 million for operation and maintenance expense, (Pounds)87 million
for amortization of goodwill and (Pounds)173 million for depreciation and other
amortization.

   Operating income of TXU Europe Limited for the period from Formation through
December 31, 1998 was (Pounds)314 million and consisted of (Pounds)2.2 billion
of operating revenues offset by costs and expenses of (Pounds)1.9 billion.
These results include the operations of TXU Europe Group from May 19, 1998.
Costs and expenses included (Pounds)1.3 billion for energy purchased for resale
and fuel consumed, (Pounds)379 million for operation and maintenance expense,
(Pounds)92 million for depreciation and other amortization and (Pounds)52
million for amortization of goodwill.

Net interest expense
--------------------

   Net interest expense of TXU Europe Limited for 1999 of (Pounds)284 million
included interest expense of (Pounds)347 million offset by interest income of
(Pounds)63 million on cash balances. Interest expense included (Pounds)64
million in respect of sterling denominated Eurobonds and (Pounds)49 million in
respect of the rent factoring financing arrangement for leased power stations,
as well as payments of (Pounds)51 million under the Sterling Credit Agreement,
(Pounds)35 million under the Senior Notes and (Pounds)19 million on the note
payable to TXU Corp., which was paid off in June 1999.

   Net interest expense of TXU Europe Limited for the period from Formation
through December 31, 1998 of (Pounds)205 million included interest expense of
(Pounds)269 million offset by interest income of (Pounds)64 million on cash
balances.  Interest expense included payments of (Pounds)74 million under the
Sterling Credit Agreement, (Pounds)40 million in respect of sterling-denominated
Eurobonds, (Pounds)38 million in respect of the rent factoring financing
arrangement as well as (Pounds)33 million on the note payable to TXU Corp. .

Total tax expense
-----------------

   Total tax expense of TXU Europe Limited for the year ended December 31, 1999
was (Pounds)111 million.  Total tax expense of TXU Europe Limited for the period
from Formation through December 31, 1998 was (Pounds)67 million. The effective
tax rate for both periods was affected by non-deductible expenses related to
capital leases and amortization of goodwill.  The 1998 periods also reflected a
tax benefit of approximately (Pounds)8 million associated with a 1% reduction in
the statutory tax rate and included income that was taxed at rates less than the
statutory rate.

Period from April 1, 1998 through May 18, 1998 (Predecessor)

   TXU Europe Group incurred an operating loss for the period from April 1, 1998
through May 18, 1998 of (Pounds)11 million consisting of (Pounds)425 million of
operating revenues offset by costs and expenses of (Pounds)436 million.  Costs
and expenses included (Pounds)287 million for energy purchased for resale and
fuel consumed, (Pounds)123 million for operation and maintenance expense and
(Pounds)26 million for depreciation and amortization.

   Net interest expense of TXU Europe Group for the period from April 1, 1998
through May 18, 1998 of (Pounds)16 million included interest expense of
(Pounds)28 million offset by interest income of (Pounds)12 million on cash
balances.  Total tax benefit of TXU Europe Group for the period from April 1,
1998 through May 18, 1998 was (Pounds)5 million

Year Ended March 31, 1998 (Predecessor)

Revenues
--------

   Energy retail - Overall revenues from the energy retail business were
(Pounds)1.7 billion for the year ended March 31, 1998.  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) generated revenues were (Pounds)0.3 billion.  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) had sales volumes of 18,642 GWh with revenues of
(Pounds)1.2 billion.

   In the gas retail market, volumes and revenues were approximately 1.3 billion
therms (126 Bcf) and (Pounds)0.2 billion, respectively.  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.

                                     A - 9
<PAGE>

   Energy management and generation  -  Segment revenues were (Pounds)1.3
billion for the year ended March 31, 1998. Contributing to revenues was the
inclusion of a full year of the additional output provided by the five power
stations leased in June and July 1996.  There was also additional revenue of
(Pounds)30 million during the commissioning period of the King's Lynn gas-fired
power station.

   Networks - Networks revenues were (Pounds)414 million for the year ended
March 31, 1998.  Revenues from TXU Europe Group's core regulated electricity
distribution business, which are determined by the distribution price control
formula, remained 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 were 31,776 GWh.

   Other - Revenues in the other businesses for the year ended March 31, 1998
were (Pounds)69 million, which included revenues from the telecommunications,
metering and modular building businesses.

Operating income
----------------

   Operating income was (Pounds)267 million for the year ended March 31, 1998.
Operating income for energy retail operations for the year ended March 31, 1998
included higher gross profit in gas of (Pounds)10 million and in electricity of
(Pounds)2 million, offset by (Pounds)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.
Operating income from the energy management and generation business was
(Pounds)180 million in the year ended March 31, 1998.  The operating income in
the networks business was  (Pounds)189 million.

Net interest expense
--------------------

   Net interest expense was (Pounds)126 million in the year ended March 31,
1998.

Total tax expense
-----------------

   Total tax expense was  (Pounds)189 million in the year ended March 31, 1998,
including a (Pounds)112 million windfall tax charge and a 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.  The 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 (Pounds)112
million, of which half was paid on December 1, 1997 and the balance was paid on
December 1, 1998.

Liquidity and Capital Resources

Year ended December 31, 1999 and period from Formation through December 31, 1998
of TXU Europe Limited.

   Net cash generated by operating activities of TXU Europe Limited was
(Pounds)417 million for 1999 and (Pounds)37 million for the period from
Formation through December 31, 1998. Cash used by changes in operating assets
and liabilities of TXU Europe Limited for the year ended December 31, 1999 was
(Pounds)88 million and for the period from Formation through December 31, 1998
was (Pounds)199 million.  Cash flows from operations before changes in operating
assets and liabilities of TXU Europe Limited were (Pounds)505 million for the
year ended December 31, 1999 and (Pounds)236 million for the period from
Formation to December 31, 1998.

   Cash used in investing activities of TXU Europe Limited was (Pounds)686
million for the year ended December 31, 1999 and (Pounds)1.8 billion for the
period from Formation through December 31, 1998.  The amount for TXU Europe
Limited for the period from Formation through December 31, 1998 includes
(Pounds)1.4 billion representing the net cash paid to acquire TEG.  Capital
expenditures were (Pounds)385 million for the year ended December 31, 1999,
which included approximately (Pounds)110 million for the acquisition of gas
assets, and were (Pounds)207 million for the period from Formation through
December 31, 1998.  In 1999 (Pounds)305 million was invested primarily in other
European assets, including investments in PVO and SVO in the Nordic market.

   TXU Europe Group received government consent to build a 215 megawatt (MW)
combined heat and power plant for which there is a commitment of (Pounds)117
million, most of which falls due in 2001.  Estimated capital expenditures on
environmental control facilities are (Pounds)43 million in 2000, (Pounds)50
million in 2001, (Pounds)40 million in 2002, and (Pounds)35 million in 2003.
(See Note 16 to Consolidated Financial Statements for a discussion of additional
commitments.)

                                     A - 10
<PAGE>

   For the year ended December 31, 1999, cash provided by financing activities
by TXU Europe Limited was (Pounds)88 million.  This included borrowings of
(Pounds)2.4 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 below.  Cash provided by financing activities of TXU Europe Limited
for the period from Formation through December 31, 1998 was (Pounds)2.2 billion
including common stock issued to parent of (Pounds)1.5 billion and borrowings
under the acquisition facility of (Pounds)1.8 billion.

Period from April 1, 1998 through May 18, 1998 and Year ended March 31, 1998 of
     TXU Europe Group (Predecessor)

   Net cash generated by operating activities of TXU Europe Group was (Pounds)74
million for the period from April 1, 1998 through May 18, 1998.  Net cash
generated by operating activities of TXU Europe Group for the year ended March
31, 1998 was (Pounds)341 million. Cash provided by changes in operating assets
and liabilities of TXU Europe Group was (Pounds)76 million for the period from
April 1, 1998 through May 18, 1998.  Cash provided by changes in operating
assets and liabilities was (Pounds)223 million for the year ended March 31,
1998. Cash used by operations before changes in operating assets and liabilities
of TXU Europe Group was (Pounds)2 million for the period from April 1, 1998
through May 18, 1998.  Cash from operations before changes in operating assets
and liabilities was (Pounds)118 million for the year ended March 31, 1998.

   Cash used in investing activities of TXU Europe Group was (Pounds)78 million
for the period from April 1, 1998 through May 18, 1998.  Cash used in investing
activities of TXU Europe Group for the year ended March 31, 1998 was (Pounds)234
million. Capital expenditures were (Pounds)51 million for the period from April
1 through May 18, 1998, and (Pounds)254 million for the year ended March 31,
1998.

   Cash provided by financing activities of TXU Europe Group for the period from
April 1, 1998 through May 18, 1998 was (Pounds)16 million.   In the year ended
March 31, 1998, cash provided by financing activities of TXU Europe Group was
(Pounds)121 million.  In that year, (Pounds)240 million was raised through
issuance of long-term debt and a further (Pounds)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 totaled (Pounds)215 million and a
dividend of (Pounds)200 million was paid.

Financing Arrangements

   On March 2, 2000, TXU Europe Capital I, a statutory business trust,
established as a financing subsidiary for TXU Europe Limited, issued to
investors US$150 million ((Pounds)93 million) of 9 3/4% Trust Originated
Preferred Securities (Trust Securities), in approximately 6,000,000 units.   In
a series of related transactions, the proceeds from this issuance were invested
in Preferred Partnership securities issued by TXU Europe Funding I, L.P., a
limited partnership of which TXU Europe Limited is the general partner.  TXU
Europe Funding I, L.P. in turn, used those funds, along with a capital
contribution of approximately (Pounds)27 million from TXU Europe Limited, to
purchase junior subordinated debentures issued by TXU Eastern Funding  and TXU
Europe Group.  The Trust Securities have a liquidation preference of $25 per
unit.  The only assets of the trust are the Preferred Partnership Securities.
The 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 Trust Securities.  TXU Europe
Limited has issued guarantees of the Trust Securities, the Preferred Partnership
Securities and the junior subordinated debentures held by the partnership.

   At December 31, 1999, TXU Europe Limited and TXU Finance have a joint
sterling-denominated line of credit with a group of banking institutions under a
credit facility agreement (Sterling Credit Agreement). The original Sterling
Credit Agreement, entered into in 1998, had an acquisition facility and a
revolving credit facility.  Borrowings under the acquisition facility provided
financing to acquire TEG and pay acquisition related expenses.  The revolving
credit facility provided for short-term borrowings. 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 (Pounds)800 million were entered into.   At December
31, 1998, borrowings totaled (Pounds)750 million under the acquisition facility
and (Pounds)231 million under the revolving credit facilities.  The Sterling
Credit Agreement was amended in March 1999.  The Sterling Credit Agreement, as
amended, provides for borrowings of up to (Pounds)1.275 billion and has two
facilities: a (Pounds)750 million term facility which will terminate on March 2,
2003 and a (Pounds)525 million revolving credit facility which has a (Pounds)200
million 364-day tranche (Tranche A) and a (Pounds)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

                                     A - 11
<PAGE>

Agreement. All of these financial ratios under the Sterling Credit Agreement are
determined in accordance with UK GAAP. At December 31, 1999, TXU Europe Limited
was 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 in
various currencies with interest rates based on the prevailing rates in effect
in the countries in which the borrowings originate.

   Eastern Electricity has a separate revolving credit facility of up to
(Pounds)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 December 31, 1999 and 1998 under this facility.

   In October 1999, Eastern Norge Svartisen AS, a subsidiary of TXU Europe
Limited, issued (Pounds)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.
In November 1999, TXU Europe borrowed approximately (Euro)300 million
(Pounds)190 million) under the Tranche B facility. The net proceeds were used to
finance the acquisition of the interest in TXU Nordic Energy, the PVO joint
venture.

   In December 1999, TXU Europe Group borrowed approximately (Euro)306 million
(Pounds)190 million) under a short-term facility with a commercial bank and used
the net proceeds to repay the Euro borrowings under the Tranche B facility. The
facility expires on June 3, 2000. TXU Europe Limited is currently negotiating
with potential lenders to refinance the (Euro)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
(Pounds)40 million) and to fund the exit termination fee from a disadvantageous
contract (Pounds)76 million). The amount of the exit termination fee was within
amounts TXU Europe Limited had previously reserved against.

   As of December 31, 1999, the amended Sterling Credit Agreement had
(Pounds)750 million of borrowings outstanding under the term facility at an
interest rate of 6.55%, and approximately (Pounds)237 million of other
borrowings outstanding under Tranche B at a weighted average interest rate of
5.61%.  On May 18, 1999, $198 million in letters of credit issued under Tranche
B of the revolving credit facility matured and were not renewed.  There were
(Pounds)3 million of letters of credit outstanding at December 31, 1999.

   On December 15, 1999, TXU Europe Limited commenced a (Euro)2.0 billion Euro
Medium Term Note (EMTN) program. Under the EMTN program, a subsidiary of TXU
Europe Limited may from time to time issue notes on a continuing basis to one or
more dealers in a principal outstanding amount not exceeding (Euro)2.0 billion.
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 the subsidiary of TXU Europe Limited and the relevant dealer. The
payment of all amounts payable in respect of the notes will be guaranteed by TXU
Europe Limited.

   On March 8, 2000, TXU Eastern Funding  issued (Pounds)225 million of 7.25%
Sterling Eurobonds due March 8, 2030 under the EMTN program,  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 on the new Sterling
Eurobonds 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.

   TXU Europe Group has facilities with Citibank N.A. to provide financing
through trade accounts receivable whereby Eastern Electricity may sell up to
(Pounds)300 million of its electricity receivables and, beginning June 11, 1999,
TXU Finance may borrow up to an aggregate of (Pounds)275 million, which is
treated as being collateralized by future receivables of Eastern Electricity,
through a short-term note issue arrangement.  The program has an overall program
limit of (Pounds)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.  At December 31, 1998, Eastern
Electricity had borrowed (Pounds)300 million under these facilities.  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 December 31, 1999, accounts receivable of Eastern
Electricity of (Pounds)224 million had been sold under the new program.  An
additional (Pounds)76 million of receivables remain as collateral for short-term
loans.  In addition, at December 31,

                                     A - 12
<PAGE>

1999, TXU Finance had borrowed a further (Pounds)101 million collateralized by
future receivables. The borrowings by Eastern Electricity and TXU Finance are
reflected on the balance sheet and bear interest at an annual rate based on
commercial paper rates plus 0.225%, which was 5.63% and 6.53% at December 31,
1999 and 1998, respectively.

   In May 1999, a financing subsidiary of TXU Europe Limited issued US$1.5
billion (Pounds)921 million) of Senior Notes, which are guaranteed by TXU Europe
Limited, in three series: US$350 million ((Pounds)215 million) at 6.15% due May
15, 2002; US$650 million (Pounds)399 million) at 6.45% due May 15, 2005; and
US$500 million (Pounds)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. 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. In December 1999, the Senior Notes were exchanged in a
transaction registered with the US Securities and Exchange Commission for
similar Senior Notes that could be traded publicly in US markets.

Customer Acquisition Costs

   Beginning in the year ended March 31, 1998, TXU Europe Group paid commissions
to agents who assist TXU Europe Group in acquiring customers in the newly
deregulated electricity and gas markets.  Those costs of acquiring customers
were charged to expense when incurred, although revenues from the acquired
customer base are expected to be received over several years.  Total charges for
the year ended March 31, 1998 were (Pounds)41 million,  for the period from
Formation through December 31, 1998 were (Pounds)38 million, and for the year
ended December 31, 1999 were (Pounds)9 million.  TXU Europe Group expects that
it will continue to incur some similar costs in connection with its effort to
acquire customers for the foreseeable future, although to a lesser degree.

   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 has resulted in the closure of two
principal offices with the loss of 300 permanent and 200 temporary positions.
TXU Europe Group is seeking 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.

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

   SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
as extended, is effective for TXU Europe Limited beginning January 1, 2001. SFAS
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. TXU Europe Limited is currently evaluating the
impact the adoption of this standard will have on its consolidated statements of
financial position and results of operations.

   The Emerging Issues Task Force (EITF) No. 98-10, "Accounting for Energy
Trading and Risk Management Activities," was effective for the fiscal year
ending December 31, 1999.  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.  The effect
of EITF 98-10 has not been significant, since trading activity

                                     A - 13
<PAGE>

(which for TXU Europe Energy Trading commenced in 1999) has been limited. (See
Note 14 to Consolidated Financial Statements for more details concerning trading
activities.)

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) 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 desk top software, and 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 was 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.

Results
-------

   During the Year 2000 rollover, none of TXU Europe Group'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.

Costs
-----

   The total costs associated with TXU Europe Limited's Y2K efforts are
currently estimated to be approximately (Pounds)12 million. These costs reflect
new, incremental costs and the reallocation of resources in pre-existing
maintenance budgets. These costs are being expensed as incurred, and a total of
approximately (Pounds)2 million is expected to be spent during 2000, mainly for
the billing system upgrade. There can be no assurance that these estimates will
not change as a result of the discovery of unexpected needs for additional
remediation work.


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 primarily for hedging
(i.e. non-trading) 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 December 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

                                     A - 14
<PAGE>

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
                                        ------------------------------------------
                                                                                          1999           1998
                                                                                     -------------   -------------
                                                                            There-            Fair            Fair
                                        2000   2001    2002   2003   2004    after   Total   Value   Total   Value
                                        ----   ----    ----   ----   ----   ------   -----   -----   -----   -----
                                                           ((Pounds) millions except percents)
<S>                                     <C>    <C>     <C>    <C>    <C>    <C>      <C>     <C>     <C>     <C>

Long-term Debt (including
 current maturities):
  Fixed Rate ((Pounds)m)........         238    191     216      2    366    1,588   2,601   2,640   2,505   2,571
    Average interest rate.......        7.35%  7.35%   6.16%  7.38%  8.37%    7.43%   7.45%      -    7.50%      -
  Variable Rate ((Pounds)m).....           -     28      21    987      -      350   1,386   1,386   1,025   1,025
    Average interest rate.......           -   6.70%   7.35%  6.33%     -     8.16%   6.42%      -    6.40%      -

  Interest Rate Swaps:
  (notional amounts)
  Fixed to Variable ((Pounds)m).           -      -     217      -      -      711     928     (52)    100      12
    Average pay rate............           -      -    6.73%     -      -     6.84%   6.82%      -       -       -
    Average receive rate........           -      -    6.15%     -      -     6.58%   6.48%      -       -       -
  Variable to Fixed ((Pounds)m).         370    400      16      -      -      423   1,209      (a)    850     (44)
    Average pay rate............        6.22%  6.71%  12.91%     -      -     6.43%   6.54%      -       -       -
    Average receive rate........        6.20%  5.55%   7.35%     -      -     5.57%   5.78%      -       -       -
</TABLE>


   (a) Fair value amount rounds to less than (Pounds)1 million.


   At December 31, 1999,  there were approximately (Pounds)15 million in forward
rate agreements outstanding which matured in the first few days of January 2000.
There was no material market risk exposure on these agreements.

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.  TXU Europe Energy
Trading manages its market risk on a portfolio basis within the limitations
imposed by the Board of Directors of TXU Europe Group (TXU Europe Board).
Market risks are monitored daily utilizing appropriate mark-to-market
methodologies which value the portfolio of contracts and the hypothetical effect
of this value of changes in market prices.

   Electricity - Non-trading Activities

   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

                                     A - 15
<PAGE>

management business which maintains energy price exposures to within a limit set
by the TXU Europe Board and also enters into derivatives to hedge the portfolio.
The derivatives used are mainly contracts for differences and electricity
forward agreements but also involve other contractual arrangements. (See Note 14
to Consolidated Financial Statements.) 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, electricity
forward agreements and other contracts in existence at December 31, 1999 and
1998 entered into for non-trading purposes arising from a 10% adverse movement
in future electricity prices from those anticipated in the fair value model is
estimated at (Pounds)21 million and (Pounds)81 million, respectively. This loss
is calculated by modeling the contracts against an internal forecast of Pool
prices using discounted cash flow techniques. The decrease in the hypothetical
market movement results from the decrease in energy purchase commitments during
1999. The fair value of outstanding contracts for differences, electricity
forward agreements and other contracts entered into for non-trading purposes at
December 31, 1999 and 1998 was (Pounds)76 million and (Pounds)61 million,
respectively, calculated as the difference between the expected value of the
contracts for differences, electricity forward agreements and other contracts,
based on their known strike price or other known value, and the current market
value of such instrument, based on an estimate of forward prices for the
contract for difference, electricity forward agreement or other contract during
their term.

   Electricity - Trading Activities

   TXU Europe Group enters into contracts for differences and other energy
purchase contracts for the purpose of trading.  TXU Europe Group trades both in
the UK market, where it seeks to take advantage of market conditions by
extending or shortening the size of its portfolio of purchase and sale
commitments, and in continental Europe, where it enters into financial
instruments in markets where it has no physical assets or retail volumes.   In
doing so, any exposures to fluctuations in energy prices resulting from such
trading are within limits set by the TXU Europe Board.  Trading activities
commenced in 1999 and net gains of (Pounds)23 million were recognized from
trading electricity commodity contracts or other derivatives.    TXU Europe
Group accounts for its trading activities in accordance with the accounting
policies set out in Note 2 to the Consolidated Financial Statements. The
hypothetical loss in fair value of TXU Europe Group's contracts for differences
and other energy purchase contracts in existence at December 31, 1999, which
were entered into for trading purposes, arising from a 10% adverse movement in
future electricity prices is estimated at (Pounds)4 million.  The fair value of
outstanding contracts for differences, electricity forward agreements and other
contracts entered into for trading purposes at December 31, 1999 was (Pounds)17
million.

   Gas

   TXU Europe Group 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
managed within a limit set by the TXU Europe Board using natural gas futures and
swaps, as appropriate, to hedge the exposures.  There were no gas swaps or
futures outstanding at December 31, 1999.  Net gains of (Pounds)0.1 million were
recognized from trading gas commodity contracts or other derivatives.

Foreign Currency Risk

   TXU Europe Limited manages its exposure to foreign currency rates principally
by matching foreign currency denominated assets with borrowings in the same
currency or by swapping principal and interest components of foreign currency
borrowings into sterling. 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 currencies other than sterling 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 first quarter of 1999.

                                     A - 16
<PAGE>

   The following table summarizes notional amounts at the contract exchange
rates, weighted average contractual exchange rates and estimated fair values by
contract maturity for open contracts at December 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                         Expected Maturity Date
                                        ------------------------------------------------------
                                                                                                  1999   1998
                                                                                There-            Fair   Fair
                                        2000    2001    2002    2003    2004     after   Total   Value   Value
                                       ------  ------  ------  ------  ------   ------   -----   -----   -----
                                                      ((Pounds) millions, except exchange rates)
<S>                                    <C>     <C>     <C>     <C>    <C>       <C>      <C>     <C>     <C>
Principal payments - (Pounds)              -       -     216       -       -       923    1,139     2     (1)
    Average exchange rate                  -       -   $1.62       -       -     $1.72   $ 1.69     -      -
Interest payments - (Pounds)              83      83      83      69      69       570      957   (25)   (17)
Average exchange rate                  $1.63   $1.63   $1.63   $1.63   $1.63     $1.62   $ 1.62     -      -


</TABLE>

                           FORWARD-LOOKING STATEMENTS

   This report and other presentations made by TXU Europe Limited contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended.  Although TXU Europe Limited believes that in
making any such statements its expectations have been based on reasonable
assumptions, any such statement involves uncertainties and is qualified in its
entirety by reference to the following important factors, among others, that
could cause the actual results of TXU Europe Limited to differ materially from
those projected in such forward-looking statement:  (1) 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; (2) unanticipated changes in interest rates, in rates of inflation,
or in foreign exchange rates; (3) 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; (4)
general industry trends; (5) competition; (6) power costs and availability; (7)
changes in business strategy, development plans or vendor relationships; (8)
availability, terms and deployment of capital and capital market conditions; (9)
availability of qualified personnel; (10) changes in, or the failure or
inability to comply with, governmental regulations, including, among other
things, environmental regulations; (11) changes in tax laws; (12) weather
conditions and other natural phenomena; (13) unanticipated population growth or
decline, and changes in market demand and demographic patterns; (14) access to
adequate transmission facilities to meet changing demand; (15) pricing and
transportation of oil, coal, natural gas and other commodities; (16)
unanticipated changes in operating expenses and capital expenditures; (17) 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; and (18) changes in
technology used and services offered by TXU Europe Limited.

   Any forward-looking statements speak only as of the date of this report.  TXU
Europe Limited undertakes no obligation to publicly update or revise any
forward-looking statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events.  New factors emerge from time to time and it is not possible for TXU
Europe Limited to predict all of such factors, nor can it assess the impact of
each such factor or the extent to which any factor or combination of factors may
cause results to differ materially from those contained in any forward-looking
statement.

                                     A - 17
<PAGE>

                      TXU EUROPE LIMITED AND SUBSIDIARIES

                          STATEMENT OF RESPONSIBILITY

   The management of TXU Europe Limited and subsidiaries (TXU Europe) is
responsible for the preparation, integrity and objectivity of the consolidated
financial statements of TXU Europe and other information included in this
report. The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. As appropriate, the statements
include amounts based on informed estimates and judgments of management.

   The management of TXU Europe has established and maintains a system of
internal control designed to provide reasonable assurance, on a cost-effective
basis, that assets are safeguarded, transactions are executed in accordance with
management's authorization and financial records are reliable for preparing
consolidated financial statements. Management believes that the system of
control provides reasonable assurance that errors or irregularities that could
be material to the consolidated financial statements are prevented or would be
detected within a timely period. Key elements in this system include the
effective communication of established written policies and procedures,
selection and training of qualified personnel and organizational arrangements
that provide an appropriate division of responsibility. This system of control
includes an ongoing Management Audit program designed to provide an assurance to
the Board of Directors of TXU Europe of the adequacy and effectiveness of
business systems and controls. Management considers the recommendations of the
internal auditors and independent auditors concerning TXU Europe's system of
internal control and takes appropriate actions which are cost-effective in the
circumstances. Management believes that, as of December 31, 1999, TXU Europe's
system of internal control was adequate to accomplish the objectives discussed
herein.

   The Board of Directors of TXU Europe addresses its oversight responsibility
for the consolidated financial statements through its Audit Committee. A
majority of the directors comprising the Audit Committee are not employees of
TXU Europe. The Audit Committee meets regularly with TXU Europe's management,
internal auditors and independent auditors to review matters relating to
financial reporting, auditing and internal control. To ensure auditor
independence, both the internal auditors and independent auditors have full and
free access to the Audit Committee.

   The independent auditors, Deloitte & Touche, are engaged to audit, in
accordance with generally accepted auditing standards, the consolidated
financial statements of TXU Europe and its subsidiaries and to issue their
report thereon.


                                            /s/ PHILIP G TURBERVILLE
                               ------------------------------------------------
                                   Philip G Turberville, Principal Executive
                                                    Officer


                                               /s/ PAUL C MARSH
                               ------------------------------------------------
                                   Paul C Marsh,  Principal Financial Officer


                                             /s/ HOWARD C GOODBOURN
                               ------------------------------------------------
                                    Howard C Goodbourn, Principal Accounting
                                                     Officer

                                     A - 18
<PAGE>

                [LETTERHEAD OF DELOITTE & TOUCHE APPEARS HERE]

INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders of TXU Europe Limited (formerly known
as TXU Eastern Holdings Limited) and Subsidiaries :

We have audited the accompanying consolidated balance sheet of TXU Europe
Limited (formerly TXU Eastern Holdings Limited) and subsidiaries as of December
31, 1999, and the related consolidated statements of income, comprehensive
income, cash flows and common stock equity for the year then ended.  These
financial statements are the responsibility of TXU Europe's management.  Our
responsibility is to express an opinion on these financial statements based on
our audit.  The financial statements of TXU Europe Limited for the period from
formation through December 31, 1998, period from April 1, 1998 through May 18,
1998 and year ended March 31, 1998, were audited by other auditors whose
reports, dated respectively March 3, 1999 and April 26, 1999, expressed an
unqualified opinion on those statements.

We conducted our audits in accordance with generally accepted auditing standards
in the United Kingdom which do not differ significantly with those in the United
States.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 1999 consolidated financial statements present fairly, in
all material respects, the financial position of TXU Europe Limited and
subsidiaries at December 31, 1999, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.

DELOITTE & TOUCHE

London, England
February 16, 2000

                                     A - 19
<PAGE>

              [LETTERHEAD OF PRICEWATERHOUSECOOPERS APPEARS HERE]


                       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 31, 1998, and the results of their operations and
their cash flows for the period from formation (February 5, 1998) to December
31, 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 audit. We conducted our audit 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
audit provides a reasonable basis for the opinion expressed above.


PricewaterhouseCoopers
London, England
March 3, 1999

                                     A - 20
<PAGE>

              [LETTERHEAD OF PRICEWATERHOUSECOOPERS APPEARS HERE]


                       Report of Independent Accountants
                       ----------------------------------

To the Board of Directors and Shareholders of TXU Europe Group plc (formerly
known as Eastern Group plc) and Subsidiaries

In our opinion, the accompanying consolidated statements of consolidated income,
of comprehensive income, of common stock equity and of cash flows for the year
ended March 31, 1998 and for the period from April 1, 1998 through May 18, 1998
present fairly, in all material respects, the results of operations and cash
flows of TXU Europe Group plc (formerly known as Eastern Group plc) and
Subsidiaries for the year ended 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

                                     A - 21
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
((Pounds) million)

<TABLE>
<CAPTION>
                                                                   Successor                               Predecessor
                                                         --------------------------------         ------------------------------
                                                                            Period From
                                                                             Formation            Period from          Year
                                                         Year Ended           Through            April 1, 1998         Ended
                                                         December 31,       December 31,            through           March 31,
                                                            1999                1998              May 18, 1998          1998
                                                         ----------         -------------        --------------     ------------
<S>                                                     <C>           <C>                    <C>                   <C>
OPERATING REVENUES.......................................  3,753                  2,165                  425             3,475
                                                         ----------         -------------        --------------     ------------
OPERATING EXPENSES
  Energy purchased for resale and fuel consumed..........  2,244                  1,328                  287             2,217
  Operation and maintenance..............................    706                    379                  123               806
  Depreciation and other amortization....................    173                     92                   22               152
  Goodwill amortization..................................     87                     52                    4                33
                                                         ----------         -------------        --------------     ------------
  Total operating expenses...............................  3,210                  1,851                  436             3,208
                                                         ----------         -------------        --------------     ------------
OPERATING INCOME (LOSS)..................................    543                    314                  (11)              267

OTHER INCOME - NET.......................................      8                     46                    1                10
                                                         ----------         -------------        --------------     ------------
INCOME (LOSS) BEFORE INTEREST, INCOME TAXES AND
  MINORITY INTEREST......................................    551                    360                  (10)              277

INTEREST INCOME..........................................     63                     64                   12                76

INTEREST EXPENSE.........................................    347                    269                   28               202
                                                         ----------         -------------        --------------     ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
  MINORITY INTEREST......................................    267                    155                  (26)              151

INCOME TAX EXPENSE (BENEFIT).............................    111                     67                   (5)              189
                                                         ----------         -------------        --------------     ------------
INCOME (LOSS) BEFORE MINORITY INTEREST...................    156                     88                  (21)              (38)
MINORITY INTEREST........................................     18                     11                    -                 -
                                                         ----------         -------------        --------------     ------------
NET INCOME (LOSS)........................................    138                     77                  (21)              (38)
                                                         ==========         =============        ==============     ============
</TABLE>

See Notes to Consolidated Financial Statements.

                                     A - 22
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
((Pounds) million)

<TABLE>
<CAPTION>
                                                                            Successor                    Predecessor
                                                                   ----------------------------   ----------------------------
                                                                                  Formation       Period from
                                                                    Year Ended     Through       April 1, 1998    Year Ended
                                                                    December 31,  December 31,      through        March 31,
                                                                       1999           1998        May 18, 1998       1998
                                                                   -------------  -------------   ------------   -------------
<S>                                                                <C>             <C>            <C>             <C>
NET INCOME (LOSS)................................................        138            77            (21)            (38)
OTHER COMPREHENSIVE INCOME (LOSS)
  Unrealized loss on securities classified as available for
   sale, net of tax effects......................................          -            (8)            (3)             (2)
  Cumulative translation adjustment..............................          1             -              -               -
                                                                   -------------  -------------   ------------   -------------
     Total.......................................................          1             (8)            (3)             (2)
                                                                   -------------  -------------   ------------   -------------
COMPREHENSIVE INCOME (LOSS)......................................        139             69            (24)            (40)
                                                                   =============  =============   ============   =============
</TABLE>

See Notes to Consolidated Financial Statements.

                                     A - 23
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
((Pounds) million)

<TABLE>
<CAPTION>
                                                                           Successor                       Predecessor
                                                                  -----------------------------   ------------------------------
                                                                                  Period From
                                                                                   Formation       Period From
                                                                    Year Ended      Through       April 1, 1998    Year Ended
                                                                   December 31,    December 31,      through        March 31,
                                                                       1999           1998         May 18, 1998       1998
                                                                   -------------  -------------   --------------  --------------
<S>                                                               <C>              <C>              <C>             <C>
CASH FLOWS - OPERATING ACTIVITIES
   Net income (loss)...............................................      138             77              (21)           (38)
   Adjustments to reconcile net income (loss) to cash provided by
    operating activities:
    Depreciation and amortization..................................      260            144               26            185
    Amortization of discount on long-term debt.....................        -             (5)               -              -
    Deferred income taxes..........................................       89             24               (7)           (24)
    Net gain on sale of businesses.................................        -            (13)               -             (5)
    Minority interest..............................................       18             11                -              -
    Undistributed equity in earnings of TEG........................        -             (2)               -              -
   Changes in operating assets and liabilities:
    Accounts receivable............................................      113           (138)              65             78
    Inventories....................................................       16            (26)              10            (25)
    Prepayments and other assets...................................      (62)            (7)              (4)             8
    Accounts payable
       Affiliates..................................................       42              7                -              -
       Other.......................................................      (75)           198                6            (82)
    Interest accrued...............................................        8             40               27              4
    Taxes accrued..................................................       (2)           (95)               2            101
    Other liabilities..............................................     (128)          (211)             (30)           139
    Due to affiliates..............................................        -             33                -              -
                                                                   -------------  -------------   --------------  --------------
          Cash provided by operating activities....................      417             37               74            341
                                                                   -------------  -------------   --------------  --------------
CASH FLOWS - INVESTING ACTIVITIES
  Acquisition of TEG, net of cash acquired of (Pounds)2,011 million        -         (1,432)               -              -
  Capital expenditures.............................................     (385)          (207)             (51)          (254)
  Proceeds from sale of businesses.................................        4             60                -             30
  Other investments................................................     (305)          (188)             (27)           (10)
                                                                   -------------  ------------   --------------  ---------------
          Cash used in investing activities........................     (686)        (1,767)             (78)          (234)
                                                                   -------------  ------------   --------------  ---------------
</TABLE>

See Notes to Consolidated Financial Statements.

                                     A - 24
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS (continued)
((Pounds) million)

<TABLE>
<CAPTION>
                                                                        Successor                       Predecessor
                                                              -------------------------------  --------------------------------
                                                                                 Period From
                                                                                  Formation      Period from
                                                                Year Ended         Through      April 1, 1998    Year Ended
                                                             December 31, 1999   December 31,      through        March 31,
                                                                   1999             1998         May 18, 1998       1998
                                                              ---------------  --------------  ---------------  ---------------
<S>                                                          <C>               <C>             <C>             <C>
CASH FLOWS - FINANCING ACTIVITIES
  Net borrowings under the:
     Sterling Credit Facility - Term Facility................          750                -              -                -
     Sterling Credit Facility - Tranche B....................          565                -              -                -
     Senior Notes............................................          921                -              -                -
     Acquisition facility....................................            -            1,821              -                -
     Interim facility........................................            -              243              -              240
     Other long-term debt....................................          187               66              -                -
    Issuance of common stock to parent.......................            -            1,467              -                -
  Retirements of :
     Sterling Credit Facility - Tranche B....................         (316)               -              -                -
     Acquisition facility....................................         (750)          (1,071)             -                -
     Interim facility........................................            -             (243)             -                -
     Loan notes..............................................          (48)              (9)             -                -
     Other long-term debt....................................         (415)            (174)             -             (215)
  Receivable securitization..................................         (123)               -              -              300
  Change in notes payable - banks............................           21              168             16               (4)
  Change in minority interest................................            -              166              -                -
  Retirements of advances from TXU Corp......................         (682)            (200)             -                -
  Debt discount and financing expenses.......................          (22)             (36)             -                -
  Dividends paid.............................................            -               (1)             -             (200)
                                                              ---------------  --------------  ---------------  ---------------
          Cash provided by financing activities..............           88            2,197             16              121
                                                              ---------------  --------------  ---------------  ---------------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS........           (1)               -              -                -
                                                              ---------------  --------------  ---------------  ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS......................         (182)             467             12              228
CASH AND CASH EQUIVALENTS - BEGINNING BALANCE................          467                -            714              486
                                                              ---------------  --------------  ---------------  ---------------
CASH AND CASH EQUIVALENTS - ENDING BALANCE...................          285              467            726              714
                                                              ===============  ==============  ===============  ===============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
   Cash paid for interest....................................          253              223              5              198
   Cash paid for income taxes................................           19              137              -               90
NON-CASH TRANSACTIONS
  Investment received in consideration for sale..............            -               22              -                -
  Consolidation of debt and related investment on
   cross-border leases.......................................            -              170              -              139

  Issuance of loan notes upon acquisition of TEG.............            -               85              -                -
  Advances from TXU Corp. upon acquisition of TEG............            -              882              -                -
</TABLE>

See Notes to Consolidated Financial Statements.

                                     A - 25
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
((Pounds) million)

<TABLE>
<CAPTION>
                                                                                                     December 31,
                                                                                        ----------------------------------------
                                                                                              1999                    1998
                                                                                        -----------------       ----------------
<S>                                                                                 <C>                     <C>
ASSETS

PROPERTY, PLANT AND EQUIPMENT, NET.........................................                   2,718                    2,676
                                                                                        -----------------       ----------------
INVESTMENTS
  Goodwill (net of accumulated amortization: 1999 - (Pounds)138 million;
   1998 - (Pounds)52 million)..............................................                   3,422                    3,209

  Restricted cash..........................................................                     740                      717
  Other....................................................................                     520                      233
                                                                                        -----------------        ---------------
     Total investments.....................................................                   4,682                    4,159
                                                                                        -----------------        ---------------

CURRENT ASSETS
  Cash and cash equivalents................................................                     285                      467
  Accounts receivable (net of allowance for uncollectible accounts:  1999
   - (Pounds)21 million; 1998 - (Pounds)22 million)........................                     469                      585

  Inventories:
   Materials and supplies..................................................                      32                       25
   Fuel stock..............................................................                      90                      116
  Prepayments..............................................................                      58                       40
  Other current assets.....................................................                      57                       70
                                                                                        -----------------        ---------------
     Total current assets..................................................                     991                    1,303
                                                                                        -----------------        ---------------

OTHER ASSETS
  Prepayments for pensions.................................................                     250                      257
  Other deferred debits....................................................                     166                      134
                                                                                        -----------------        ---------------
     Total other assets....................................................                     416                      391
                                                                                        -----------------        ---------------
       Total...............................................................                   8,807                    8,529
                                                                                        =================        ===============
</TABLE>

See Notes to Consolidated Financial Statements.

                                     A - 26
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
((Pounds) million, except for number of shares and par value)

<TABLE>
<CAPTION>
                                                                                                      December 31,
                                                                                        ----------------------------------------
                                                                                              1999                   1998
                                                                                        -----------------       ----------------
CAPITALIZATION AND LIABILITIES

CAPITALIZATION
<S>                                                                                   <C>                     <C>
  Common stock (3,000,000,000 shares at US$1 par and 100 deferred shares
   at (Pounds)1 par authorized) 2,455,705,299 shares and 100 deferred
   shares issued and outstanding...........................................                    1,467                    1,467


  Retained earnings........................................................                      213                       76
  Accumulated other comprehensive loss:
      Unrealized loss on marketable securities.............................                       (8)                      (8)
      Currency translation adjustments.....................................                        1                        -
                                                                                        -----------------       ----------------
    Total common stock equity..............................................                    1,673                    1,535
                                                                                        -----------------       ----------------
  Minority interest........................................................                      243                      190
                                                                                        -----------------       ----------------
  Note payable to TXU Corp.................................................                        -                      682
  Long-term debt, less amounts due currently...............................                    4,531                    3,629
                                                                                        -----------------       ----------------
    Total long-term debt...................................................                    4,531                    4,311
                                                                                        -----------------       ----------------
    Total capitalization...................................................                    6,447                    6,036
                                                                                        -----------------       ----------------
CURRENT LIABILITIES
  Notes payable - banks....................................................                      251                      238
  Long-term debt due currently.............................................                      380                      382
  Short-term loans on accounts receivable..................................                      177                      300
  Accounts payable:
   Affiliates..............................................................                       49                        7
   Other...................................................................                      458                      532
  Taxes accrued............................................................                      194                      162
  Interest accrued.........................................................                       61                       53
  Other current liabilities................................................                      156                       17
                                                                                        -----------------       ----------------
    Total current liabilities..............................................                    1,726                    1,691
                                                                                        -----------------       ----------------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
  Deferred income taxes....................................................                      409                      321
  Provision for unfavorable contracts......................................                       89                      250
  Due to affiliates........................................................                        -                       33
  Other deferred credits and noncurrent liabilities........................                      136                      198
                                                                                        -----------------       ----------------
    Total deferred credits and other noncurrent liabilities................                      634                      802
                                                                                        -----------------       ----------------
COMMITMENTS AND CONTINGENCIES (Notes 16 and 17)............................                        -                        -
                                                                                        -----------------       ----------------
     Total.................................................................                    8,807                    8,529
                                                                                        ==================      ================
</TABLE>

See Notes to Consolidated Financial Statements.

                                     A - 27
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY
((Pounds) million)

<TABLE>
<CAPTION>
Year Ended March 31, 1998 (Predecessor)                                                                     Accumulated Other
                                                                  Contributed Capital  Retained Deficit    Comprehensive Loss
                                                                    ----------------  -----------------    ------------------
<S>                                                              <C>                  <C>                 <C>
Balance at April 1, 1997.......................................           2,586             (556)                  (5)
Net loss.......................................................               -              (38)                   -
Cash dividends.................................................               -             (200)                   -
Tax relief received from Parent................................              17                -                    -
Unrealized loss on securities classified as available for sale.               -                -                   (2)
                                                                    ----------------  -----------------    ------------------
Balance at March 31, 1998......................................           2,603             (794)                  (7)
                                                                    ----------------  -----------------    ------------------
Period from April 1, 1998 through May 18, 1998 (Predecessor)
Net loss.......................................................               -              (21)                   -
Unrealized loss on securities classified as available for sale.               -                -                   (3)
                                                                    ----------------  -----------------    ------------------
Balance at May 18, 1998........................................           2,603             (815)                 (10)
                                                                    ================  =================    ==================
                                                                                                           Accumulated Other
                                                                                                          Comprehensive Income
                                                                      Common Stock    Retained Earnings         (Loss)
Period from Formation through December 31, 1998 and Year Ended      ----------------  -----------------    ------------------
 December 31, 1999 (TXU Europe Limited)
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
 (net of tax)..................................................               -                -                   (8)
Currency translation adjustments...............................               -                -                    -
                                                                    ----------------  -----------------    ------------------
Balance at December 31, 1998...................................           1,467               76                   (8)
                                                                    ----------------  -----------------    ------------------
Net income.....................................................               -              138                    -
Other..........................................................               -               (1)                   -
Unrealized loss on securities classified as available for sale
 (net of tax)..................................................               -                -                    -

Currency translation adjustments...............................               -                -                    1
                                                                    ----------------  -----------------    ------------------
Balance at December 31, 1999...................................           1,467              213                   (7)
                                                                    ================  =================    ==================
</TABLE>

See Notes to Consolidated Financial Statements.

                                     A - 28
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1.  Description of Business, Acquisitions and Dispositions

        The business and operations of TXU Europe Limited, formerly known as TXU
     Eastern Holdings Limited, and subsidiaries are comprised of two main
     businesses, energy and networks, which are divided into three principal
     operating segments, as follows:

     ENERGY -

     (i)   The Energy Retail business which supplies electricity and gas to
           national domestic, industrial and commercial customers in the United
           Kingdom (UK);

     (ii)  The Energy Management and Generation business which manages an
           integrated portfolio of generation assets, physical gas assets and
           contracts; and

     NETWORKS -

     (iii) The Networks business which owns, manages and operates the
           electricity distribution system.

           These businesses are carried out primarily in the UK with interests
     increasingly being developed throughout the rest of Europe.

     Formation

           TXU Europe 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 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 known as Eastern Group plc (TXU Europe
     Group), after all conditions to its offer for all of the ordinary shares of
     TEG were satisfied or waived.  Substantially all of TEG's continuing
     operations are conducted through TXU Europe Group plc, one of the largest
     integrated electricity and gas groups in the United Kingdom.  Also on May
     19, 1998, TEG sold its United States (US) and Australian coal businesses
     and US energy marketing operations (Peabody Sale).  The "TEG Businesses
     Acquired" refers to TEG, exclusive of the operations sold in the Peabody
     Sale.

           TXU Europe Group is considered the predecessor company to TXU Europe
     Limited.  Financial statements for periods prior to the May 19, 1998
     acquisition date are labeled "Predecessor".

           The "period from formation through December 31, 1998" referred to in
     these financial statements represents February 5, 1998 through December 31,
     1998, inclusive.  From March 1998 to May 18, 1998 TXU Europe Limited,
     through TXU Acquisitions, had acquired an equity interest in TEG of
     approximately 22%, which resulted in the recognition of equity income of
     (Pounds)2 million for that period, which is reflected in "Other Income -
     Net".

     Name Changes

           On November 9, 1999, name changes were announced for certain
     subsidiaries of TXU Europe Limited to reflect the increasing importance of
     European investments.  Eastern Group plc was renamed TXU Europe Group plc
     and its subsidiary, Eastern Generation Limited, was renamed TXU Europe
     Power Limited.  TXU Europe Group's subsidiary, Eastern Power & Energy
     Trading Limited, was renamed TXU Europe Energy Trading Limited  (TXU Europe
     Energy Trading) in January 2000. TXU Europe Group's retail and networks
     businesses will continue operating under the Eastern brand name.

                                     A - 29
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Purchase Accounting

        The acquisition of TEG was accounted for as a purchase in accordance
     with US generally accepted accounting principles.  Accordingly, the results
     of operations of the businesses acquired have been consolidated into the
     results of operations of TXU Europe Limited since the acquisition of TEG on
     May 19, 1998.  The total purchase consideration for the TEG businesses
     acquired was approximately (Pounds)4.4 billion.  At the date of the
     acquisition, TEG had assets of (Pounds)6.0 billion, including cash of
     (Pounds)2.0 billion, and liabilities of (Pounds)4.5 billion, including debt
     of (Pounds)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
     (Pounds)3.5 billion, which is being amortized over 40 years. The process of
     determining the fair value of assets acquired, liabilities assumed and
     contingencies existing at the acquisition date of TEG was completed in 1999
     and resulted in an increase in goodwill of approximately (Pounds)263
     million over the preliminary allocation primarily due to refinement of
     estimates.

        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 Corp. 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 Corp. the shares of TXU Corp. common stock
     exchanged for TEG shares by issuing a term note to TXU Corp. for
     (Pounds)882 million, the value of the TXU Corp. common stock.

      Other Acquisitions

        On November 5, 1999, TXU Europe Limited formed 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 (Euro)300 million ((Pounds)190 million) for an
     81% ownership interest in the joint venture company, TXU Nordic Energy. TXU
     Nordic Energy acquired Class "C" Shares of PVO, which entitle TXU Nordic
     Energy to the output from approximately 584 megawatts (MW) of PVO's thermal
     generating capacity and most of a wholesale trading business owned by the
     industrial shareholders of PVO. TXU Nordic Energy's interest in the Class
     "C" shares is equal to approximately a 14.7% ownership of PVO. The
     acquisition of the interest in PVO resulted in goodwill of approximately
     (Pounds)36 million on the basis of preliminary estimates of fair values,
     which will be amortized over 40 years. 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.

        In December 1999, TXU Europe Limited completed a previously announced
     agreement to acquire an approximate 40% interest in Savon Voima Oy (SVO),
     Finland's seventh largest electricity distributor, for approximately
     (Pounds)40 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 January 7, 2000, TXU Europe Limited announced that its subsidiary,
     Eastern Natural Gas (Offshore) Limited, had raised its stake in the
     Johnston Gas Field in the North Sea to 64.2% and had 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 of natural gas with average daily production of 62 million cubic
     feet.

                                     A - 30
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

      Dispositions

        On December 22, 1998, TXU Europe Limited disposed of Eastern Group
     Telecoms, resulting in a gain of (Pounds)13 million.  In consideration for
     the business, TXU Europe Limited received cash of (Pounds)60 million and an
     investment in the preferred stock of the purchaser, NTL Inc., with a
     carrying value of (Pounds)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.

        In 1999, it was determined to sell the metering business of TXU Europe
     Group.  Completion of the sale is expected in 2000.  The modular building
     business operated by Rollalong Limited was sold in February 1999.


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 TXU Europe Limited and all majority-owned subsidiaries.
     Minority interest represents the minority shareholders' proportionate share
     in the equity or income of TXU Europe Limited'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. Certain prior year amounts have been
     reclassified to conform to the current year's presentation.

        Use of estimates - The preparation of TXU Europe Limited's consolidated
     financial statements requires management to make estimates and assumptions
     about future events that affect the reporting and disclosure of assets and
     liabilities at the balance sheet dates and the reported amounts of revenue
     and expense during the 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.

        Inventories - Inventories are stated at the lower of weighted average
     cost or net realizable value.

        Marketable securities - TXU Europe Limited 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 or loss in common
     stock equity.  Declines in fair value that are other than temporary are
     reflected in income.

        Capitalized interest - Interest is capitalized on major capital
     expenditures during the period of construction and is reflected as a
     reduction of interest expense in the statements of consolidated income.
     No interest was capitalized in 1999 and (Pounds)4 million was capitalized
     for the period from formation through December 31, 1998.  There was no
     interest capitalized  for the period from April 1, 1998 through May 18,
     1998 and for the year ended March 31, 1998.

        Property, plant and equipment - Property, plant and equipment are stated
     at cost less accumulated depreciation.  The cost of additions,
     improvements, and interest during the period of 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.

                                     A - 31
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

        Depreciation - Depreciation of property, plant and equipment, is
     determined on the straight-line method over estimated useful lives of the
     assets as follows:

<TABLE>

<S>                                                                 <C>
Electricity generating station assets                                 30 years
Electricity generating station assets under capital lease             Shorter of lease period or estimated remaining useful life

Electricity distribution system assets and customer contributions     40 years (3% per annum for first 20 years and 2% per
to the construction of electricity distribution system assets         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
</TABLE>

        In accordance with industry practice, the unamortized amount of customer
     contributions to the construction of electricity distribution system assets
     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 (UK) Government is entitled to claim a portion of any
     gain realized by TXU Europe Limited on certain property disposals made up
     to March 31, 2000.  Provisions for such claims are made when an actual
     disposal occurs.

        Depletion of gas reserves is charged on a unit-of-production basis,
     based on an assessment of proven reserves. Appraisal expenditures of gas
     fields are accounted for under the successful efforts method.  General
     seismic and other costs are expensed as incurred.  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.  As of December 31, 1999, the oil
     and gas producing activities of TXU Europe Limited represent less than 10%
     of consolidated revenues, operating profits and assets.

        TXU Europe Limited capitalizes computer software costs in accordance
     with Statement of Position 98-1, "Accounting for the Costs of Computer
     Software Developed or Obtained for Internal Use".  These costs are being
     amortized over a five-year period.

        Valuation of long-lived assets - TXU Europe Limited evaluates the
     carrying value of goodwill and long-lived assets to be held and used when
     events and circumstances warrant such a review.  The carrying value of
     goodwill and long-lived assets is considered impaired when the projected
     undiscounted cash flows are less than the carrying value.  In that event, a
     loss will be recognized based on the amount by which the carrying value
     exceeds the fair market value.  Fair market value is determined primarily
     by available market valuations or, if applicable, discounted cash flows.

        Goodwill - Goodwill represents the excess of the purchase price paid
     over the estimated fair value of the assets acquired and liabilities
     assumed for each company acquired and is being amortized over 40 years.

        Derivative financial instruments - TXU Europe Limited, through TXU
     Europe Energy Trading, manages its exposure to commodity price risk from
     existing contractual commitments and provides price risk management
     services to its customers through various financial instruments.  Such
     energy management comprises both non-trading and trading activities.
     Contracts for differences, electricity forward agreements and other
     contracts are utilized to hedge the impact of market fluctuations on
     existing assets or liabilities.  Gains and losses 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.

                                     A - 32
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

        Beginning in 1999, TXU Europe Limited, through its subsidiary, TXU
     Europe Energy Trading, began entering into energy contracts, including
     derivative financial instruments, for trading purposes.  Contracts for
     differences and other financial instruments utilized in connection with
     trading activities are accounted for using the mark-to-market method.
     Under this method, contracts for differences and financial instruments are
     adjusted to market value on the balance sheet, and the unrealized gains and
     losses are included in revenues in the income statement for that period.
     (See Note 14.)

        TXU Europe Limited enters into interest rate swaps to reduce exposure to
     interest rate fluctuations.  Amounts paid or received under interest rate
     swap agreements are accrued as interest rates change and are recognized
     over the life of the agreements as adjustments to interest expense.  Swaps,
     options and forward contracts are used to hedge foreign currency exposure.

        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 primarily relate to voluntary
     termination benefits and are recorded in Operation and Maintenance expense
     in the period in which the employee accepts the offer and the amount can be
     reasonably estimated.  TXU Europe Limited has established voluntary
     retirement programs to progressively reduce manpower levels.

        Foreign currencies - Assets and liabilities of foreign (non-UK)
     subsidiaries are translated at the exchange rate as of 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 other income - net.

        Income taxes - Income tax expense includes UK and other national income
     taxes.  TXU Europe Limited intends to reinvest the earnings of its non-UK
     subsidiaries into those businesses.  Accordingly, no provision has been
     made for taxes which would be payable if such earnings were distributed to
     TXU Europe Limited.

        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 payable.

        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.

        New accounting standards - Statement of Financial Accounting Standards
     (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
     Activities", as extended, is effective for TXU Europe Limited beginning
     January 1, 2001. SFAS 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. TXU Europe Limited is currently evaluating the
     impact the adoption of this standard will have on its consolidated
     statements of financial position and results of operations.

                                     A - 33
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

        The Emerging Issues Task Force (EITF) No. 98-10, "Accounting for Energy
     Trading and Risk Management Activities," was effective for the fiscal year
     ending December 31, 1999.  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.  The effect of EITF 98-10 has not been significant, since
     trading activity (which for TXU Europe Energy Trading commenced in 1999)
     has been limited.   (See Note 14  for more details concerning trading
     activities.)

3.  Property, Plant and Equipment

<TABLE>
    Property, plant and equipment consisted of:                                         December 31, 1999        December 31, 1998
                                                                                        -----------------        -----------------
                                                                                                  ((Pounds) million)
<S>                                                                                        <C>                      <C>
Electricity distribution system..............................................                   1,227                     1,143
Electricity generating stations:
     Owned...................................................................                     409                       349
     Under capital lease.....................................................                     775                       913
Upstream gas assets..........................................................                     145                        35
Other land and buildings.....................................................                     105                       100
Plant and equipment..........................................................                     319                       225
Accumulated depreciation.....................................................                    (262)                      (89)
                                                                                       ------------------        -----------------
Net property, plant and equipment............................................                   2,718                     2,676
                                                                                       ==================        =================
</TABLE>

        The net book value of electricity generating stations under capital
     lease was (Pounds)697 million and (Pounds)888 million at December 31, 1999
     and 1998, respectively.

        Capitalized software costs totaling (Pounds)24 million and (Pounds)14
     million as of December 31, 1999 and 1998, respectively, are included in
     plant and equipment.  Amortization expense relating to software costs of
     (Pounds)2 million has been recorded in the year ended December 31, 1999.
     No amortization expense was recorded in the periods prior  to December 31,
     1998.

4.   Restricted Cash

        At December 31, 1999 and 1998, (Pounds)408 million of deposits were 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 8).  Additionally, (Pounds)326 million and (Pounds)309
     million at December 31, 1999 and 1998, respectively, were used to cash-
     collateralize existing future lease obligations arising from cross-border
     leasing arrangements on several power stations (see Note 8).  TXU Europe
     Limited's investment in Eastern Norge Kobbelv AS (Kobbelv) (see Note 5),
     includes (Pounds)6 million of deposits which are classified as restricted
     cash at December 31, 1999.

5.   Investments

        Marketable securities investments are classified as available for sale,
     and are considered non-current based upon management's intentions in
     holding the investments.  Marketable securities investments consisted of
     the following:

<TABLE>
<CAPTION>
                                     Cost                      Fair market value          Unrealized gain/(loss)
                          ----------------------------    --------------------------   -----------------------------
                          December 31,    December 31,    December 31,  December 31,   December 31,     December 31,
                              1999           1998            1999           1998           1999            1998
                          ------------    ------------    ------------  ------------   ------------    -------------
                                                                 ((Pounds) million)
<S>                       <C>           <C>              <C>          <C>            <C>             <C>
SME                            31              28              20            13            (11)             (15)
HC                             49              56              49            63              -                7
                          ------------    ------------    ------------  ------------   ------------    -------------
                               80              84              69            76            (11)              (8)
                          ============    ============    ============  ============   ============    =============
</TABLE>

                                     A - 34
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

        At December 31, 1999 and 1998, TXU Europe Limited directly held an
     approximate 16% investment in Severomoravska Energetika (SME), which is
     listed in the Czech Republic, and a 5% investment in Hidroelectrica del
     Cantabrico (HC), which is listed in Spain. TXU Europe Limited does not have
     the ability to exercise significant influence over either SME's or HC's
     operating and financial policies; accordingly, these investments have been
     accounted for as marketable securities and marked to market.

        Non-marketable investments at December 31, 1999 and 1998 consist
     principally of investments in the offtake generated from water rights in
     hydro-electric power plants in Norway over a 55 year period, Eastern Norge
     Svartisen AS (Svartisen) and Kobbelv, amounting to approximately
     (Pounds)145 million and (Pounds)124 million, respectively.  The carrying
     value at December 31, 1999 and 1998 of an investment in the preferred stock
     of NTL Incorporated (NTL Inc.), the purchaser of TXU Europe Limited's
     telecoms business, was (Pounds)28 million and (Pounds)22 million,
     respectively.

        The investment in PVO held by TXU Nordic Energy is the equivalent of a
     14.7% ownership in PVO and is carried at cost, which was approximately
     (Pounds)190 million at December 31, 1999.  Investments accounted for by the
     equity method, including the approximately 40% interest in SVO that was
     acquired in November 1999, totaled (Pounds)63 million at December 31, 1999
     and (Pounds)4 million at December 31, 1998.  The remainder of SVO 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.  (See Note 1.)

        The remaining other investments were (Pounds)25 million and (Pounds)7
     million at December 31, 1999 and 1998, respectively.

6.   Related Party Transactions

        As part of the acquisition of TEG, TXU Europe Limited acquired shares of
     TXU common stock used for the share alternative in exchange for a two year
     term note from TXU Acquisitions in the amount of (Pounds)882 million with
     an interest rate of 6.7% per annum.  In December 1998, (Pounds)200 million
     of this note was repaid, and in May 1999, the remaining (Pounds)682 million
     principal amount, was repaid (see Note 8).  The interest on the note
     ((Pounds)47 million at December 31, 1999) is due at maturity in May 2000,
     and is reflected in the "Accounts payable - Affiliates" balance.  The  "Due
     to affiliates" balance at December 31, 1998 reflects (Pounds)33 million of
     accrued interest.

        At December 31, 1999 and 1998, the balance of (Pounds)2 million and
     (Pounds)7 million, respectively, in the "Accounts payable - Affiliates"
     account arises primarily from payments of amounts by TXU Corp. on behalf of
     TXU Europe Limited, primarily for taxes.

        The 10% holding in TXU Finance of (Pounds)195 million and (Pounds)177
     million at December 31, 1999 and 1998, respectively, which is held by a
     wholly-owned subsidiary of TXU Corp., has been included in "Minority
     Interest".

7.   Short-term Debt

        Short- term Debt - Weighted average interest rates at December 31, 1999
     and 1998 on notes payable to banks, including accounts receivable
     securitization balances, is 5.15% and 8.98%, respectively.

        Accounts receivable securitization -  TXU Europe Group has facilities
     with Citibank N.A. to provide financing through trade accounts receivable
     whereby Eastern Electricity may sell up to (Pounds)300 million of its
     electricity receivables and, beginning June 11, 1999, TXU Finance may
     borrow up to an aggregate of (Pounds)275 million, which is treated as being
     collateralized by future receivables of Eastern Electricity, through a
     short-term note issue arrangement.  The program has an overall program
     limit of (Pounds)550 million.

                                     A - 35
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

        Through March 31, 1999, the electricity receivable financings were in
     the form of short-term loans collateralized by Eastern Electricity's trade
     accounts receivable.  At December 31, 1998, Eastern Electricity had
     borrowed (Pounds)300 million under these facilities.  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 December 31, 1999, accounts receivable of
     Eastern Electricity of (Pounds)224 million had been sold under the new
     program.  An additional (Pounds)76 million of receivables remain as
     collateral for short-term loans.  In addition, at December 31, 1999, TXU
     Finance had borrowed a further (Pounds)101 million collateralized by future
     receivables.  These borrowings by Eastern Electricity and TXU Finance are
     reflected in "Notes Payable - Banks" on the balance sheet and bear interest
     at an annual rate based on commercial paper rates plus 0.225%, which was
     5.63% and 6.53% at December 31, 1999 and 1998, respectively.

        Promissory note program - TXU Europe Limited has a promissory note
     program with two facilities issued within the Czech Republic which has been
     utilized to fund its investment in SME and Teplarny Brno a.s.  At December
     31, 1999 and 1998, (Pounds)60 million and (Pounds)58 million, respectively,
     was outstanding under the promissory note program. The average annual
     interest rate on the notes at December 31, 1999 and 1998 was 6.96% and
     13.89%, respectively, based on PRIBOR plus 0.5% to 0.7%.

        Letters of credit - At December 31, 1998, TXU Europe Limited had
     outstanding letters of credit totaling (Pounds)121 million, (Pounds)118
     million of which was outstanding under a revolving credit facility.  On May
     18, 1999, $198 million in letters of credit issued under the Sterling
     Credit Agreement revolving credit facility, as described below, matured and
     were not renewed.  At December 31, 1999, TXU Europe Limited had outstanding
     letters of credit of (Pounds)3 million.

                                     A - 36
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

8.   Long-term Debt

     Long-term debt consisted of the following:

<TABLE>
<CAPTION>
                                                                                   December 31, 1999         December 31, 1998
                                                                                   ((Pounds) million)       ((Pounds) million)
                                                                                  ---------------------     --------------------
<S>                                                                               <C>                       <C>
Notes and Bonds:
  $200 million 7.425% guaranteed notes due 2017...............................             124                      121
  $300 million 7.55% guaranteed notes due 2027................................             185                      181
  (Pounds)350 million 8.375% bonds due 2004...................................             363                      363
  (Pounds)200 million 8.5% bonds due 2025.....................................             237                      237
  (Pounds)200 million 8.75% bonds due 2012....................................             229                      229
  $350 million 6.15% Exchange Senior Notes due 2002...........................             215                        -
  $650 million 6.45% Exchange Senior Notes due 2005...........................             399                        -
  $500 million 6.75% Exchange Senior Notes due 2009...........................             307                        -
  7.25% Norwegian Kroner bonds due 2029.......................................              77                        -

Other:
  Sterling Credit Agreement - due 2003........................................
      Term facility - 6.55%...................................................             750                      750
      Tranche B revolving credit                                                             -
           Spanish pesatas - 4.33%............................................              47
           Norwegian kroner - 7.13%...........................................              54                        -
           Pounds sterling - 6.61% and 8.23%..................................              75                       51
           Euro's - 4.04%.....................................................              61                        -
  Rent factoring loans (weighted average interest rate of 7.35%, due
   1999-2001).................................................................             428                      649

  Other unsecured loans, due in installments (weighted average rates range                                          139
   from 4.95% - 10.8%)........................................................             114

  Capital leases..............................................................             924                      982
  Other.......................................................................               6                        -
  Note payable to TXU Corp., 6.7% term note due 2000                                         -                      682
  Cross-border leases (US$ denominated).......................................             316                      309
                                                                                  ---------------------     --------------------
Total long-term debt..........................................................           4,911                    4,693
Less current portion..........................................................             380                      382
                                                                                  ---------------------     --------------------
Long-term debt, less amounts due currently....................................           4,531                    4,311
                                                                                  =====================     ====================
</TABLE>


        In May 1999, a financing subsidiary of TXU Europe Limited issued US$1.5
     billion ((Pounds)921 million) of Senior Notes, guaranteed by TXU Europe
     Limited, in three series: US$350 million ((Pounds)215 million) at 6.15% due
     May 15, 2002; US$650 million ((Pounds)399 million) at 6.45% due May 15,
     2005; and US$500 million ((Pounds)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.  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.  In December 1999, the
     Senior Notes were exchanged in a transaction registered with the US
     Securities and Exchange Commission for similar Senior Notes that could be
     traded publicly in US markets.

     Lines of credit

        At December 31, 1999, TXU Europe Limited and TXU Finance have a joint
     sterling-denominated line of credit with a group of banking institutions
     under a credit facility agreement (Sterling Credit Agreement). The original
     Sterling Credit Agreement entered into in 1998, had an acquisition facility
     and a revolving credit facility.  Borrowings under the acquisition facility
     provided financing to acquire TEG and pay

                                     A - 37
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     acquisition related expenses. The revolving credit facility provided for
     short-term borrowings. 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 (Pounds)800 million were entered into. As part of this facility,
     (Pounds)75 million has been allocated to financing the repayment of
     outstanding loan notes issued upon acquisition. At December 31, 1998,
     borrowings totaled (Pounds)750 million under the acquisition facility and
     (Pounds)231 million under the revolving credit facilities. The Sterling
     Credit Agreement was amended in March 1999. The Sterling Credit Agreement,
     as amended, provides for borrowings of up to (Pounds)1.275 billion and has
     two facilities: a (Pounds)750 million term facility which will terminate on
     March 2, 2003 and a (Pounds)525 million revolving credit facility which has
     a (Pounds)200 million 364-day tranche (Tranche A) and a (Pounds)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. At December 31, 1999,
     TXU Europe Limited was 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 in various currencies with interest
     rates based on the prevailing rates in effect in the countries in which the
     borrowings originate.

        In October 1999, Eastern Norge Svartisen AS, a subsidiary of TXU Europe
     Limited, issued (Pounds)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.   In November 1999, TXU Europe borrowed approximately (Euro)300
     million  ((Pounds)190 million) 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.

        In December 1999, TXU Europe Group borrowed approximately (Euro)306
     million ((Pounds)190 million) under a short-term facility with a commercial
     bank and used the net proceeds to repay the Euro borrowings under the
     Tranche B facility. The facility expires on June 3, 2000. TXU Europe
     Limited is currently negotiating with potential lenders to refinance the
     (Euro)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 (Pounds)40 million) and to
     fund the exit termination fee from a disadvantageous contract ((Pounds)76
     million). The amount of the exit termination fee was within amounts TXU
     Europe Limited had previously reserved against.

        Eastern Electricity has a separate revolving credit facility of up to
     (Pounds)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 December 31, 1999 and 1998
     under this facility.

        On December 15, 1999, TXU Europe Limited commenced a (Euro)2.0 billion
     Euro Medium Term Note (EMTN) program. Under the EMTN program, a subsidiary
     of TXU Europe Limited may from time to time issue notes on a continuing
     basis to one or more dealers in a principal outstanding amount not
     exceeding (Euro)2.0 billion. 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 the subsidiary of TXU
     Europe Limited and the relevant dealer. The payment of all amounts payable
     in respect of the notes will be guaranteed by TXU Europe Limited.

                                     A - 38
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

        Long-term debt, as of December 31, 1999 excluding capital lease
        balances, is repayable as follows:

                                                      December 31,
                                                   -------------------
                                                   ((Pounds) million)

        2000.......................................         238
        2001.......................................         219
        2002.......................................         237
        2003.......................................         989
        2004.......................................         366
        Thereafter.................................       1,938
                                                   -------------------
        Long-term debt, excluding capital leases...       3,987
        Capital leases.............................         924
                                                   -------------------
        Total long-term debt.......................       4,911
                                                   ===================

        Capital lease obligations - As at December 31, 1999 future minimum lease
     payments for assets under capital leases, together with the present value
     of minimum lease payments, were:


                                                      December 31
                                                   -------------------
                                                   ((Pounds) million)

        2000.......................................          55
        2001.......................................         466
        2002.......................................          22
        2003.......................................          21
        2004.......................................          20
        Thereafter.................................         192
                                                   -------------------
        Total future minimum lease payments........         776
        Less amounts representing interest.........        (143)
                                                   -------------------
        Present value of future minimum lease
          payments.................................         633
                                                   -------------------
        Current....................................          47
        Non-current................................         586
                                                   -------------------
        Total......................................         633
                                                   ===================

        Substantially all of the capital lease obligations relate to coal-fired
     power stations.  Additional payments of approximately (Pounds)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 TXU
     Europe Group (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, 1999 and 1998, the balance of the liability
     of (Pounds)291million and (Pounds)412 million, respectively, is included
     with capital lease obligations, of which (Pounds)95 million and (Pounds)114
     million are classified as current, respectively.

        The lease agreement for three of the coal-fired power stations contains
     a purchase option of (Pounds)1 in 2046.  The lease is for a total of
     ninety-nine years, commencing in 1996.

        In the first quarter of 1999, TXU Europe Limited entered into a capital
     lease relating to the King's Lynn Power Station with a present value
     obligation amount of (Pounds)68 million over the next 25 years.

                                     A - 39
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

        Cross-border leases - Certain subsidiaries of TXU Europe Group have
     entered into cross-border lease transactions in respect of two power
     stations that are wholly owned by TXU Europe Limited.  TXU Europe Limited
     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 collateralized by restricted cash on deposit (see Note 4).

        TXU Europe Limited's debt agreements contain certain covenants,
     including leverage ratios, levels of net assets and interest coverage.  At
     December 31, 1999 and 1998, TXU Europe Limited was in compliance with all
     such covenants.

        Rent factoring loans - Certain subsidiaries of TXU Europe Limited
     entered into an agreement with commercial banks whereby future intra-group
     rental payments were assigned to these banks in return for a capital sum.
     At December 31, 1999 and 1998, (Pounds)408 million of the capital sums were
     on deposit to cash collateralize existing future lease obligations to
     another group of banks related to the funding of the leases of three power
     stations leased from National Power (see Note 4).

9.   Common Stock Equity

        TXU Europe Limited has two classes of shares outstanding, ordinary and
     deferred.  Both classes are held by wholly owned subsidiaries of TXU Corp..
     Ordinary shares have voting rights.

        In May 1998, TXU Europe Limited'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 (Pounds)1 per share only after holders of ordinary
     shares are paid (Pounds)100 million per share.  In addition, all deferred
     shares may be repurchased for the sum of (Pounds)1.

        Certain debt instruments of TXU Europe Limited contain provisions that,
     under certain conditions, restrict distributions on or acquisitions of
     common stock.  At December 31, 1999 and 1998, retained earnings were not
     restricted as a result of such provisions.

10.  Provision for Unfavorable Contracts

        As part of the purchase accounting for TEG, TXU Europe Limited made
     provisions for certain unfavorable long-term gas and electricity purchase
     contracts.  As of December 31, 1999, the electricity provision related to a
     contract that expires in 2009, while the gas provision relates to two
     contracts that expire in 2010.

        During the year ended December 31, 1999 and the period from formation
     through December 31, 1998, (Pounds)46 million and (Pounds)74 million,
     respectively, of the provision was released to offset expenses recognized
     on purchases under unfavorable electricity and gas contacts.  Of the
     amounts recognized in income in the December 1998 period, (Pounds)41
     million, which is net of a release payment of (Pounds)24 million, was
     related to one gas contract which TXU Europe Limited renegotiated in
     November 1998. In December 1999, TXU Europe Limited paid (Pounds)76 million
     in termination fees to exit a disadvantageous contract.  There was no
     income effect as this amount matched the liability previously established
     against this contract.

11.  Pensions

        The majority of TXU Europe Group 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 TXU Europe Group'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 UK and European
     equities, UK property holdings and cash.  The pension cost relating to the
     TXU Europe Group portion of the ESPS is assessed in accordance with the


                                     A - 40
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     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.

<TABLE>
<CAPTION>
                                                                                                         Period from
                                                                                  Year Ended          formation through
                                                                              December 31, 1999       December 31, 1998
                                                                              ------------------   ------------------------
Change in benefit obligation:                                                 ((Pounds) million)      ((Pounds) million)
-----------------------------
<S>                                                                           <C>                 <C>
Benefit obligation at beginning of period...................................          985                     882
Service cost................................................................           15                       7
Interest cost...............................................................           53                      33
Participants' contributions.................................................           10                       5
Plan amendments.............................................................           19                       7
Actuarial (gain) loss.......................................................          (56)                     82
Termination liabilities.....................................................           10                       -
Benefits paid...............................................................          (54)                    (31)
Net transfer of obligations to other plans..................................           (3)                      -
                                                                              ------------------   ------------------------
Ending benefit obligation...................................................          979                     985
                                                                              ==================   ========================
Change in plan assets:
----------------------
Fair value of plan assets at beginning of period............................        1,082                   1,130
Actual return on plan assets................................................          107                     (25)
Employer contribution.......................................................           25                       3
Participants contributions..................................................           10                       5
Benefits paid...............................................................          (54)                    (31)
Net transfer of assets to other plans.......................................           (3)                      -
                                                                              ------------------   ------------------------
Ending fair value of plan assets............................................        1,167                   1,082
                                                                              ==================   ========================
Funded status:
--------------
Funded status...............................................................          188                      97
Unrecognized net actuarial loss.............................................           43                     153
Unrecognized prior service cost.............................................           19                       7
                                                                              ------------------   ------------------------
Prepaid  benefit cost.......................................................          250                     257
                                                                              ==================   ========================
Weighted average assumptions:
-----------------------------
Discount rate...............................................................          6.0%                    5.5%
Expected return on plan assets..............................................          6.5%                    6.0%
Rate of compensation increase...............................................          3.5%                    3.5%
</TABLE>

                                     A - 41
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

<TABLE>
<CAPTION>
                                                                                  Period from
                                                                                   formation            Period from
                                                                Year Ended          through            April 1, 1998    Year Ended
                                                               December 31,       December 31,            through       March 31,
                                                                   1999              1998               May 18, 1998       1998
                                                              --------------  --------------------   -----------------  ------------
                                                                                          ((Pounds) million)
Components of net periodic pension cost (benefit):
--------------------------------------------------
<S>                                                        <C>                 <C>                   <C>               <C>
Service cost.............................................             15                   7                   1              9
Interest cost............................................             53                  33                   7             53
Expected return on plan assets...........................            (63)                (45)                (10)           (69)
Net amortization.........................................              4                   -                   -              1
                                                              --------------  --------------------   -----------------  ------------
    Net periodic pension cost (benefit)..................              9                  (5)                 (2)            (6)
                                                              ==============  ====================   =================  ============
</TABLE>

        In addition, TXU Europe Limited has a defined contribution  pension
     plan.  Contributions made by TXU Europe Limited to the plan were
     (Pounds)827 thousand in 1999 and (Pounds)490 thousand in the period from
     formation to December 31, 1998.

12.  Employee Share Plans

        Since May 18, 1998, all options or awards then outstanding under the
     previous employee share plans of TXU Europe Group have, as a consequence of
     the acquisition by TXU Corp., either been exercised, waived or surrendered
     for a cash cancellation payment by TXU Corp. or lapsed.

        During 1998, TXU Europe Limited instituted the TXU Europe Group Long
     Term Incentive Plan (LTIP) which is administered by a remuneration
     committee.  Awards of "phantom stock" in TXU Corp. under the LTIP may be
     made available to the management group, senior managers and salaried
     directors of TXU Europe Limited.  There is no exercise price associated
     with the awards. 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 Corp. at or around the date of
     grant. If participants leave TXU Europe Limited before the awards vest,
     their awards lapse.

        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 during which the participants must remain with TXU Europe
     Limited for their awards to become vested.  For the awards granted in 1998,
     the deferral period for directors is one year.  For the senior managers,
     one-half of each award vested 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, TXU Europe Limited shall pay to the
     participant, in cash, an amount equal to the higher of the stock price of
     TXU Corp. 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,
     and accumulated dividends.

        TXU Europe Limited granted 145,878 awards on September 1, 1998, and
     granted 190,820 awards in 1999. There were no grants between February 5,
     1998 and May 18, 1998, inclusive.  For grants during 1999 the stock price
     of TXU Corp. on the date of grant was (Pounds)28.06.  For grants during the
     period May 19, 1998 through December 31, 1998 the stock price of TXU Corp.
     at May 19, 1998 of (Pounds)23.81 was utilized.   None of the 144,093 awards
     outstanding at December 31, 1998 were exercisable due to the vesting
     criteria.  The weighted average remaining contractual life of awards
     outstanding at December 31, 1999 was 18 months and at December 31, 1998 was
     17 months.  At December 31, 1999 and 1998, the closing market price of TXU
     Corp. common stock was $35.56 ((Pounds)22.00) and  $46.69 ((Pounds)28.13),
     respectively, per share.

                                     A - 42
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

        TXU Europe Limited adopted the following additional employee share plans
     in 1999:

     (a)  The TXU Europe Group Sharesave Scheme which is available to the UK-
          based directors and employees of TXU Europe Group who devoted more
          than 25 hours a week to their duties.  Employees who participated in
          this scheme entered into a monthly savings contract, for either a
          three- or five-year period. At the end of that period, a participant
          may elect to apply the savings accumulated to the purchase of shares
          of TXU Corp. common stock.  The exercise price for the three-year
          Sharesave Scheme was based on a 15% discount of the TXU Corp. stock
          price of (Pounds)28.52 on or about July 16, 1999 (date of original
          grant) and the five year Sharesave Scheme exercise price was based on
          a 20% discount.  The plan became effective on October 1, 1999.

     (b)  The TXU Europe Group Loyalty Award Scheme, which is administered by a
          remuneration committee of the Board of Directors of TXU Europe
          Limited, provided for grants at the discretion of the committee for
          the issuance of additional shares of TXU Corp. common stock upon the
          exercise of options to acquire TXU Corp. common stock from the
          Sharesave Scheme.

     The changes in share awards outstanding were as follows:

<TABLE>
<CAPTION>
                                                                                                                         Long-term
                                              Sharesave      Sharesave       Loyalty        Loyalty       Long-term      Incentive
                                               Scheme         Scheme          Award          Award        Incentive     Compensation
                                               3 Years        5 Years        3 Years        5 Years          Plan           Plan
                                              -----------    -----------    -----------    -----------    -----------   -----------
<S>                                         <C>            <C>            <C>            <C>            <C>            <C>
Balance - May 19, 1998                                  -              -              -              -              -             -
     Granted..............................              -              -              -              -        145,878             -
     Lapsed...............................              -              -              -              -         (1,785)            -
                                              -----------    -----------    -----------    -----------    -----------   -----------
Balance - December 31, 1998...............              -              -              -              -        144,093             -
                                              -----------    -----------    -----------    -----------    -----------   -----------
     Granted..............................        201,046      1,132,083         29,517        225,584        190,820        26,761
     Lapsed...............................              -              -              -              -        (27,178)            -
                                              -----------    -----------    -----------    -----------    -----------   -----------
Balance - December 31, 1999...............        201,046      1,132,083         29,517        225,584        307,735        26,761
                                              ===========    ===========    ===========    ===========    ===========   ===========
Exercisable - 2000........................              -              -              -              -        190,516             -
Exercisable - 2001........................              -              -              -              -        117,219             -
Weighted average exercise price...........  (Pounds)21.95  (Pounds)20.66              -              -  (Pounds)26.26(Pounds)26.675

Weighted average  fair value of  awards
 granted in:
       1999...............................   (Pounds)8.41  (Pounds)11.37  (Pounds)25.82  (Pounds)25.82   (Pounds)5.76 (Pounds)26.66

       1998...............................              -              -              -              -   (Pounds)4.28             -

</TABLE>

        In June 1999, awards of performance-related restricted stock of TXU
     Corp. were made to certain officers and directors of TXU Europe Limited
     under the Long-Term Incentive Compensation Plan of TXU Corp.  The awards
     represented 26,761 shares of TXU Corp. common stock with a valuation price
     of (Pounds)26.675 per share at the date of grant, which were issued subject
     to performance and vesting requirements over a three- to five-year period.

        Total compensation expense recognized under the various employee share
     plans for the year ended December 31, 1999 and the period from formation
     through December 31, 1998 were (Pounds)7.3 million and (Pounds)1 million,
     respectively.

        TXU Europe Limited applies Accounting Principles Board Opinion No. 25
     "Accounting for Stock Issued to Employees" and related Interpretations in
     accounting for its employee share plans. TXU Europe Limited  determined the
     potential impact of SFAS No. 123, "Accounting For Stock-Based Compensation"

                                     A - 43
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     with regard to the recognition of compensation expense.  Under SFAS 123,
     compensation expense is determined based upon the fair value at the grant
     date for awards.  Had compensation expense for TXU Europe Limited employee
     share plans been determined based upon the methodology prescribed under
     SFAS 123, TXU Europe Limited's income would not have been significantly
     different from actual results.


13.  Taxation

        The components of TXU Europe Limited's income tax expense are as
     follows:

<TABLE>
<CAPTION>

                                                                       Period from
                                                                        formation            Period from
                                                   Year Ended            through            April 1, 1998
                                                  December 31,         December 31,           through             Year Ended
                                                      1999                 1998             May 18, 1998          March 31, 1998
                                                 ----------------     ----------------     ----------------      ----------------
                                                                               ((Pounds) million)
Current:
<S>                                           <C>                  <C>                  <C>                   <C>
 UK.........................................                   21                   24                    2                   213
 US.........................................                    -                   18                    -                     -
 Other Countries............................                    1                    1                    -                     -
                                                 ----------------     ----------------     ----------------      ----------------
                                                               22                   43                    2                   213
Deferred:
 UK.........................................                   89                   24                   (7)                  (24)
                                                 ----------------     ----------------     ----------------      ----------------
   Total income tax expense.................                  111                   67                   (5)                  189
                                                 ================     ================     ================      ================
</TABLE>


        The components of TXU Europe Limited's deferred tax assets and
     liabilities are as follows:

<TABLE>
<CAPTION>
                                                                              December 31, 1999            December 31, 1998
                                                                           ------------------------   --------------------------
                                                                                           ((Pounds) million)
Deferred tax assets:
<S>                                                                    <C>                           <C>
 Leased assets and related items.....................................               313                           353
 Tax loss carryforwards..............................................                10                             9
 Provision for unfavorable contracts and other.......................               100                           129
                                                                           ------------------------   --------------------------
  Total deferred tax assets..........................................               423                           491

Valuation allowance for deferred tax assets..........................              (162)                         (138)
                                                                           ------------------------   --------------------------

  Net deferred tax assets............................................               261                           353
                                                                           ------------------------   --------------------------
Deferred tax liabilities:
 Excess of book value over taxation value of fixed assets............               280                           281
 Leased assets and related items.....................................               302                           334
 Other items.........................................................                88                            59
                                                                           ------------------------   --------------------------

  Total deferred tax liabilities.....................................               670                           674
                                                                           ------------------------   --------------------------

  Net deferred tax liabilities.......................................               409                           321
                                                                           ========================   ==========================
</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.  TXU Europe Limited 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.  TXU Europe Limited continually

                                     A - 44
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     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
     (Pounds)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 (Pounds)8 million in the period from May 19, 1998 to
     December 31, 1998, resulting in a balance of (Pounds)138 million at
     December 31, 1998.  For the year ended December 31, 1999, the valuation
     allowance was increased by (Pounds)24 million, resulting in a balance of
     (Pounds)162 million at December 31, 1999.

        Income before income taxes:

<TABLE>
<CAPTION>
                                                                                                           Period
                                                                                                            from
                                                                                        Period from        April 1,
                                                                                         Formation           1998          Year
                                                                       Year Ended         Through           through        Ended
                                                                      December 31,      December 31,        May 18,       March 31,
                                                                          1999             1998              1998           1998
                                                                      -------------   ----------------   -------------   -----------
                                                                                        ((Pounds) million)
Income before income taxes:
<S>                                                                <C>                <C>                <C>             <C>
 UK..............................................................           264                103            (27)           157
 US..............................................................             -                 51              -              -
 Other Countries.................................................             3                  1              1             (6)
                                                                      -------------   ----------------   -------------   -----------
Total income before income taxes and minority interest...........           267                155            (26)           151
                                                                      =============   ================   =============   ===========
</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      April 1,
                                                                                        formation        1998           Year
                                                                       Year Ended        through        through         Ended
                                                                       December 31,    December 31,      May 18,      March 31,
                                                                           1999            1998           1998           1998
                                                                       -------------   -------------   ------------   ------------
                                                                                        ((Pounds) million)
<S>                                                                  <C>              <C>               <C>         <C>
Tax at UK statutory rate (30% in 1999 and 31% for all other
 periods)..........................................................            81              48            (8)            47
Windfall tax.......................................................             -               -             -            112
Non-deductible goodwill and depreciation...........................            26              16             1             10
Effect of overseas tax rates.......................................             -               2             -              -
Effect of tax rate on UK dividends.................................             -              (4)            -             (2)
Tax rate change....................................................             -              (8)            -              -
Movement in valuation allowance charged to expense.................            10               8             2             18
Other..............................................................            (8)              -             -              1
Non-deductible expenses............................................             2               5             -              3
                                                                       -------------   -------------   ------------   ------------
Income tax expense.................................................           111              67            (5)           189
                                                                       =============   =============   ============   ============
</TABLE>

                                     A - 45
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

        At December 31, 1999 and December 31, 1998, TXU Europe Limited has net
     operating loss carryforwards of (Pounds)10 million and (Pounds)9 million,
     respectively, 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 SFAS 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 year ended December 31, 1999 was a benefit of
     (Pounds)3 million, for the period from formation through December 31, 1998
     was a benefit of (Pounds)2 million, for the year ended March 31, 1998 was a
     benefit of (Pounds) 1 million and for the period from April 1, 1998 through
     May 18, 1998 was a benefit of (Pounds)1 million.

14.  Derivatives and Financial 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
     primarily to reduce its exposure to fluctuations in electricity prices, gas
     prices, interest rates and foreign exchange rates for hedging purposes.
     Derivative financial instruments used by TXU Europe Limited include
     electricity contracts for differences, electricity forward agreements, gas
     swaps, interest rate swaps and forward rate agreements, and foreign
     exchange futures, swaps and forward purchase contracts.   Both the energy
     management and the treasury operations make use of these instruments, where
     such instruments are authorized for use.

        Electricity price risk management - TXU Europe Energy Trading engages in
     price risk management activities primarily for non-trading and, beginning
     in late 1999, for trading purposes.

        Non-trading Activities - Electricity forward contracts are primarily
     used by TXU Europe Limited to hedge its exposure to future fluctuations in
     electricity Pool prices.  Almost all electricity generated in England and
     Wales must be sold to the wholesale electricity trading market in the UK
     (Pool), and electricity suppliers must likewise generally buy electricity
     from the Pool for resale to their customers.

        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 2009.  The impact of
     changes in the market value of these contracts, which serve as hedges, is
     deferred until the related transaction is completed.

        TXU Europe Energy Trading has also entered into a number of agreements
     with third parties, under which it makes a variety of payments related to a
     notional capacity of plant, fuel consumption and operations in exchange for
     the receipt of revenues related to prevailing Pool prices for a notional
     output.  Certain of these contracts are used for hedging purposes, and the
     impact of changes in the market value of the contracts is deferred until
     settlement occurs under the contract.

        The fair value of outstanding CfDs, EFAs and other contracts used for
     hedging purposes at December 31, 1999 and 1998 was (Pounds)76 million and
     (Pounds)61 million, respectively, calculated as the difference between the
     expected value of the CfDs, EFAs and other contracts and the current market
     value, based on an estimate of forward prices for the term of the CfD, EFA
     or other contract. At December 31, 1999, the outstanding notional quantity
     of all electricity commodity instruments under contracts held for non-
     trading purposes was 142 TWh of electricity for periods to 2010.  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

                                     A - 46
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     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.

        Trading Activities - In late 1999, TXU Europe Energy Trading began
     offering price risk management services to customers through a variety of
     financial and other instruments including CfDs, EFAs, contractual
     agreements and other forward contracts.   During 1999, net gains of
     (Pounds)23 million were recognized from trading electricity commodity
     contracts or other derivatives.   At December 31, 1999, the outstanding
     notional quantity of commodity instruments under contracts held for trading
     purposes was 118 TWh of electricity for periods to 2015.  The fair value of
     such instruments at December 31, 1999 was (Pounds)10 million and the
     average fair value for the year ended December 31, 1999 was (Pounds)12
     million.

        Gas price risk management - In the gas retail business, TXU Europe
     Limited 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 TXU Europe Limited to the gas spot
     market is managed by using gas swaps and futures.  At December 31, 1999
     there were no gas swaps in place. During 1999, net gains of (Pounds)0.1
     million were recognized from trading gas commodity contracts or other
     derivatives. At December 31, 1999, the outstanding notional contract
     quantity of gas commodity instruments held for trading purposes was 134 Bcf
     for periods to 2003. The fair value of such instruments at December 31,
     1999 was (Pounds)5 million, and the average fair value for the year ended
     December 31, 1999 was (Pounds)2 million.

        Interest rate management - Interest rate swaps and forward rate
     agreements are entered into only for non-trading purposes and are used by
     TXU Europe Limited 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, TXU
     Europe Limited held two interest rate swaps which convert (Pounds)100
     million of the (Pounds)350 million 8.375% bonds due 2004 into floating rate
     debt.  These swaps were cancelled in June 1999.

        At December 31, 1999, TXU Europe Limited had various interest rate swaps
     in effect with an aggregate notional amount of US$1.5 billion ((Pounds)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 6.82% and had a negative fair value of
     (Pounds)51.6 million at December 31, 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
     (Pounds)800 million maturing in 2001 through 2008 with average fixed rates
     of 5.55% and 6.58% at December 31, 1999 and 1998, respectively.

        In addition, TXU Europe Limited has various other interest rate swaps on
     subsidiary borrowings and as a portfolio hedge with a notional amount of
     (Pounds)408 million to swap floating rate interest to fixed rates.  These
     swaps mature in 2000 through 2008 and have a weighted average fixed rate of
     6.47%.

        Forward rate agreements totaling (Pounds)531 million for a maximum
     duration of less than one year to swap floating rate deposits into fixed
     rates were outstanding at December 31, 1998. At December 31, 1999, there
     were approximately (Pounds)15 million in forward rate agreements
     outstanding which matured in the first few days of January 2000.

        Foreign currency risk management - TXU Europe Limited has exposure to
     foreign currency movements and uses derivative financial instruments that
     are entered into only for non-trading purposes to manage this exposure
     (principally on US$ denominated debt and investments in European
     countries).  The instruments used are forward purchase contracts and swaps.
     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 specific currency then forward
     contracts, options or swaps 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.
     There were no options outstanding at December 31, 1999.  Foreign currency
     transaction losses for 1999 were (Pounds)8 million, and were less than
     (Pounds)1 million for the period

                                     A - 47
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     from formation through December 31, 1998, the period from April 1, 1998
     through May 18, 1998 and the year ended March 31, 1998, respectively.

        TXU Europe Limited has entered into contracts to fix the exchange rate
     on the interest payments to be made under US$ denominated debt.  For the
     $200 million 7.425% notes due 2017, TXU Europe Limited entered into a
     contract that sets the exchange rate between sterling and US$ at $1.605
     over the life of the debt.  For the $300 million 7.55% notes due 2027, TXU
     Europe Limited entered into a contract that sets the exchange rate between
     sterling and US$ at $1.625 over the life of the debt.

        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 (Pounds)218 million
     to settle the principal amount of related debt.  The difference between the
     forward rate and the spot rate at inception of the contract (a foreign
     currency gain of approximately (Pounds)92 million) will be amortized to
     income over the life of the contract.

        In connection with the May 1999 issuance of $1.5 billion of Senior
     Notes, TXU Europe Limited entered into currency swaps that in effect fixed
     the principal amount to be repaid in sterling ((Pounds)921million) at a
     weighted average exchange rate between sterling and US$ at $1.629.

        In November 1999, TXU Europe Limited entered into a gilt lock (foreign
     currency/interest rate) contract to hedge a notional amount of (Pounds)230
     million on the anticipated  issuance of a financing issue. The anticipated
     transaction did not close before December 31, 1999.  The contract was ended
     in January 2000 and the resulting gain of approximately (Pounds)8 million
     has been deferred pending the outcome of the financing issue.

        Concentrations of credit risk - TXU Europe Limited's financial
     instruments that are exposed to concentrations of credit risk consist
     primarily of cash equivalents, trade receivables and derivative contracts.

        TXU Europe Limited's trade receivables result primarily from its gas and
     electricity retail operations and reflect a broad customer base including
     industrial, commercial and residential customers.

        Credit risk relates to the risk of loss that TXU Europe Limited would
     incur as a result of non-performance by counterparties to their respective
     derivative instruments.  TXU Europe Limited maintains credit policies with
     regard to its counterparties that management believes significantly
     minimize overall credit risk.  TXU Europe Limited 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 38% and 54% by volume of TXU Europe Limited's CfDs and
     EFAs traded in the periods ended December 31, 1999 and 1998, respectively,
     were contracted with two primary counterparties.  The risk of loss to TXU
     Europe Limited arising from non-performance by these counterparties is
     considered unlikely.

                                     A - 48
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

        Fair value of financial instruments - The carrying amounts and related
     estimated fair values of TXU Europe Limited's significant financial
     instruments were as follows:

<TABLE>
<CAPTION>
                                                                           December  31, 1999      December 31, 1998
                                                                          --------------------    --------------------
                                                                           ((Pounds) million)     ((Pounds) million)
                                                                           Carrying     Fair      Carrying      Fair
                                                                            Amount     Value       Amount      Value
                                                                          ---------  ---------    ---------  ---------
<S>                                                                    <C>         <C>         <C>         <C>
On balance sheet assets (liabilities):
 Assets
  Other investments..............................................            520        520          233        233
  Cash and cash equivalents......................................            285        285          467        467
  Restricted cash................................................            740        740          717        717

 Liabilities
  Notes payable - banks (current)................................           (251)      (251)        (238)      (238)
  Note payable to TXU Corp.......................................              -          -         (682)      (682)
  Total long-term debt, excluding capital leases.................         (3,987)    (4,026)      (3,029)    (3,096)
  Short term loans on accounts receivable........................           (177)      (177)        (300)      (300)

Off balance sheets assets (liabilities):
  Interest rate swaps............................................              -        (51)           -        (31)
  Foreign currency exchange contracts............................              -        (23)           -        (18)
  Gas swaps......................................................              -          -            -         (2)
  CfDs, EFAs and other energy contracts..........................              -         86            -         61
   Financial guarantees and letters of credit....................              -       (271)           -       (186)
</TABLE>

        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 TXU Europe Limited.

     (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 currency 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, EFAs and other energy contracts 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.

                                     A - 49
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

15.  Regulation and Rates

        Prior to September 1998, 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 the period from September 1998 to 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.  On October 8, 1999, the Office of Gas and Electricity Markets
     (OFGEM) issued proposed price adjustments for the electricity supply
     businesses.  The final report of OFGEM 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 (Pounds)15 million.

        In December 1999, following extensive consultation with the industry,
     the Director General of Electricity Supply (Director General) 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 wholesale prices ensure that their prices
     closely reflect their costs and that they do not take unfair advantage of
     any imperfections in the operation of wholesale markets. The Director
     General has proposed that these restrictions should cease one year after
     the introduction of the New Electricity Trading Arrangements (NETA).  TXU
     Europe Limited has played an active part in these discussions and accepted
     the proposals on February 7, 2000.  However, five generators rejected the
     proposals and the matter has been referred to the UK Competition Committee.
     TXU Europe Limited does not anticipate that these new proposals will have a
     material adverse effect on its revenues.  The implementation of the NETA,
     scheduled for introduction on October 1, 2000, is also likely to lead to a
     number of modifications to generation, distribution and retail electricity
     licenses.

        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 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
     adjustments.  Two distribution price control reviews by OFGEM in 1994 and
     1995 established the current distribution price control formula.  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 OFGEM in the near future.  However, TXU
     Europe Limited and TXU Europe Group estimate that the effect on revenues
     will be a reduction of about (Pounds)73 million for the year ending
     December 31, 2000 and about (Pounds)100 million for the year ending
     December 31, 2001.  The net impact on TXU Europe Limited is less than these
     reductions, as a portion of the reduction is a pass through of costs to the
     energy retail business.

16.  Commitments

        TXU Europe Limited'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

                                     A - 50
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     (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 TXU Europe Limited will receive
     income.

        Gas take-or-pay contracts - TXU Europe Limited 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, TXU Europe Limited has entered into a range of gas
     purchase contracts. As at December 31, 1999, the commitments under long-
     term gas purchase contracts amounted to an estimated (Pounds)1.1 billion
     covering periods up to 15 years forward. Management does not consider it
     likely, on the basis of TXU Europe Limited's current expectations of demand
     from its customers that any material payments will become due for gas not
     taken.

        Coal contracts - In November 1998, TXU Europe Limited agreed to two coal
     purchase agreements with a supplier, supplementing the 12 million tons TXU
     Europe Limited 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 (Pounds)1.3 billion at December 31, 1999.

        Capacity payments and guarantee - TXU Europe Energy Trading has several
     contracts requiring the payment of annual capacity fees.  Under the terms
     of these contracts, TXU Europe Energy Trading  will pay (subject to
     contract terms) an annual capacity fee of (Pounds)215 million in 2000,
     (Pounds)229 million in 2001, (Pounds)232 million in 2002, (Pounds)248
     million in 2003, (Pounds)248 million in 2004 and (Pounds)1,491million
     thereafter. In addition, TXU Europe Group will provide a (Pounds)200
     million guarantee (declining over time) representing approximately one
     year's capacity payment, with the counterparty providing a (Pounds)20
     million guarantee.

        Rental commitments - The future minimum rental commitments under non-
     cancelable operating leases were as follows:

                                                     December 31,
                                                  ------------------
                                                  ((Pounds) million)

     2000....................................             33
     2001....................................             32
     2002....................................             34
     2003....................................             30
     2004....................................             28
     Thereafter..............................              -
                                                  ------------------
     Total...................................            157
                                                  ==================

        The operating lease commitments relate to coal-fired power stations.
     Additional variable payments of approximately (Pounds)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 TXU
     Europe Limited.

        Rental expense for operating leases amounted to (Pounds)23 million and
     (Pounds)16 million for the periods ended December 31, 1999 and 1998,
     respectively.  Rental expense for operating leases during the periods ended
     December 31, 1999 and 1998 includes (Pounds)17 million and (Pounds)10
     million, respectively, of minimum lease payments and (Pounds)6 million and
     (Pounds)6 million, respectively, of variable lease payments.  For the
     period ended May 18, 1998, operating lease rental expense was (Pounds)10
     million, including (Pounds)6 million of minimum lease payments and
     (Pounds)4 million of variable payments. For the year ended March 31, 1998,
     operating lease rental expense was (Pounds)77 million, including (Pounds)42
     million of minimum lease payments and (Pounds)35 million of variable
     payments.

                                     A - 51
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

        Other - TXU Europe Group received government consent to build a 215
     megawatt (MW) combined heat and power plant for which there is a commitment
     of (Pounds)117 million, most of which falls due in 2001.  Estimated capital
     expenditure on environmental control facilities is (Pounds)43 million in
     2000, (Pounds)50 million in 2001, (Pounds)40 million in 2002, and
     (Pounds)35 million in 2003.

17.   Contingencies

        TXU Europe Limited 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 final determination against the National Grid
     Company plc (National Grid) and its group trustees with respect to
     complaints by two pensioners in National Grid's section of the Electricity
     Supply Pension Scheme (ESPS) 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 appealed  this decision to
     the Court of Appeal and judgment was received. The judgment endorsed the
     Pensions Ombudsman's determination that the corporation was not entitled to
     unilaterally deal with any surplus.  National Grid has made an appeal to
     the House of Lords, although the case is not likely to be heard until the
     fourth quarter of 2000.  If a similar complaint were to be made against TXU
     Europe Group in relation to its use of actuarial surplus in its section of
     the ESPS, it would vigorously defend the action, ultimately through the
     courts.  However, if a determination were finally to be made against it and
     upheld by the courts, TXU Europe Group could have a potential liability to
     repay to its section of the ESPS an amount estimated by TXU Europe Group to
     be up to (Pounds)45 million , exclusive of any future applicable interest
     charges.

        On January 25, 1999, the Hindustan Development Corporation issued
     proceedings in the Arbitral Tribunal in Delhi, India against TEG claiming
     damages of (Pounds)255 million for breach of contract following the
     termination of a Joint Development Agreement dated March 20, 1997 relating
     to the construction, development and operation of a lignite based thermal
     power plant at Barsingsar, Rajasthan.  TXU Europe 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 (Pounds)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.

        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 operations or cash
     flows.

        Financial guarantees - TEG has guaranteed up to (Pounds)68 million at
     December 31, 1999 of certain liabilities that may be incurred and payable
     by the purchasers of its US and Australian coal business and US Energy
     marketing operations sold in 1998 (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.  TXU Europe Limited and TEG
     continue to be either the guarantor or the indemnifying party, as the case
     may be, under these various agreements.

                                     A - 52
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

        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 subsidiaries of TXU Corp. may be required to make certain
     adjustments to the guarantees, which the Directors of TXU Europe Limited do
     not currently expect to have a material adverse impact on TXU Europe
     Limited.

18.  Segments

        TXU Europe Limited has two major businesses, energy and networks, which
     are comprised of three reportable operating business segments.

        The segments have been identified on the basis of the underlying nature
     of the business and its customer base and the different product or services
     offered.  They are managed separately because each business requires
     different strategies and the corresponding necessary skill sets, e.g.,
     engineering, portfolio management and customer services.

        The energy retail business segment provides electricity and gas to UK
     residential, industrial and commercial customers.  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 other businesses, metering
     and telecoms, which fall below the quantitative thresholds for determining
     reportable segments.  The metering business is expected to be sold in 2000,
     and the telecoms business was sold in 1998. Revenues billed by energy
     retail for the other segments are presented as revenues of the other
     segments.  TXU Europe Limited accounts for intersegment sales and transfers
     as if the sales or transfers were to third parties, that is, at current
     market prices.

        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 European equity investments, but 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 headquarters office and core costs related to
     information technology, are not allocated among the segments.

                                     A - 53
<PAGE>

<TABLE>
<CAPTION>
                                           Energy
                                         Management
                                Energy       And       Total              All       Eliminations/
                                Retail   Generation   Energy   Networks  Other     Reconciliations    Consolidated
                                -------  -----------  -------  --------  ------  -------------------  -------------
<S>                             <C>      <C>          <C>      <C>       <C>     <C>                  <C>
                                                                ((Pounds) million)
Trade Revenues
           1999                  1,548        1,759    3,307        428     18                 -             3,753
           Dec-98                1,036          845    1,881        253     31                 -             2,165
           May-98                  205          165      370         53      2                 -               425
           Mar-98                1,655        1,337    2,992        414     69                 -             3,475


Contribution (a)
           1999                    (40)         330      290        175      4                82 (b)           551
           Dec-98                  (13)         121      108        100     18               134 (c)           360
           May-98                   (5)         (13)     (18)        21     (3)              (10)(d)           (10)
           Mar-98                  (52)         180      128        189      -               (40)(e)           277

Capital /Investment
 Expenditures
           1999                     10          423      433        114      3               140               690
           Dec-98                   21           61       82         82     17               214               395
           May-98                    6            6       12         31     35                 -                78
           Mar-98                   42           44       86        120     32                26               264

</TABLE>
     Periods covered:
     1999 =  Year ended December 31, 1999
     Dec-98 = Period from formation through December 31, 1998
     May-98= Period from April 1, 1998 through May 18, 1998
     Mar-98 = Year ended March 31, 1998

     (a) Contribution is defined as operating and other income after a nominal
     charge for the cost of capital.  The following is a reconciliation of
     contribution to amounts reflected in the income statement:

<TABLE>
<CAPTION>
                                                                           Period from    Period from
                                                               Year         Formation    April 1, 1998      Year
                                                               Ended         Through        Through        Ended
                                                           December 31,   December 31,      May 18,      March 31,
                                                               1999           1998            1998          1998
                                                           -------------  -------------  --------------  ----------
<S>                                                        <C>            <C>            <C>             <C>
                                                                             ((Pounds) millions)
Total Contribution by segments...........................           469            226               -         317
                                                           -------------  -------------  --------------  ----------
UK GAAP items in management reports:
 Cost of capital elimination.............................           141             86              17         125
 Unallocated corporate costs.............................           (72)           (17)            (28)        (11)

Other Adjustments and Reconciling Items:
 Purchase accounting and US GAAP adjustments.............           101             57               -         (70)
 Unallocated contract costs..............................           (89)             -               -         (68)
 Unallocated restructuring costs.........................           (11)           (22)              -         (20)
 Unallocated investment income...........................            12             30               1           4
                                                           -------------  -------------  --------------  ----------
 Total reconciling items.................................            82(b)         134(c)          (10)(d)     (40)(e)
                                                           -------------  -------------  --------------  ----------
Income before interest, income taxes and minority
 interest................................................           551            360             (10)        277
                                                           =============  =============  ==============  ==========
</TABLE>

                                     A - 54
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

        Other information required to be disclosed by SFAS No. 131 is not
     presented because it is not readily available for presentation, and TXU
     Europe Limited would incur excessive costs to develop such information.

        The accounting policies for the segments are the same as those described
     in the summary of significant accounting policies.  The management of TXU
     Europe Limited evaluates performance based on contribution, before US GAAP
     and purchase accounting adjustments.

        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 TXU Europe Limited's revenue.  The Pool is not
     considered by TXU Europe Limited to be an external customer, as all
     electricity generated is sold into the Pool and is subsequently repurchased
     from the Pool for resale.


<TABLE>
<CAPTION>

                                                    Period from formation      Period from April 1,
                                   Year Ended              through                 1998 through          Year Ended March 31,
                                December 31, 1999     December 31, 1998            May 18, 1998                  1998
                                ------------------  -----------------------    ----------------------    ----------------------
-----------------------------                                         ((Pounds) million)
           Revenues
-----------------------------
<S>                             <C>                <C>                       <C>                       <C>
UK                                          3,691                     2,150                       422                     3,447
Other countries                                62                        15                         3                        28
                                ------------------  -----------------------    ----------------------    ----------------------
Total                                       3,753                     2,165                       425                     3,475
                                ==================  =======================    ======================    ======================
</TABLE>




                            December 31, 1999            December 31, 1998
                            -----------------            -----------------
-------------------                       ((Pounds) million)
 Long-lived assets
-------------------
United Kingdom                       2,656                       2,606
Other countries                         62                          70
                            -----------------            -----------------
Total                                2,718                       2,676
                            =================            =================

19.  Quarterly Financial Information - (Unaudited)

        In the opinion of TXU Europe Limited, for the information below includes
     all adjustments (constituting only normal recurring accruals) necessary to
     a fair statement of such amounts.

<TABLE>
<CAPTION>
                                                                                                      Consolidated Net
                                              Operating Revenues         Operating Income               Income (loss)
                                           ------------------------   -----------------------    ------------------------------
Quarter Ended                                 1999          1998*        1999        1998*          1999             1998*
                                           -----------   ----------   ----------   ----------    ------------     -------------
<S>                                   <C>              <C>           <C>         <C>           <C>             <C>
                                                                         ((Pounds) million)
March 31                                        1,173            -          168            -              57                 -
June 30                                           813          326          120           32              19                10
September 30                                      700          613           66           21              (5)              (35)
December 31                                     1,067        1,226          189          261              67               102
                                           -----------   ----------   ----------   ----------    ------------     -------------
                                                3,753        2,165          543          314             138                77
                                           ===========   ==========   ==========   ==========    ============     =============
</TABLE>


* Period from formation through December 31, 1998.

                                     A - 55
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

20.  Miscellaneous

       Other income - Net - Consists of the following for the periods
     indicated:

<TABLE>
<CAPTION>

                                                                         Period From       Period From
                                                                           Formation       April 1, 1998
                                                         Year Ended         Through           Through           Year Ended
                                                          December         December 31,       May 18,            March 31,
                                                          31, 1999            1998              1998               1998
                                                        -------------    --------------    ----------------    --------------
                                                                               ((Pounds) million)
<S>                                                 <C>                <C>              <C>                 <C>
Dividends from cost investments...................                 9                 5                   -                 5
Gain on the sale of Eastern Group Telecoms........                 -                13                   -                 -
Foreign currency transaction loss.................                (8)                -                   -                 -
Dividends from marketable securities..............                 2                26                   -                 4
Other.............................................                 5                 -                   1                 1
Undistributed equity in earnings of TEG...........                 -                 2                   -                 -
                                                        -------------    --------------    ----------------    --------------
     Total........................................                 8                46                   1                10
                                                        =============    ==============    ================    ==============
</TABLE>



        Accounts receivable - A provision for uncollectible accounts of
     (Pounds)17 million and (Pounds)11 million was recorded during the year
     ended December 31, 1999 and the period from formation through December 31,
     1998, respectively.  TXU Europe Limited did not realize any material
     recoveries during those periods.  TXU Europe Limited wrote-off accounts
     receivable of (Pounds)18 million and (Pounds)3 million during the year
     ended December 31, 1999 and the period from formation through December 31,
     1998, respectively.  A provision for uncollectible accounts of (Pounds)11
     million and (Pounds)2 million was recorded during the year ended March 31,
     1998 and the period from April 1, 1998 through May 18, 1998, respectively.
     TXU Europe Limited did not realize any material recoveries during the year
     ended March 31, 1998 or the period from April 1, 1998 through May 18, 1998.
     TXU Europe Limited wrote-off accounts receivable of (Pounds)10 million and
     (Pounds)1 million during the year ended March 31, 1998 and the period from
     April 1, 1998 through May 18, 1998, respectively.


21.  Subsequent Events - (Unaudited)

        On December 15, 1999, TXU Europe Limited commenced a (Euro)2.0 billion
     Euro Medium Term Note (EMTN) program. Under the EMTN program, TXU Europe
     Limited may from time to time issue notes on a continuing basis to one or
     more dealers in a principal outstanding amount not exceeding (Euro)2.0
     billion. As of December 31, 1999, no notes had been issued under this
     program. However, in March 2000, (Pounds)225 million of 7.25% Sterling
     Eurobonds due March 8, 2030, were issued. On the same day, an interest rate
     swap was entered into that converts the interest on the new Sterling
     Eurobond to a variable rate based on LIBOR for the first five years. The
     effective interest rate after the swap was 5.862%. Also in March 2000, a
     financing subsidiary of TXU Europe Limited issued US$150 million
     ((Pounds)93 million) of 9 3/4% Trust Originated Preferred Securities.

        On March 1, 2000, TXU Europe Power acquired Nedalo BV for (Pounds)4.5
     million, including the remaining 25% of Nedalo (UK) Limited it did not
     already own. Nedalo BV is a leading manufacturer of small scale combined
     heat and power plant, with sales across Europe and in the USA, and has
     approximately 28% of this market.

                                     A - 56
<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

        On March 13, 2000, TXU Europe (Espana) S.L., a subsidiary of TXU Europe
     Limited, announced its intention to make a cash offer to acquire all of the
     shares of Hidroelectrica Del Cantabrico, SA (Hidrocantabrico) that TXU
     Europe Limited does not currently own.  Hidrocantabrico is a vertically
     integrated Spanish energy company.  The offer is subject to a number of
     conditions, including, among others, authorization by the CNMV, or Spanish
     Securities Exchange, approved by European Union competition authorities and
     TXU Europe acquiring sufficient shares such that it would hold at least 51%
     of Hidrocantabrico after the transaction is completed.  The transaction is
     expected to close in the second quarter of 2000.

        TXU Europe Espana's offer of (Euro)21.25 per share values the equity of
     Hidrocantabrico at (Euro)2.4 billion ($2.3 billion). If the offer becomes
     unconditional, TXU Europe Limited intends to finance the acquisition
     through bank borrowings and the issuance of preferred securities to its
     parent company, TXU International Holdings.  TXU International Holdings
     intends to finance the purchase of the TXU Europe Limited preferred
     securities through bank borrowings guaranteed by TXU Corp.

                                     A - 57
<PAGE>

                                                                      APPENDIX B
                              TXU EUROPE LIMITED
                          Exhibits to 1999 Form 10-K

<TABLE>
<CAPTION>
                  Previously Filed*
            -------------------------------
 Exhibit    With File Number     As Exhibit
---------   ----------------     ----------
<S>         <C>                  <C>                 <C>
3(a)           333-82307           3(a)        -     Memorandum of Association of TXU Eastern Funding Company.
            and 333-82307-1

3(b)           333-82307           3(b)        -     Articles of Association of TXU Eastern Funding Company.
            and 333-82307-1

3(c)           333-82307           3(c)        -     Memorandum of Association of TXU Europe Limited.
            and 333-82307-1

3(d)           333-82307           3(d)        -     New Articles of Association of TXU Europe Limited.
            and 333-82307-1

4(a)           333-82307           4(a)        -     Indenture (For Unsecured Debt Securities) dated May 1, 1999.
            and 333-82307-1

4(b)           333-82307           4(b)        -     Officer's Certificate establishing 6.15% senior notes due May
            and 333-82307-1                          15, 2002 and 6.15% exchange senior notes due May 15, 2002, with
                                                     the forms of notes attached thereto.

4(c)           333-82307           4(c)        -     Officer's Certificate establishing 6.45% senior notes due May
            and 333-82307-1                          15, 2005 and 6.45% exchange senior notes due May 15, 2005, with
                                                     the forms of notes attached thereto.

4(d)           333-82307           4(d)        -     Officer's Certificate establishing 6.75% senior notes due May
            and 333-82307-1                          15, 2009 and 6.75% exchange senior notes due May 15, 2009 with
                                                     the forms of notes attached thereto.

4(e)           333-82307           4(f)        -     Deposit Agreement with respect to the senior notes and the
            and 333-82307-1                          exchange senior notes.

4(f)           1-12833            4(rrr)       -     Amended and Restated Trust Agreement, dated as of March 2,
            Form 10-K (1999)                         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.

4(g)           1-12833            4(sss)       -     Amended and Restated Partnership Agreement of Limited
            Form 10-K (1999)                         Partnership, dated as of March 2, 2000, of TXU Europe
                                                     Funding I, L.P.

4(h)           1-12833            4(ttt)       -     Preferred Trust Securities Guarantee, dated as of March 2,
            Form 10-K (1999)                         2000, between TXU Europe Limited and The Bank of New York.

4(i)           1-12833            4(uuu)       -     Preferred Partnership Securities Guarantee, dated as of March
            Form 10-K (1999)                          2, 2000, between TXU Europe Limited and The Bank of New York.

4(j)           1-12833            4(vvv)       -     Indenture (for Unsecured Subordinated Debt Securities), dated
            Form 10-K (1999)                         as of March 2, 2000, among Funding, TXU Europe Limited and The
                                                     Bank of New York.

4(k)           1-12833            4(www)       -     Officer's certificate, dated as of March 2, 2000,
            Form 10-K (1999)                         establishing the terms of the 9 3/4% Junior Subordinated
                                                     Deferrable Interest Debentures, Series A, due March 2, 2020, of
                                                     Funding.

4(l)           1-12833            4(xxx)       -     Deposit Agreement, dated as of March 2, 2000, between The
            Form 10-K (1999)                         Bank of New York and Funding.

</TABLE>

                                     B - 1
<PAGE>

<TABLE>
<CAPTION>
                  Previously Filed*
            -------------------------------
 Exhibit    With File Number     As Exhibit
---------   ----------------     ----------
<S>         <C>                  <C>                 <C>
4(m)           1-12833            4(yyy)       -     Indenture (for Unsecured Subordinated Debt Securities) dated
            Form 10-K (1999)                         as of March 2, 2000, among TXU Europe Group, TXU Europe Limited
                                                     and The Bank of New York.

4(n)           1-12833            4(zzz)       -     Officer's Certificate, dated as of March 2, 2000,
            Form 10-K (1999)                         establishing the terms of the 9 3/4% Junior Subordinated
                                                     Deferrable Interest Debentures, Series A, due March 2, 2020 of
                                                     TXU Europe Group.

4(o)           1-12833             4(A)        -     Deposit Agreement, dated as of March 2, 2020, between The
            Form 10-K (1999)                         Bank of New York TXU Europe Group plc.

4(p)         333-8008 and         4.1          -     Indenture, dated as of October 16, 1997, among Energy Group
              333-8008-1                             Overseas B.V. (EGO), The Energy Group PLC and The Bank of New
                                                     York, as Trustee.

4(q)         333-8008 and          4.2         -     Form of 7.375% Series B Guaranteed note of EGO due 2017.
              333-8008-1

4(r)         333-8008 and          4.3         -     Form of 7.500% Series B Guaranteed note of EGO due 2027.
              333-8008-1

4(s)           1-12833             4(B)        -     Trust Deed relating to a (Pounds)2,000,000,000 Euro Medium
            Form 10-K (1999)                         Term Note Programme (EMTN Program) between Funding, TXU Europe
                                                     Limited and the Law Debenture Trust Corporation, dated December
                                                     15, 1999.

4(t)           1-12833             4(C)        -     Pricing Supplement with respect to (Pounds)225,000,000 7.25%
            Form 10-K (1999)                         Notes due 2030 issued pursuant to the EMTN Program.

10(a)          1-12833            10(a)        -     Facilities Agreement for (Pounds)1,275,000, Credit
              Form 10-Q                              Facilities, dated March 24, 1999, among TXU Europe Limited, TXU
            (Quarter ended                            Finance (No. 2) Limited, TXU Acquisitions Limited, Chase
            March 31, 1999)                           Manhattan Bank plc, Lehman Brothers International (Europe),
                                                      Merrill Lynch Capital Corporation and the other banks named
                                                      therein.

10(b)         1-12833             99(a)        -     Facility Agreement for (Pounds)250,000,000 Revolving Credit
             Form 10-Q                               Facility, dated May 21, 1998, among Eastern Electricity plc
            (Quarter ended                           (EE), and Chase Manhattan plc, Lehman Brothers International and
            September 30,                            Merrill Lynch Capital Corporation as Joint Lead Arrangers, and
               1998)                                 The Chase Manhattan Bank, Lehman Commercial Paper Inc. and
                                                     Merrill Lynch Capital Corporation as Underwriters.

10(c)           1-14576            3.10        -     Deed of Assignment of Rents, dated as of October 28, 1996,
            Form 20-F, dated                          among EMPL (EMPL), Eastern Group Finance Limited, Barclays Bank
            January 27, 1997                          PLC (as agent) and the banks listed therein.

10(d)          1-14576            3.12         -     Guarantee and Indemnity Deed, dated as of October 28, 1996,
            Form 20-F, dated                         among Eastern Group, Eastern Generation Limited (EGL), EE,
            January 27, 1997                         Barclays Bank PLC, Barclays De Zoete Wedd Limited, and the other
                                                     banks listed therein.

10(e)         333-82307           10(f)-2      -     Amendment dated July 17, 1998 to the Guarantee and Indemnity
            and 333-82307-1                          Deed, dated as of October 28, 1996, among Eastern, EGL, EE,
                                                     Barclays Bank PLC, Barclays De Zoete Wedd Limited, and the other
                                                     banks listed therein.

10(f)         333-82307           10(f)-3      -     Amendment dated March 11, 1999 to the Guarantee and Indemnity
            and 333-82307-1                          Deed dated as of October 28, 1996 (as amended and restated on
                                                     July 17, 1998), among Eastern Group, EGL, EE, Barclays Bank PLC,
                                                     Barclays De Zoete Wedd Limited, and the other banks listed
                                                     therein.
</TABLE>


                                     B - 2
<PAGE>

<TABLE>
<CAPTION>
                  Previously Filed*
            -------------------------------
 Exhibit    With File Number     As Exhibit
---------   ----------------     ----------
<S>         <C>                  <C>                 <C>
10(g)           1-14576            3.11        -     Standby Credit Facility Agreement, dated as of October 28,
            Form 20-F, dated                         1996, among EMPL and Eastern Merchant Generation Limited (EMGL)
            January 27, 1997                         (as borrowers), Eastern Group and EGL (as guarantors), EE, The
                                                     Industrial Bank of Japan, Limited (as arranger and agent), The
                                                     Bank of Nova Scotia, the Dai-ichi Kangyo Bank, Limited, The
                                                     Royal Bank of Scotland plc and Societe Generale (as
                                                     co-arrangers), and the financial institutions listed therein.

10(h)         333-82307           10(g)-1      -     Supplemental Agreement dated July 17, 1998 to the Standby
            and 333-82307-1                          Credit Facility dated October 28, 1996 among EMPL and EMGL (as
                                                     borrowers), Eastern and EGL (as guarantors), EE, Barclays
                                                     Capital and The Royal Bank of Scotland plc (as arrangers), The
                                                     Bank of Nova Scotia, Bayerische Landesbank Girozentrale, The
                                                     Dai-Ichi Kangyo Bank, Limited, Den Danske Bank Aktieselskab,
                                                     Nationsbank, N.A., Royal Bank of Canada Europe Limited, The
                                                     Toronto-Dominion Bank and Westdeutsche Landesbank Girozentrale
                                                     (as co-arrangers), The Royal Bank of Scotland plc (as agent),
                                                     and the financial institutions listed therein.

10(i)         333-82307           10(g)-2      -     Amendment dated March 11, 1999 to the Supplemental Agreement
            and 333-82307-1                          dated July 17, 1998 to the Standby Credit Facility dated October
                                                     28, 1996 among EMPL and EMGL (as borrowers), Eastern and EGL (as
                                                     guarantors), EE, Barclays Capital and The Royal Bank of Scotland
                                                     plc (as arrangers), The Bank of Nova Scotia, Bayerische
                                                     Landesbank Girozentrale, The Dai-Ichi Kangyo Bank, Limited, Den
                                                     Danske Bank Aktieselskab, Nationsbank, N.A., Royal Bank of
                                                     Canada Europe Limited, The Toronto-Dominion Bank and
                                                     Westdeutsche Landesbank Girozentrale (as co-arrangers), The
                                                     Royal Bank of Scotland plc (as agent), and the financial
                                                     institutions listed therein.

10(j)          333-82307          10(h)        -     Pooling and Settlement Agreement dated 30 March 1990, as
            and 333-82307-1                          amended as of 15 April 1999, among EE, National Grid Company plc
                                                     and other parties.

10(k)          333-82307          10(i)        -     Master Connection and Use of System Agreement dated as of 30
            and 333-82307-1                          March 1990 among the National Grid Company plc and its users
                                                     (including EE).

10(l)          333-82307          10(j)        -     Lease of land and premises known as West Burton, Ironbridge
            and 333-82307-1                          and Rugeley B Power Stations dated 27 June  1996 from National
                                                     Power PLC to EMPL and Eastern.

10(m)          333-82307          10(k)        -     Sublease of land and premises known as West Burton,
            and 333-82307-1                          Ironbridge and Rugeley B Power Stations dated 27 June  1996 from
                                                     EMPL to EMGL and Eastern.

10(n)          333-82307          10(l)        -     Lease of commercial premises at High Marnham, Newark,
            and 333-82307-1                          Nottinghamshire dated 2 July 1996 between PowerGen plc and EMPL.

10(o)          333-82307          10(m)        -     Underlease of commercial premises at High Marnham, Newark,
            and 333-82307-1                          Nottinghamshire dated 2 July 1996 between EMPL and EMGL.

10(p)          333-82307          10(n)        -     Lease of commercial premises at Drakelow, Burton-on-Trent,
            and 333-82307-1                          Staffordshire dated 2 July 1996 between PowerGen plc and EMPL.

</TABLE>

                                     B - 3
<PAGE>

<TABLE>
<CAPTION>
                  Previously Filed*
            -------------------------------
 Exhibit    With File Number     As Exhibit
---------   ----------------     ----------
<S>         <C>                  <C>                 <C>
10(q)          333-82307          10(o)        -     Underlease of commercial premises at Drakelow,
            and 333-82307-1                          Burton-on-Trent, Staffordshire dated 2 July 1996 between EMPL
                                                     and EMGL.

12(a)                                          -     Computation of Ratio of Earnings to Fixed Charges for TXU
                                                     Europe Limited (formerly TXU Eastern Holdings Limited) for the
                                                     year ended  December 31, 1999, and the period from formation
                                                     through December 31, 1998.
12(b)          333-82307          12(b)        -     Computation of Ratio of Earnings to Fixed Charges Charges for
            and 333-82307-1                          TXU Europe Group plc and Subsidiaries (formerly Eastern Group
                                                     plc and Subsidiaries) (US GAAP basis).

16                                             -     Letter re: change in certifying accountant.

27                                             -     Financial Data Schedule.

</TABLE>

                    *    Incorporated herein by reference.

                                     B - 4