<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, 2001
                                     -- 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>
001 - 15709                     TXU EUROPE LIMITED                         98-0188080
                                The Adelphi
                                1-11 John Adam Street
                                London, England WC2N 6HT
                                011-44-207-879-8081

<CAPTION>
 Securities registered pursuant to Section 12(b) of the Act:
                                                                     Name of Each Exchange on
Registrant                       Title of Each Class                     Which Registered
----------                       -------------------               ------------------------
<S>                             <C>                                <C>
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 8, 2002: 2,455,705,299 shares, at US$1 par
value and 100 deferred shares at(pound)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>
<CAPTION>
                                                                                         Page
<S>                                                                                      <C>
                                     PART I

Item 1.  BUSINESS                                                                        1

         LEGAL ENTITIES
           TXU Europe Limited                                                            1
           TXU Europe Group plc                                                          1
         INDUSTRY BACKGROUND                                                             2
         STRATEGY FOR TXU EUROPE GROUP                                                   2
         SEGMENT                                                                         3
         SUMMARY OF BUSINESS OPERATIONS                                                  3
         REGULATION AND OTHER                                                            7
         ENVIRONMENTAL MATTERS                                                           8

Item 2.  PROPERTIES                                                                      9

Item 3.  LEGAL PROCEEDINGS                                                               10

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                             10



                                     PART II

Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS                                                             10

Item 6.  SELECTED FINANCIAL DATA                                                         10

Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS                                                           11

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                      11

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                     11

Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
         AND FINANCIAL DISCLOSURES                                                       11


                                    PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                              11

Item 11. EXECUTIVE COMPENSATION                                                          11

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                  11

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                  11


                                     PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                 12
</TABLE>


APPENDIX A - Financial Information of TXU Europe Limited and Subsidiaries

APPENDIX B - Exhibits

                                        i

<PAGE>

                                     PART I

      Item 1. BUSINESS

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

                               TXU EUROPE LIMITED

      TXU Europe Limited (TXU Europe) is a private limited company incorporated
under the laws of England and Wales on February 5, 1998. TXU Europe is an
indirect wholly-owned subsidiary of TXU Corp., a Texas corporation. TXU Corp. is
a global energy services company that engages in electricity generation,
wholesale energy trading, retail energy marketing, energy delivery, other energy
related services and, through a joint venture, telecommunications services. TXU
Europe is a holding company for TXU Corp.'s United Kingdom (UK) and other
European operations.

      Almost all of TXU Europe's operating income is derived from, and its
consolidated assets are held by, TXU Europe Group plc (TXU Europe Group) and TXU
Europe Group's subsidiaries.

      On January 18, 2002, TXU Europe completed the sale of its UK distribution
business (Eastern Electricity Limited), and its 50 percent interest in 24seven
Utility Services Limited (together, the Networks business) to London Electricity
Group plc. The distribution business sold by TXU Europe is the largest in the UK
and consists of the assets and wires that deliver electricity through a 90,000
kilometer network in East Anglia and southeast England. The results of
operations of TXU Europe have been restated to reflect the disposition of the
Networks business separately as a discontinued operation in the consolidated
financial statements. (See Note 3 to Financial Statements.)


                              TXU EUROPE GROUP plc

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

          In the UK:

          TXU Europe Energy Trading Limited (TXU Europe Energy Trading), which
          coordinates and manages for TXU Europe Group and for other parties the
          price and volume risks associated with electricity generation,
          electricity and gas retail businesses, and energy trading;

          TXU Europe Power Limited (TXU Europe Power), a generator of
          electricity in the UK; and

          TXU UK Limited (TXU UK), one of the largest retailers of electricity
          and gas in the UK.

          In continental Europe:

          TXU Europe Energy Trading BV (and its subsidiaries), which conducts
          portfolio trading in central European markets, primarily in Germany,
          the Netherlands, Switzerland and Spain; and

          TXU Nordic Energy Oy (a joint venture with Powest Oy (formerly
          Pohjolan Voima Oy), Finland's second largest electricity generator)
          which trades energy on Nordic markets, has access to hydro-electric
          generation at Svartisen and Kobbelv in Norway and participates in
          distribution and retail markets through joint ventures, especially
          Atro Oyj (formerly Savon Voima Oyj).

      European operations were further expanded when Stadtwerke Kiel AG (Kiel),
a German municipal utility owning and operating infrastructure assets and
supplying customers (258,000 at acquisition), became a subsidiary of TXU Europe
Group on January 8, 2001. In addition, in May 2001, Kiel acquired Ares Energie
Direkt GmbH (Ares), an electricity retailer based in Berlin, with 110,000
customers at the date of acquisition. On January 2,

                                       1

<PAGE>

2002, Ares was transferred to a wholly owned subsidiary of TXU Europe Group.
Ares was supplying 200,000 customers at December 31, 2001.


      TXU Europe Group sells electricity and natural gas under the brand name of
TXU Energi in the UK. All of the above operations are treated by TXU Europe as
one energy business for reporting purposes.

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

      The electricity industry in the UK, including retail, distribution,
transmission and generation, is subject to varying degrees of regulation.
Transmission and distribution systems, which provide services as a single
integrated network, are subject to extensive regulation, including regulation of
prices (rates). Following the disposal of the Networks business, TXU Europe will
operate only in the sectors of the UK market where prices are not regulated. The
high voltage transmission system is owned and operated by The National Grid
Company. Power is then transformed for delivery on to the local distribution
networks, which are owned and operated by holders of public electricity
distribution licenses. Electricity generation and retailing operations are
subject to competition. Through March 2001, almost all electricity generated in
England and Wales was required to be sold and purchased from the wholesale
trading market for electricity, commonly known as the Pool. New Electricity
Trading Arrangements (NETA) were implemented in March 2001 that effectively
eliminated the Pool. All participants in the electricity industry must be
licensed to generate, transmit, distribute or supply (retail) electricity. The
electricity industry, with the exception of some nuclear operations, has been
privatized for several years.

      The gas industry in the UK has been privatized and is competitive.
Competition among suppliers was extended, first to larger customers and, since
1997, to smaller customers, including residential users. Most of the gas
transmission and distribution network in the UK is now owned by Lattice plc,
which is required to provide fair access to its network to all shippers of gas
and whose pricing is regulated.

      Retail and wholesale electricity and gas markets in the UK are now fully
open to competition, where customers are free to choose their energy providers.
The competition in the UK and further deregulation in continental European
markets allow for the use of a portfolio management business model. Under this
model, TXU Europe manages its portfolio of generation assets, contracts and
customer relationships as a single integrated energy business. To that end, TXU
Europe has undergone an internal reorganization during 2001 to reflect a more
fully integrated energy business.

                         STRATEGY FOR TXU EUROPE GROUP
                         ------------------------------

      TXU Europe Group began as a regional electricity company, operating the
largest electric networks business and one of the largest electricity supply
businesses in the UK. As the UK energy market has become increasingly
competitive, and as the energy markets in continental Europe have begun to open
to competition, TXU Europe Group has been active in the development of the
flexible energy portfolio concept.

      Electricity and gas activities have been combined and the physical and
financial resources and customers in TXU Europe Group's energy business are
managed as a single portfolio to provide flexibility in energy markets in the UK
and in continental Europe.

      The energy portfolio comprises the retail, trading and production
disciplines operating together as a single energy business in each market.
According to local circumstances, the relative extent of generation and retail
activity will vary from market to market. However, in general terms, as markets
move to competition, a strong retail position is considered essential as it
provides a strong and stable foundation for the portfolio. Trading must be
carried out to ensure full understanding of market dynamics and to clear
generation and retail positions in the short-term markets. TXU Europe Group's
entire portfolio, including its generation assets, contractual links and
customer relationships, is managed to take advantage of evolving short-term
market conditions and to manage the risks of longer-term movements in value
within the components of the energy market. The portfolio management attempts to
anticipate such value movements, through accurate market forecasting, and then
take commercial advantage of the changes.

      The performance of the portfolio is consolidated through a financial
portfolio of cash flow and risk. Because of the flexibility embedded within TXU
Europe Group's diversified and integrated single energy portfolio, it is able
not only to reduce the costs of risk management but also to identify and extract
elements of value that could not be extracted from individual components on
their own.

                                       2

<PAGE>

      The Networks business of TXU Europe was mature and had been the subject of
11 years of incentive price regulation and price reviews. Over the past six
years customers have benefitted from step reductions in regulated revenues of
11% in 1995, 10% in 1996 and 28% in 2000. Future earnings growth was limited by
future price reviews, each of which is a source of regulatory risk. In addition,
the Networks business continued to require significant forward
      capital investment to maintain and further improve service levels. In
accordance with TXU Europe's strategy, it was the appropriate time to sell the
Networks business and increase the focus on the core energy business.

      TXU Europe Group's strategy for the energy business in the UK is to
optimize its market share in the retail sale of electricity and gas by
strengthening its existing positions in those markets, to maintain a leading
trading position in both electricity and gas and to operate an appropriately
sized owned and contractual production asset base. Examples of this are the
Norweb Energi acquisition in 2000 and the acquisition in March 2002 of the UK
retail subsidiary of Amerada Hess, which strengthened TXU Europe Group's
position in the retail market. TXU Europe Group believes that substantial
economic and marketing benefits are derived from operating its electricity and
natural gas retailing business as a single unit. Competitive markets provide
opportunities for TXU Europe Group to develop its retail base through its
marketing efforts and a focus on service to customers. Providing portfolio
management services to other third party energy providers gives TXU Europe Group
additional opportunities to develop its retail 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 where
it expects competition to increase. As opportunities arise, TXU Europe Group
intends to expand its current European presence by developing its European
energy business. As appropriate, TXU Europe Group intends to establish positions
through interests in physical assets or through contracts and trading. The
commonly anticipated entry strategy is to trade within small risk capital limits
to build market understanding, complemented by recruitment of local management
to build relationships and seek asset or customer transactions. It expects to
develop retail customer bases (including, where appropriate, the associated
distribution assets) through acquisitions, direct marketing and alliances or
joint ventures, with businesses having existing customer bases. These steps will
enable TXU Europe Group to operate profitably in these markets by combining
skills learned in the UK market with knowledge of the specifics of local
markets.

      The operations of TXU Europe's integrated portfolio of customers, assets
and contracts in the UK and continental Europe are conducted through
wholly-owned subsidiaries and joint venture operations. Through its portfolio
management and trading operations, TXU Europe seeks to allocate risk capital so
as to maximize returns across European markets. As a consequence, the
composition of assets and operations in each market within the portfolio changes
from time to time.

                                     SEGMENT
                                     -------

      Following the disposition of the Networks business, the operations of TXU
Europe and its subsidiaries consist of the retail, power and trading operations,
which are treated as a single segment. The operations of TXU Europe are managed
as a single operating unit, with management responsibilities crossing
geographical and functional boundaries. TXU Europe's flexible energy portfolio
strategy involves the periodic reallocation of capital across these boundaries.

                         SUMMARY OF BUSINESS OPERATIONS
                         ------------------------------

UNITED KINGDOM OPERATIONS

POWER

UK Generation Facilities

      Following a review of its energy portfolio and in particular its UK
generating portfolio, during 2001 TXU Europe Group sold its Rugeley and West
Burton generating stations and transferred its King's Lynn and Peterborough
generating stations in a series of leasing arrangements. These transactions are
in line with TXU Europe's flexible portfolio management strategy. TXU Europe
Group's current portfolio of power stations provides flexibility in managing the
price, volume and fuel supply risks of its energy contracts. TXU Europe
continually reviews its energy portfolio within each of its markets.

                                       3

<PAGE>

       TXU Europe Group currently owns, operates or has a principal interest in
six power stations in the UK and has a residual non-posessory interest in two
gas fired power stations at Peterborough and King's Lynn, which have been sublet
on long-term leases to Centrica.

       Information on TXU Europe Group's current interests in power stations in
the UK is set out in the following table.


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
                                                        Installed
                                                        Capacity           Date of earliest
Plant                Type                                 MW                 commissioning
---------------------------------------------------------------------------------------------
<S>                  <C>                                <C>                <C>
Drakelow C           Coal-fired                           976                   1965
Ironbridge           Coal-fired                           970                   1970
High Marnham         Coal-fired                           945                   1959
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                                                   3,072
                                                        --------
</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.

       Drakelow C and High Marnham. TXU Europe Group leases the land, buildings
       ---------------------------
and plant at the Drakelow C and High Marnham power stations under 99 year-
leases, which are accounted for as operating leases.

       On January 14, 2002, TXU Europe announced it is planning to idle 522
megawatts of power capacity (the 333 MW C12 unit at Drakelow and the 189 MW unit
4 at High Marnham). The idling of these units reflects current market conditions
of system over-capacity and low wholesale prices in the UK coupled with unit
specific issues of age, efficiency, reliability, maintenance requirements and
flexibility under NETA. The reinstatement of these units or the idling of other
units may be considered as market conditions change.

       Ironbridge. TXU Europe Group purchased the freehold of the Ironbridge
       ----------
power station in January 2001. Previously, TXU Europe Group had leased the plant
from Innogy (formerly National Power) under a 99-year lease. The lease had been
accounted for as a capital lease.

       Combined Heat and Power Plants. TXU Europe owns two combined heat and
       ------------------------------
power (CHP) plants, one located in Central London and one in northeast England.

       Nedalo. TXU Europe Power 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 megawatts (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.

       TXU Europe is in the process of completing the 215 MW Shotton CHP Station
on Deeside in the UK. Due to two failures of the high-pressure steam turbine
rotor during commissioning of the steam turbine and delays during commissioning
of the power station, the scheduled completion of the plant has been delayed
until the second quarter of 2002.

       On April 5, 2001, TXU Europe announced that, through its subsidiary
Solway Offshore Limited and in partnership with Offshore Energy Resources
Limited, it had prequalified to obtain a lease of two separate, but adjoining,
plots of seabed off the Scottish and English coasts, as the first step in the
development of a major offshore wind farm. The two companies are working
together to develop a planning application for 60 turbines, each with an
installed capacity of at least 2 MW.

ENERGY TRADING

       TXU Europe Energy Trading integrates and manages the price and volume
risks associated with electricity generation, long-term power and gas contracts
(including tolling agreements), electricity and gas retailing and energy trading
activities. This activity is central to the portfolio management model that TXU
Europe applies to

                                        4

<PAGE>

its energy business. This type of activity is essential in a competitive energy
market because customer, asset and long-term contractual positions (volumes
across time-periods) will not automatically balance: imbalances have to be
cleared in the market through trading activities. This is especially the case
since the implementation in March 2001 of NETA, since NETA require each market
participant to have balanced volumes in each daily half-hour period. (This is in
contrast with previous arrangements under the Pool, where system balancing was
the responsibility of the system operator and market participants did not have
specific responsibility to balance half-hourly volumes.) In the UK, 317
Terrawatt hours (TWh) of electricity were bought and sold by TXU Europe Energy
Trading in 2001, an increase of 33% over 2000. In addition, 1,321 TWh of
equivalent gas was bought and sold in the UK by TXU Europe Energy Trading, an
increase of 20%. TXU Europe Energy Trading decides when and how to bring TXU
Europe's exposures from its customer, asset and contractual positions to balance
based on its view of future market trends and prices. The extent to which future
net commitments are left open is subject to strict, independently monitored risk
limits.

       Over and above the long term positions arising from customer commitments,
assets and long-term contracts, TXU Europe Energy Trading also enters into open
trading positions, accounted for on a mark-to-market basis, seeking to benefit
from movements in price on long or short volume positions. These may be
short-term or longer-term and in electricity, gas and coal. All activity is
managed within strict value at risk (VAR) or other risk measures. A core
expertise of the trading business is applying in-depth market understanding of
near-term and longer-term demands and trends across inter-related energy
markets, fixed on an understanding of the behaviour of retail customers.

       TXU Europe Energy Trading enters into a variety of contracts to effect
these activities. These include derivative instruments, including options,
swaps, forwards and other contractual commitments, as well as more
straightforward physical and bilateral arrangements, including tolling
agreements. Tolling agreements allow for the conversion of fuel to electric
power through the services of a power station owner. Included in TXU Europe's
tolling agreements is a four-and-a-half year agreement related to disposal of
the 1,000 MW Rugeley power station during 2001.

       Included within the portfolio of contracts managed by TXU Europe Energy
Trading are a number of long-term purchase contracts, particularly for
electricity. These contracts have been put in place or assumed largely to
provide long-term volumes at fixed prices for supply through the retail customer
base. These contracts have been put in place or assumed over a period of time,
some through acquisition activity (for example the two significant contracts
assumed with the purchase of Norweb Energi in 2000). These contracts tend to be
fixed price, so providing a hedge to movements in spot power prices. As a
consequence, however, during periods when market prices are low, the presence of
these contracts, while providing certainty of cost, will result in lower
profitability than would result from spot or shorter-term purchases from market.

RETAIL

       TXU Europe Group, through its subsidiaries, supplies electricity to
customers in almost all sectors of the UK and, at December 31, 2001, is one of
the largest retailers of energy (electricity and gas) in England and Wales. The
retail electricity market in the UK is served by the retail businesses of former
regional electricity companies, which in the past had monopoly of supply in
their "franchise areas", and new entrants. TXU Europe competes nationally for
customers, but continues to serve customers in the east and northwest of
England, the previous franchise area of Eastern Energy and Norweb. The retail
energy markets in the UK are highly competitive. At December 31, 2001, TXU
Europe Group supplied electricity to approximately 4 million customers in the
UK. TXU Europe Group is an active participant in the UK industrial and
commercial electricity market, which TXU Europe Group estimates is approximately
(Pounds)6 billion per year. TXU Europe Group competes in this market on the
basis of the quality of its customer service and by competitive pricing. Sales
to industrial and commercial customers accounted for approximately 43% of TXU
Europe Group's electricity sales revenues in 2001. As of December 31, 2001, TXU
Europe Group's share of this market was approximately 17%.

       TXU Europe Group purchased United Utilities plc's retail energy supply
business, Norweb Energi (a division of Norweb plc) in August 2000. The agreement
for the purchase of Norweb Energi included, among other things, the transfer of
the current Norweb plc public electricity supply license-area customers to TXU
Europe Group. This was completed on October 1, 2001 following implementation of
the Utilities Act.

       On March 1, 2002, TXU Europe announced that it is acquiring the UK Retail
and Trading business of Amerada Hess in a transaction that will bring 400,000
domestic energy and telecommunication accounts to TXU Europe. The (Pounds)117
million acquisition also includes a 63 billion cubic feet (Bcf) small business
and commercial

                                        5

<PAGE>

and industrial gas supply operation in the UK as well as wholesale gas marketing
operations. This part of the business provides market access for approximately
11 independent producers, accounting for about 4 percent of the UK's daily gas
production.

       Previously, TXU Europe Group sold electricity and natural gas in the UK
principally under the brand names of Eastern Energy and Norweb Energi. In
September 2001, a sole principal brand, TXU Energi, was adopted.

       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 customer retention as well as capitalizing on emerging new
markets. As an example, TXU Europe is involved in a joint marketing venture with
Tesco, the leading food retailer in the UK. Under the Tesco Clubcard program,
participants receive points, which they can use towards various special offers,
based upon the amount they spend on electricity or gas with TXU Energi. At
December 31, 2001, the program had in excess of 1.2 million participants. A
further example is TXU Europe's Staywarm program. This innovative product is
targeted at low income residential customers who benefit from fixed payments
based on estimated size of household and consumption. At December 31, 2001
Staywarm had 275,000 customer accounts.

       Competition has now been fully introduced for electricity customers in
all areas of the UK. TXU Europe Group competes nationally for residential and
small business customers and, by December 31, 2001, it was supplying electricity
to 4.0 million customers in the UK. Of these customers, 3.5 million were inside
TXU Europe Group's historical principal geographical markets in the east and
northwest of England and 465,000 customers were outside these areas. During
2001, 667,000 customers inside the east and northwest of England transferred to
another supplier and 324,000 customers outside these areas transferred to TXU
Europe Group. One of the major competitors in TXU Europe Group's traditional
service areas, and for new customers outside this service area, is Centrica plc
(trading as British Gas) which has a substantial presence in markets nationwide
through its existing gas customer base.

       On August 3, 2000, TXU Europe Group acquired the gas supply interests of
Norweb Gas Ltd as part of the Norweb Energi acquisition. TXU Europe Group
intends to maintain a significant share of this market through strong new
marketing efforts and serving customer needs with competitive pricing and
excellent service.

       TXU Europe is one of the largest suppliers of natural gas in the UK. At
December 31, 2001, TXU Europe's market share by volume was estimated at
approximately 6% of gas delivered to all customers. At December 31, 2001, it was
supplying gas to approximately 1.2 million residential and small business
customers in the UK, and 35,000 industrial and commercial customers.

CONTINENTAL EUROPE OPERATIONS

Nordic

       TXU Europe has operations in the power generation, trading and retail
markets of the Nordic region. TXU Europe trades extensively on the Nordpool
exchange, which serves Finland, Norway, Sweden and Denmark, from its trading
office in Stockholm. TXU Europe traded 398 TWh of power in 2001, up from 195 TWh
in 2000. TXU Europe has access, through a long-term licensing arrangement, to
137 megawatts (MW) of hydro-electric power generation in northern Norway. In
Finland, TXU Europe Group owns 80.1% of a consolidated joint venture company
called TXU Nordic Energy Oy, the remaining 19.9% being held by Powest Oy,
Finland's second largest electricity generator. TXU Nordic Energy Oy is entitled
to the output from approximately 584 MW of Powest's thermal generating capacity.
TXU Europe Group also owns approximately 40% of Atro Oyj, a regional electricity
distributor in Finland. On February 21, 2002, TXU Europe Group increased its
holding in Atro Oyj to 45% at a cost of (Pounds)6 million following the exercise
of a put option by municipalities holding 5.13% of the shares. Further, as part
of a consortium which has acquired approximately 190 MW of generating capacity
in the Finnish company, Etela-Pohjanmaan Oy, TXU Nordic Energy Oy is entitled to
annual output of approximately 60 MW.

Central Europe

       The central European operations, based in Geneva, trade power and gas on
mainland Europe, specifically in the bilateral and over-the-counter (OTC) power
markets and exchanges of the Netherlands, Spain, Germany (including the asset,
contract and customer positions associated with Kiel) and neighboring markets.
The

                                        6

<PAGE>

continental gas trading activity is centered primarily at the Zeebrugge hub.
The centralization of the trading activity in Geneva ensures that the
correlations and arbitrage opportunities between the continental markets are
captured and risk is managed efficiently. TXU Europe is one of the main European
trading parties, trading around 279 TWh of electricity and 123 TWh equivalent of
gas in mainland Europe in 2001 compared with 97 TWh of electricity and 60 TWh
equivalent of gas in 2000. As the markets have only recently begun to
liberalize, the structure of the central European trading portfolio is currently
focused on standard trading products, although a range of more complex products
are being added to the portfolio.

       On January 8, 2001, TXU Europe completed the acquisition of 51% of Kiel
AG (Kiel), a German municipal utility, for approximately (Pounds)145 million.
The government of the city of Kiel, the state capital, retained the remaining
49% of the utility, which has approximately 250,000 electricity and gas
customers, 175 megawatts of power generation and 2.7 billion cubic feet of gas
storage capacity. Further, in May 2001, Kiel acquired all of the share capital
of Ares, based in Berlin, Germany, for approximately 24 million Deutsche Marks
((Pounds)8 million). Ares is an electricity retailer that offers energy services
to both business and residential customers throughout Germany. On January 2,
2002, Ares was transferred to a wholly owned subsidiary of TXU Europe Group.
Ares had 200,000 customers at December 31, 2001.

Other

       Czech Republic. In August 2000, TXU Europe Group completed the sale of
       --------------
its interest in Severomoravska energetika a.s., the largest Czech electricity
distribution and supply company. On December 5, 2001, TXU Europe Group completed
the sale of its 84% interest in Teplarny Brno, a district heating and generation
company based in Brno, Czech Republic. Following these dispositions, TXU Europe
Group has no investments in the Czech Republic.

       Spain. On December 28, 2001, TXU Europe, acquired for (Pounds)2 million,
       -----
40% of the equity in two project companies and the holding company developing a
100 MW wind farm project in Aragon, Spain. In April 2001, TXU Europe sold its
19.2% interest in Hidroelectrica del Cantabrico, SA and received net proceeds of
(euro)522 million (Pounds)325 million) from the sale and recorded a pre-tax gain
of (Pounds)51 million (Pounds)36 million after-tax).

                              REGULATION AND OTHER
                              --------------------

Industry Regulation

       The electricity and natural gas supply industries in the UK are subject
to regulation under, among other things, the Electricity Act 1989 (as amended
principally by the Competition and Service (Utilities) Act 1992 and the
Utilities Act 2000), the Gas Act 1986 (as amended principally by the Competition
and Service (Utilities) Act 1992, the Gas Act 1995 and the Utilities Act 2000)
and UK and European Union (EU) environmental legislation.

       The Utilities Act 2000 (Utilities Act) made changes to the electricity
and gas licensing framework, but for the most part license obligations were
carried over largely unchanged from the old framework. In addition, the
regulators of gas and electricity markets were combined into a single regulatory
body, the Gas and Electricity Markets Authority, which consists of a Chairman
and Members appointed by the Secretary of State for Trade and Industry and is
supported by the Office of Gas and Electricity Markets (OFGEM). TXU Europe Group
and its subsidiaries have all of the necessary licenses, franchises and
certificates required to enable them to conduct their businesses.

       Although the electricity and gas markets in the UK are now fully open to
competition, there are currently certain price restrictions on rates that may be
charged and other price restrictions for electricity supply businesses. OFGEM
has announced that these restrictions, which currently affect TXU Europe Group's
electricity supply business, will be removed in April 2002. TXU Europe Group's
natural gas supply business is not subject to price regulation.

       Unless covered by an exemption, all electricity generators operating a
power station are required to have a generation license. Following the
implementation of the Utilities Act the license conditions require compliance
with the Balancing and Settlement Code which is the primary central commercial
document specifying the new wholesale electricity trading arrangements under
NETA in England and Wales.

                                        7

<PAGE>

       The regulation of energy derivatives trading in the UK has undergone
significant change following the introduction of the Financial Services and
Markets Act 2000, which became effective December 1, 2001. TXU Europe Trading
has gained authorization from the Financial Services Authority to deal in energy
investments (futures, swaps and options) as agent on behalf of TXU Europe Energy
Trading and other TXU Europe Group companies as may be necessary.

       Differing regulatory arrangements exist in the countries of continental
Europe in which TXU Europe operates. All of these countries are in the European
Union and are governed by the requirements of the Electricity Directive and the
Natural Gas Directive covering the liberalization of European energy markets.

Employees

       At December 31, 2001, TXU Europe and its subsidiaries had 3,677 full-time
employees, including 1,156 employees of Kiel and 116 employees of Ares.

       Union membership existed at TXU Europe Group when it was privatized. TXU
Europe Group recognizes trade unions for collective bargaining purposes, and
approximately 29% of employees of TXU Europe Group's UK businesses are union
members. Most of the employees at Kiel are union members. There have been no
industrial disputes or work stoppages at TXU Europe Group during the period
following its privatization in 1990.

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

       TXU Europe's businesses are subject to numerous regulatory requirements
with respect to the protection of the environment. The European electricity
generation industry is subject to a framework of national legislation and EU
environmental directives, which regulate the construction, operation and
decommissioning of generating stations. Under these laws and directives,
generating stations operated by TXU Europe are required to have an authorization
or operating license, which regulates releases into the environment. In the UK
regulations are designed also to minimize pollution of the environment taken as
a whole, having regard to available techniques which generally do not entail
excessive cost. These authorizations are issued by the relevant environmental
enforcement agencies, which are responsible for regulating the impact of
generating stations on the environment.

       In the UK, the principal laws which have environmental implications for
TXU Europe are the Electricity Act, the UK Environmental Protection Act 1990 and
the UK Environment Act 1995. The Electricity Act requires TXU Europe to consider
the preservation of natural beauty and 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 impact assessments are required in connection with
proposals such as regulation of overhead line constructions at high voltages and
generating station developments. TXU Europe Group has produced Environmental
Policy Statements and Electricity Act Schedule 9 Statements that describe the
manner in which it complies with environmental obligations.

       The principal EU directive affecting atmospheric emissions is the Large
Combustion Plant Directive, which requires reductions of sulfur dioxide (SO\2\)
emissions and nitrogen oxides (NO\x\). This was updated in 2001 and is currently
being implemented across the EU. A key decision of governments will be to
determine whether to ensure compliance by introducing a national plan to control
overall emissions in 2008 and 2016 or by requiring all plant to operate within
strict site-specific limits. The decisions made in the UK particularly affect
TXU Europe's three large coal-fired stations in the UK, which would be unlikely
to comply with site-specific limits without significant expenditure on new
combustion systems. Those countries that decide to operate a national plan could
introduce SO\2\ and NO\x\ emissions trading systems within the next few years to
ensure compliance.

       Following the restructuring of the TXU Europe generation portfolio in the
UK in 2001, the UK Environment Agency reviewed the remaining authorizations of
TXU Europe Group's coal-fired stations and made modifications to the limits for
SO\2\ emissions particularly in light of the sale of the West Burton plant and
its associated flue gas desulfurisation equipment.

       Compliance with air quality targets is important at a local level in the
UK. TXU Europe Group is developing and implementing management action plans to
ensure compliance.

       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.

                                        8

<PAGE>

The EU is committed to an 8% reduction in carbon dioxide emissions by 2012 with
separate targets for individual member states which together meet the overall EU
target. Member states are therefore introducing separate climate change programs
consistent with a general EU framework that include support for renewable
sources and energy efficiency initiatives, among other measures.

      TXU Europe 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 laws and government regulations for the protection of the
environment. There are no material legal or administrative proceedings pending
against TXU Europe with respect to any environmental matter.

      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 plan. Renewable energy sources are those that
are not currently consumed faster than they are replenished, including solar and
wind power. Because electricity generated from renewable energy sources is
generally more expensive than electricity from fossil fuel plants, a non-fossil
fuel obligation levy has been instituted to reimburse the electricity suppliers
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. Additional opportunities for renewable energy projects are being
considered.




Item 2.  PROPERTIES

      The principal properties owned or occupied by TXU Europe's businesses are
as follows:


<TABLE>
<CAPTION>
                                                                                                                 Site Area (acres)
                                                                               Remaining                           except where
       Property                          Owner/Leaseholder        Interest      Term of     Principal Use            indicated)
-----------------------------          --------------------      ----------    ----------   --------------       -----------------
<S>                                    <C>                       <C>           <C>          <C>                  <C>
The Adelphi, London                    TXU Europe Group plc      Leasehold      14 years    Offices                14,905 sq.ft.

Bedford                                TXU Europe Group plc      Freehold          --       Offices and Depot           5.0

Milton, Cambridge                      TXU Europe Group plc      Freehold          --       Depot                      19.0

Rayleigh                               TXU Europe Group plc      Freehold          --       Offices and Depot           8.0

Wherstead Park, Wherstead, Ipswich     TXU Europe Group plc      Freehold          --       Offices                80,000 sq. ft.

Suffolk House                          TXU Europe Group plc      Leasehold       1 year     Offices                44,000 sq. ft.

Fison House                            TXU Europe Group plc      Leasehold       2 years    Offices                24,000 sq. ft.

Constantine House                      TXU Europe Group plc      Leasehold       4 years    Offices                54,000 sq. ft.

3 Place des Bergues, Geneva,           TXU Europe Energy         Leasehold       8 years    Offices                 7,600 sq.ft.
Switzerland                            Trading

Birgir Jarlsgaten 2&4, Stockholm,      TXU Europe Energy         Leasehold       2 years    Offices                 1,200 sq. ft.
Sweden                                 Trading

Drakelow C Power Station               TXU Europe Merchant       Leasehold      94 years    Power station             177.0
                                       Properties Limited

High Marnham Power Station             TXU Europe Merchant       Leasehold      94 years    Power station             178.4
                                       Properties Limited

Ironbridge Power Station               TXU Europe Merchant       Freehold*         --       Power station             212.7
                                       Properties Limited

Shotton Combined Heat & Power          Shotton Combined          Leasehold      97 years    Power station              12.5
Station                                Heat & Power Limited

</TABLE>

      * In January 2001, TXU Europe Group exercised its option to purchase the
freehold interest on this plant. Previously, the land was leased under a 99-year
lease arrangement.

                                        9

<PAGE>

Item 3.  LEGAL PROCEEDINGS

     TXU Europe and its subsidiaries are party to lawsuits arising in the
ordinary course of their business. TXU Europe believes, based on its current
knowledge and the advice of counsel, that the ultimate resolution of all such
lawsuits and resulting claims would not have a material adverse effect on TXU
Europe's financial position, results of operations or cash flows and those of
its subsidiaries.

     On November 29, 2001, various subsidiaries of Enron Corporation (Enron)
went into Administration (bankruptcy) in the UK. Prior to Enron's going into
Administration, TXU Europe Energy Trading (TXUEET) had certain energy purchase
and sales contracts with Enron, which had been entered into in the ordinary
course of business. The terms of these contracts provided that they terminated
automatically upon a party going into Administration. Also, on November 29, 2001
just prior to Enron going into Administration, TXUEET received a notice from
Enron purporting to terminate these contracts for cause. TXUEET and the
Administrator have had discussions regarding potential claims relating to
contract termination; Enron has filed an action in the High Court, London,
relating to interpretation of contractual provisions; and TXUEET plans to seek a
judicial determination regarding contract termination. While the outcome of
these matters cannot be predicted, TXUEET believes, consistent with the advice
of external legal advisors in the UK, that the attempted termination of the
contracts by Enron was without substance. Accordingly, TXUEET believes any
related claims by Enron would be without merit.

     On January 25, 1999, the Hindustan Development Corporation (HDC) issued
arbitration proceedings in the Arbitral Tribunal in Delhi, India against The
Energy Group PLC (TEG) now Energy Holdings (No.3) Limited), 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. On November 21, 2000, the Arbitrators issued their decision and
dismissed HDC's claim in full, and TEG was liable only for its own legal costs
involved in the case, an estimated (Pounds)1 million. On December 21, 2000, HDC
filed a Request for Clarification of the Arbitrators' decision (Request) under
Section 33 of the Arbitration and Conciliation Act, the purpose of which is to
entitle a party to arbitration to seek clarification of language used in the
Arbitrators' decision. TEG filed its response to the Request on January 15,
2001, asserting that the Request was untimely made and that the language used by
the Arbitrators needed no clarification. TXU Europe believes that the
Arbitrators will have no alternative but to dismiss the Request. While the
effect of filing the Request has been to stay the time HDC has to file an appeal
of the Arbitrators' decision, TXU Europe regards this matter as concluded.

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

None

                                     PART II

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

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



Item 6.  SELECTED FINANCIAL DATA

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

                                       10

<PAGE>

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

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

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

None

                                    PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

                                       11

<PAGE>

                                     PART IV

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

(A)  Documents filed as part of this report:

<TABLE>
<CAPTION>
                                                                                                     Page
                                                                                                     ----
     <S>                                                                                             <C>
     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-20

         Independent Auditors' Report                                                                 A-21

         Statements of Consolidated Income                                                            A-22

         Statements of Consolidated Comprehensive Income                                              A-23

         Statements of Consolidated Cash Flows                                                        A-24

         Consolidated Balance Sheets                                                                  A-25

         Statements of Consolidated Shareholder's Equity                                              A-26

         Notes to Consolidated Financial Statements                                                   A-27
</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, 2001, are as follows:

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

              November 23, 2001          Item 5. Other Events and Regulation FD
                                                 Disclosure

              January 31, 2002           Item 2. Disposition of Assets

                                         Item 7. Financial Statements, Pro Forma
                                                 Financial Information and
                                                 Exhibits

(c)  Exhibits:

     Included in Appendix B to this report.

                                       12

<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

                                       By      /s/ Philip G. Turberville
                                            ------------------------------------
Date:    March 20, 2002                     Name:  Philip G. Turberville
                                            Title: Chief 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            Chief Executive
------------------------------------   Officer and Director
   (Philip G. Turberville)

      /s/ Paul C. Marsh                Chief Operating Officer
------------------------------------   and Director
       (Paul C. Marsh)

       /s/ Brian Dickie                Director
------------------------------------                              March 20, 2002
        (Brian Dickie)

     /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/ Henry Birt                 Principal Financial Officer
------------------------------------
         (Henry Birt)

       /s/ Henry Davies                Principal Accounting
------------------------------------   Officer
        (Henry Davies)

                                       13



<PAGE>

                                                                      Appendix A

TXU EUROPE LIMITED AND SUBSIDIARIES

INDEX TO FINANCIAL INFORMATION
December 31, 2001

<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- 20
Independent Auditors' Report ............................................................................   A- 21

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- 25
Statements of Consolidated Shareholder's Equity .........................................................   A- 26
Notes to Consolidated Financial Statements ..............................................................   A- 27
</TABLE>

                                      A-1

<PAGE>

                       TXU EUROPE LIMITED AND SUBSIDIARIES

                             SELECTED FINANCIAL DATA
                        CONSOLIDATED FINANCIAL STATISTICS

     TXU Europe Limited (TXU Europe), a private limited company incorporated
under the laws of England and Wales on February 5, 1998 (Formation), is an
indirect wholly-owned subsidiary of TXU Corp., a Texas corporation. The selected
financial data of TXU Europe has been derived from the audited consolidated
financial statements of TXU Europe and has been prepared in accordance with
accounting principles generally accepted in the United States of America (US
GAAP). Historical results of operations, except for the period from April 1,
1998 through May 18, 1998 and the year ended March 31, 1998, have been restated
to reflect the Networks business as discontinued operations. The period from
April 1, 1998 through May 18, 1998 and the year ended March 31, 1998 were not
restated because it was not practical to do so and the resulting presentation
would not have enhanced comparability or trend analyses.

     On May 19, 1998, TXU Europe obtained control of The Energy Group PLC (TEG),
the former holding company of TXU Europe Group plc, formerly Eastern Group plc,
(TXU Europe Group). For financial reporting purposes, TXU Europe Group is
considered to be the "Predecessor Company" to TXU Europe. Earnings of TXU Europe
Group are not reflected in TXU Europe's results before May 19, 1998, other than
as a result of TXU Europe'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 has
accounted for TEG and TXU Europe Group as consolidated subsidiaries. Also on May
19, 1998, TEG sold its United States (US) and Australian coal businesses and US
energy marketing operations.

     The acquisition of TEG was accounted for as a purchase business combination
in accordance with US GAAP.

<TABLE>
<CAPTION>
                                            Year Ended December 31,                                  Predecessor
                                      ----------------------------------                   -----------------------------

                                                                             Period from
                                                                              Formation      Period from
                                                                               Through      April 1, 1998    Year Ended
                                                                             December 31,      Through        March 31,
                                        2001         2000         1999           1998        May 18, 1998       1998
                                      --------     --------     --------    -------------- ---------------  ------------
                                                                          ((pound) million)
<S>                                   <C>          <C>          <C>       <C>              <C>              <C>
Total assets - end of year              8,990        9,825        7,422         7,110                          5,826
                                      --------     --------     --------    -------------- ---------------  ------------
Capitalization - end of year
  Long-term debt and other
     obligations, less amounts
     due currently                      2,794        3,658        3,709         2,800                          1,976
  Affiliate interest in
     subsidiary                           208          208          195           178
  Minority interest                        92           50           48            12                              6
  Preferred securities of
     subsidiary perpetual trust            95           95            -             -                              -
  Notes payable to TXU Corp.                -            -            -           682                              -
  Shareholder's equity                  1,768        1,799        1,673         1,535                          1,802
                                      --------     --------     --------    -------------- ---------------  ------------
     Total                              4,957        5,810        5,625         5,207                          3,784
                                      --------     --------     --------    -------------- ---------------  ------------
Operating revenues                      8,691        4,517        3,663         2,123           425            3,475
Operating income (loss)                   107          261          307           175           (11)             267
Income (loss) before interest *           170          328          315           221           (10)             277
Income (loss) from continuing
     operations                           (14)          41           32            37             -                -
Income from discontinued
     operations                            39           92          112            51             -                -
Net income (loss)                           7          120          138            88           (21)             (38)
Net interest expense                      268          258          228           142            16              126

Ratio of earnings to fixed charges        0.7          1.2          1.3           1.4           0.1              1.7
</TABLE>

 * Income (loss) before Interest, Income Taxes, Distributions and Minority
Interest on the face of the Statements of Consolidated Income.

                                       A-2

<PAGE>

                       TXU EUROPE LIMITED AND SUBSIDIARIES

                             SELECTED FINANCIAL DATA
                              OPERATING STATISTICS

<TABLE>
<CAPTION>
                                                           Year Ended December 31,            Period From      Period From
                                              ----------------------------------------------   Formation        January 1,
                                                                                                Through           1998
                                                                                                December         Through
                                                    2001             2000            1999      31, 1998        May 18, 1998
                                              --------------  ---------------  -------------  -------------   -------------
SALES VOLUMES
<S>                                           <C>             <C>              <C>            <C>             <C>
      Electric (gigawatt-hours) - (GWh):
       Industrial and commercial ............      28,510           22,586          19,698         15,459          7,593
       Residential ..........................      21,640           17,263          16,726          7,826          6,501
                                              --------------  ---------------  -------------  -------------   -------------
         Total electricity ..................      50,150           39,849          36,424         23,285         14,094
                                              ==============  ===============  =============  =============   =============

      Gas (billion cubic feet) - (Bcf):
       Industrial and commercial ............          57               57              77             51             49
       Residential ..........................          86               58              49             21              6
                                              --------------  ---------------  -------------  -------------   -------------
         Total gas ..........................         143              115             126             72             55
                                              ==============  ===============  =============  =============   =============
      Wholesale energy sales (physical):
       Electricity (GWh) ....................     148,160          111,259          78,950         51,060         31,122
                                              ==============  ===============  =============  =============   =============
       Gas (Bcf) ............................       1,585            1,060             447            148             77
                                              ==============  ===============  =============  =============   =============

      CUSTOMERS (end of period  -  in
      thousands)
          Electric ..........................       4,395            4,358           2,931          3,211
          Gas ...............................       1,273            1,127             805            777
</TABLE>

                                      A-3

<PAGE>

                       TXU EUROPE LIMITED AND SUBSIDIARIES
                    MANAGEMENTS'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

     The discussion below should be read in conjunction with the consolidated
financial statements and the related notes of TXU Europe Limited (TXU Europe).
TXU Europe Group plc (TXU Europe Group) constituted 100% of TXU Europe's
operating assets as of December 31, 2001 and generated 100% of TXU Europe's
operating revenues for the year ended December 31, 2001. Historical information
presented has been restated to reflect the Networks business as discontinued
operations. Certain prior year information has been reclassified to conform to
the current year's presentation.

Dispositions, Acquisitions  and Other Changes in the Business

     TXU Europe continually reviews its portfolio of businesses and investments
and makes adjustments as considered necessary to meet its strategic objectives
and to maintain financial and operational flexibility. As part of this review,
capital may be redeployed within the energy portfolio to maximize returns across
Europe.

     On March 1, 2002, TXU Europe announced the acquisition of the UK energy
retail and trading business of Amerada Hess for (Pounds)117 million. Through the
acquisition of Amerada Hess UK Retail and Trading, TXU Europe gains 400,000
domestic energy customer accounts, a further 7% share of the UK's industrial and
commercial business and a significant gas trading portfolio.

     On January 18, 2002, TXU Europe completed the sale of its UK distribution
business (Eastern Electricity Limited), and its 50 percent interest in 24seven
Utility Services Limited (24seven) to London Electricity Group plc (LE Group)
for (Pounds)1.3 billion, consisting of a cash payment of (Pounds)560 million and
the assumption by LE Group of (Pounds)750 million aggregate principal amount of
debt (the Eastern Electricity Sterling Bonds). TXU Europe recorded a one-time
charge in December 2001 of (Pounds)61 million after taxes associated with the
disposition. The distribution business sold by TXU Europe is the largest in the
UK and consists of the assets and wires that deliver electricity through a
90,000 kilometer network in East Anglia and southeast England. 24seven, the
former joint venture between TXU Europe and LE Group, operates and maintains the
networks for both TXU Europe and LE Group. The transaction has resulted in
approximately (Pounds)1.3 billion of debt reduction, consisting of (Pounds)750
million of debt assumed by LE Group and approximately (Pounds)560 million of
debt repaid using the cash proceeds from the sale. The ultimate proceeds remain
open until the analysis of working capital and fixed asset amounts, as of the
completion date has been finalized.

     In December 2001, TXU Europe completed the sale of its 2,000 MW coal-fired
West Burton power station to LE Group for (Pounds)366 million in cash, including
(Pounds)44 million for working capital amounts (fuel stock) realized through the
disposal. In addition, LE Group has reimbursed TXU Europe for costs of
(Pounds)60 million incurred to date on a flue gas desulphurisation plant at the
site.

     In December 2001, TXU Europe acquired for (Pounds)2 million, 40% of the
equity in two project companies and the holding company developing a 100 MW wind
farm project in Aragon, Spain.

     In December 2001, TXU Europe ended its operations in the Czech Republic
with the sale of its interest in Teplarny Brno for (Pounds)17 million and
recorded a pre-tax loss of (Pounds)14 million ((Pounds)10 million after-tax) in
Other Income - Net.

     In October 2001, TXU Europe completed the transfer of its 380 MW
Peterborough and 325 MW King's Lynn gas-fired generating stations to Centrica
through a series of leasing arrangements. TXU Europe previously had a capital
lease interest in each of the plants. The proceeds from the transfers were
(Pounds)173 million. In addition, TXU Europe retained certain tax benefits.

     In July 2001, TXU Europe completed the sale of its 1,000 MW coal-fired
Rugeley generating station to International Power for (Pounds)200 million. Cash
received at closing was (Pounds)67 million and the remaining cash proceeds from
the sale were received in January 2002.

                                       A-4

<PAGE>

                      TXU EUROPE LIMITED AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The restructuring of the generating portfolio, including the sale of West
Burton and Rugeley and the transfer of the Peterborough and King's Lynn
generation stations, resulted in a pre-tax loss of (Pounds)142 million, recorded
in operating and maintenance expense. The retention of certain tax benefits
related to the stations and reversal of previously established deferred taxes
resulted in a net tax benefit of (Pounds)132 million. The resulting after-tax
loss on the sale and the transfer was (Pounds)10 million.

     In May 2001, Stadtwerke Kiel AG (Kiel) acquired all of the share capital of
Ares Energie Direkt GmbH (Ares), based in Berlin, Germany, for approximately 24
million Deutsche Marks ((Pounds)8 million). The acquisition of Ares was
accounted for as a purchase business combination. Ares is an electricity
retailer that offers energy services to both business and residential customers
throughout Germany, having 110,000 customers at the time of acquisition.

     In April 2001, TXU Europe received net proceeds of (Euro)522 million
((Pounds)325 million) from the sale of its 19.2% interest in Hidroelectrica del
Cantabrico, SA (Hidrocantabrico) and recorded a pre-tax gain of (Pounds)51
million ((Pounds)36 million after-tax). In the year ended December 31, 2000, TXU
Europe incurred (Pounds)7 million of costs associated with the offer for
Hidrocantabrico. Both of these items are recorded in Other Income - Net.

     In February 2001, TXU Europe finalized the sale of its interest in the
North Sea gas fields for (Pounds)138 million. From the date of the sale through
December 31, 2001, TXU Europe received net cash proceeds of (Pounds)106 million
after settlement of certain outstanding issues, and recorded a net pre-tax gain
of (Pounds)9 million in Other Income - Net ((Pounds)6 million after-tax).

     In January 2001, TXU Europe completed the acquisition of 51% of Kiel for
(Pounds)145 million. The acquisition of Kiel was accounted for as a purchase
business combination. The process of determining the fair value of the assets
and liabilities of Kiel was completed in the fourth quarter of 2001. TXU
Europe's final valuation of goodwill is (Pounds)109 million. The results of
operations of Kiel are reflected in the consolidated financial statements from
the January 8, 2001 acquisition date.

     In August 2000, TXU Europe purchased United Utilities plc's retail energy
supply business, Norweb Energi (a division of Norweb plc), for total
consideration, including direct costs of the acquisition, of (Pounds)340
million. In the transaction, TXU Europe assumed certain of Norweb Energi's
obligations. These include Norweb Energi's power purchase agreements, which have
been integrated into TXU Europe's energy portfolio. The acquisition of Norweb
Energi was accounted for as a purchase business combination. The final amount
assigned to goodwill was (Pounds)628 million.

     In August 2000, TXU Europe contracted its customer services operation to
Vertex Data Science Limited (Vertex), United Utilities plc's customer services
business. Customer services include call centers, billing, credit management and
debt collection. TXU Europe's 1,335 customer services staff was transferred to
Vertex on September 1, 2000.

     In May 2000, TXU Europe sold its metering business in the UK realizing a
pre-tax gain of approximately (Pounds)29 million. In addition, in August 2000,
TXU Europe completed the sale of its interest in the Czech utility,
Severomoravska energetika, a.s. (SME), realizing a pre-tax gain of approximately
(Pounds)20 million.

Critical Accounting Policies

     TXU Europe's accounting policies are detailed in Note 2 to Financial
Statements. TXU Europe follows US GAAP. In applying these accounting policies in
the preparation of TXU Europe's financial statements, management is required to
make estimates and assumptions about future events that affect the reporting and
disclosure of assets and liabilities at the balance sheet dates and the reported
amounts of revenue and expense during the periods covered. The following is a
summary of certain critical accounting policies of TXU Europe which are impacted
by judgments and uncertainties and for which different amounts would be reported
under a different set of conditions or using different assumptions.

                                      A-5

<PAGE>

                      TXU EUROPE LIMITED AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Revenue recognition -- TXU Europe records revenue for retail and other
energy sales and services under the accrual method. 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.
As a result, unbilled revenues are subject to a degree of estimation, which can
be significant. For the years ended December 31, 2001 and 2000, (Pounds)452
million and (Pounds)410 million, respectively, of unbilled revenue was included
in total revenues.

     Derivatives and financial instruments -- TXU Europe accounts for
derivatives in accordance with Statement of Financial Accounting Standards
(SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 requires the recognition of derivatives in the balance sheet and
the measurement of those instruments at fair value. Changes in the fair value of
derivatives are recorded in earnings, unless (i) the normal purchase or sale
exception or (ii) cash flow hedge accounting is elected.

     TXU Europe enters into derivative instruments, including options, swaps and
other contractual commitments for both non-trading (i.e., hedging) and trading
purposes. TXU Europe enters into derivative instruments for non-trading purposes
in order to manage market risks related to changes in interest rates, foreign
currency exchange rates and commodity prices.

     TXU Europe has designated, documented and assessed accounting hedge
relationships which resulted in cash-flow hedges that require TXU Europe to
record the derivative assets or liabilities at their fair value on its balance
sheet with an offset in other comprehensive income. Hedge ineffectiveness is
recorded in earnings. Amounts are removed from other comprehensive income as the
underlying transactions occur and realized gains and losses are recorded.

     Although the amounts that ultimately would be recognized in the income
statement over the term of the derivatives are the same under any of the methods
used, it is the timing of the recognition of these amounts that is the main
difference in these methods. The determination of fair value is dependent upon
certain assumptions and judgments, as discussed in Energy trading contracts and
mark-to-market accounting below.

     The use of the normal purchase and sale exception from derivative
classification and the hedge accounting designation are elections that can be
made by management if certain strict criteria for derivatives are met and
documented. These elections can reduce the volatility in earnings resulting from
fluctuations in fair value. Results of operations could be materially affected
by elections of normal purchase or sale or hedge accounting for qualifying
derivative contracts.

     Energy trading contracts and mark-to-market accounting -- All energy
trading contracts, whether or not derivatives under SFAS No. 133, are accounted
for under the mark-to-market method of accounting as required by US GAAP. Energy
trading portfolios, which may include volumetric forecasts, are valued at
current market prices. This marking-to-market process recognizes changes in the
value of trading portfolios associated with market price fluctuations. Under
mark-to-market accounting, the current values of energy-related contracts are
recorded as assets or liabilities on the balance sheet, and any period-to-period
change in the current value of such contracts is recognized in the statement of
income.

     In the energy trading market, the availability of quoted market prices is
dependent on the type of commodity (e.g., natural gas, electricity, etc.) time
period specified and location of delivery. In computing the mark-to-market
valuations, each market segment is split into liquid and illiquid portions. The
liquid portion varies by region, time period and commodity. Generally, the
liquid period is supported by broker quotes and frequent trading activity. In
illiquid periods, little or no market information may exist, and the fair value
would be estimated through market modeling techniques.

     For those periods where quoted market prices are not available, forward
price curves are developed based on the available trading information or through
the use of industry accepted modeling techniques and practices based on

                                      A-6

<PAGE>

                      TXU EUROPE LIMITED AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

market fundamentals (e.g., supply/demand, replacement cost, etc.), discounted
using a risk free interest rate. However, as a matter of policy, TXU Europe
generally does not recognize any income from these illiquid markets.

     In accounting for energy trading contracts, settlements of positions under
which energy ownership is exchanged (physical contracts) are recorded as
revenues and purchases. Gains and losses from settlements of financial positions
are recorded net as revenues. For energy trading contracts not yet settled,
whether financial or physical, changes in fair value are recorded net as
revenues. Such fair value changes are referred to as unrealized gains and losses
from mark-to-market valuations. When positions are settled and gains and losses
are realized, the previously recorded unrealized gains and losses from
mark-to-market valuations are reversed.

     RESULTS OF OPERATIONS

     Operating Results

     Year ended December 31, 2001 compared to 2000

     Operating revenues increased by (Pounds)4.2 billion, to (Pounds)8.7 billion
in 2001. This increase is primarily the result of the continued expansion of
wholesale trading activity in the UK, Nordic and Central European markets.
Wholesale electricity and gas physical sales volumes in 2001 increased 33% and
50%, respectively, over 2000. Trading activity in the UK increased partially as
a result of the implementation of the New Electricity Trading Arrangements
(NETA) in March 2001, which eliminated the old Pool system and allows contracts
to be made directly between counterparties. Physical sales of power and gas are
being recorded gross in revenues and physical purchases of power and gas are
recorded in energy purchased for resale rather than net in revenues as is the
case for financial contracts. 2001 also includes a full year of revenues from
the Norweb acquisition (August 2000) of (Pounds)851 million compared to revenues
of (Pounds)391 million in 2000. The inclusion of Kiel and Ares, acquired in
2001, contributed (Pounds)215 million and (Pounds)34 million, respectively, to
revenues. The balance of the increase reflects the significant rise in energy
trading activity, particularly in the central European and Nordic operations.
Downward pressures on revenues include the loss of ex-franchise customers,
replaced with customers outside of TXU Europe's ex-franchise area, but who
contribute lower margins.

     Gross margin, which is revenues less energy purchased for resale and fuel
consumed, increased (Pounds)233 million to (Pounds)1.5 billion in 2001,
primarily reflecting increased retail margins resulting from acquisitions,
partially offset by declines in wholesale trading margins in the Central Europe
and Nordic regions. Included in gross margin are net unrealized gains from
mark-to-market valuations of trading positions of (Pounds)41 million in 2001 and
a (Pounds)45 million gain on a renegotiated power supply contract of an acquired
business. Downward pressures on margins include the loss of ex-franchise
customers, replaced with customers outside of TXU Europe's ex-franchise area,
but who contribute lower margins.

     Operation and maintenance expense increased (Pounds)218 million to
(Pounds)993 million in 2001. The increase includes net charges of (Pounds)22
million related to the Enron bankruptcy. This net charge largely comprises the
write-off of energy trading assets and related items of (Pounds)43 million and
the write-back of net working capital liabilities of (Pounds)21 million. In
addition, there were charges of (Pounds)9 million in respect of the transfer of
customer service operations to a third party. This transfer is expected to be
completed in mid-2002. The underlying increase also reflects the full-year
impact of the Norweb acquisition in 2000 and the Kiel and Ares acquisitions in
2001.

     Excluding the (Pounds)142 million loss on disposal or transfer of
generating plants in 2001, other operating expenses increased (Pounds)27 million
to (Pounds)235 million in 2001, primarily due to goodwill amortization resulting
from acquisitions. Goodwill amortization ceased January 1, 2002 (see Note 2 to
Consolidated Financial Statements). In addition, there was (Pounds)23 million in
respect of the transfer of customer service operations to a third party.

                                      A-7

<PAGE>

                      TXU EUROPE LIMITED AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Operating income decreased (Pounds)154 million, to (Pounds)107 million in
2001. This reflects the (Pounds)142 million loss on the UK generation plant
transactions. The other (Pounds)12 million reflects trading losses in the
central European region and the effect of the competitive pressures in the UK
retail market offset by the Kiel and Ares acquisitions.

     Other income - net decreased (Pounds)4 million to (Pounds)63 million from
income of (Pounds)67 million in 2000. The 2001 period includes a (Pounds)51
million pre-tax ((Pounds)36 million after-tax) gain on the sale of the
investment in Hidrocantabrico. The 2000 period includes a (Pounds)20 million
pre-tax gain ((Pounds)17 million after-tax) from the sale of its investment in
SME in eastern Europe and a (Pounds)29 million pre-tax ((Pounds)20 million
after-tax) gain on the sale of its UK metering business.

     Interest expense net of interest income increased (Pounds)10 million, or
4%, to (Pounds)268 million in 2001. The increase is primarily due to interest on
borrowings to finance the Norweb acquisition in late 2000 and the Kiel
acquisition in January 2001. The period also includes (Pounds)11 million of
interest expense related to the receivables securitization. Other changes in
financing in the two periods had a largely neutral effect.

     In 2001, there was an income tax benefit of (Pounds)84 million, compared
with an income tax expense of (Pounds)29 million in 2000. The change resulted
from the tax effects of the UK generation plant transactions. A pre-tax loss of
(Pounds)142 million on the generation plant transactions compared to an
after-tax loss of (Pounds)10 million reflects the retention of certain UK tax
benefits and reversals of related deferred tax liabilities. Excluding the
effects of the UK plant transactions, the higher effective tax rate reflects
higher levels of non-deductible goodwill amortization in 2001 and the effects of
overseas tax rates. Certain additional tax benefits accrued to TXU Europe's
parent company as a result of UK tax charges and payments.

     In summary, the operating results for 2001 can be characterized by:

     Decreasing operating income from UK operations, reflecting competitive
     pressures on retail electricity prices and customer retention, lower and
     less volatile UK wholesale power prices, which reduced contributions from
     power stations and opportunities in the UK electricity trading markets,
     partially offset by strong contribution from gas operations in the UK, in
     particular in mark-to-market profits on the gas portfolio and in profits
     from the upstream gas business prior to its disposal in the early spring of
     2001 and from a full year's contribution from the Norweb Energi acquisition
     in August 2000;

     Net after-tax capital gains on the disposal of the investment in
     Hidrocantabrico and the restructuring of the generating fleet;

     Relatively flat European operating income, itself being the net of the
     contribution of the acquired Kiel and Ares businesses in Germany and
     trading losses incurred in central Europe.

     Year ended December 31, 2000 compared to 1999

     Operating revenues increased by (Pounds)854 million, to (Pounds)4.5 billion
in 2000. This increase includes the result of the Norweb acquisition, which
contributed (Pounds)391 million in revenues in 2000. Wholesale electricity and
gas physical sales volumes in 2000 increased 41% and 137%, respectively, over
1999. This was offset by a reduction in revenues from other retail customers in
TXU Europe's traditional service area, reflecting intense competition. The
balance of the increase in revenues is attributable to the expansion of the
energy trading operations, an increase of (Pounds)924 million over 1999.

     Gross margin decreased (Pounds)175 million to (Pounds)1.2 billion in 2000,
primarily reflecting lower margins on UK wholesale sales of electricity and gas.

                                      A-8

<PAGE>

                      TXU EUROPE LIMITED AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Operation and maintenance expense decreased (Pounds)139 million to
(Pounds)775 million in 2000. The reduction from the comparable 1999 amount
reflects the underlying benefits of staff reorganizations and other exit costs
and on-going cost savings programs throughout TXU Europe, partially offset by
the inclusion of Norweb Energi.

     Other operating expenses increased (Pounds)10 million to (Pounds)208
million in 2000, primarily due to goodwill amortization.

     Other income - net increased (Pounds)59 million in 2000 to (Pounds)67
million. The increase is comprised primarily of the gains from the sale of
certain assets and other investments, including the sale of the metering
business and the sale of the portfolio interest in SME, aggregating (Pounds)65
million pre-tax ((Pounds)46 million after-tax). Other gain transactions, equity
in earnings of joint ventures and dividend income from other investments,
reduced by the (Pounds)7 million in costs associated with the intended offer for
Hidrocantabrico, were also contributing factors.

     Interest expense for 2000 was higher than for 1999 primarily due to higher
variable interest rates and a higher level of debt.

     Total income tax expense of TXU Europe for 2000 was (Pounds)29 million
compared with (Pounds)55 million for 1999. The effective tax rate in both
periods is affected by amortization of goodwill and other non-deductible items
primarily related to a capital lease. The effective tax rate in 2000 also
reflects (Pounds)18 million in respect of favorable resolutions of certain
matters relating to tax matters in prior years.

Energy Trading Activities

     The table below summarizes the changes in energy trading assets and
liabilities for the year ended December 31, 2001. The net change, excluding
"other activity" as described below, represents the effect of mark-to-market
accounting on earnings for 2001 (in millions).

<TABLE>
     <S>                                                                                              <C>
     Balance of net trading assets/(liabilities) at December 31, 2000 .......................         (Pounds)(49)

     Settlements of positions included in the opening balance (1) ...........................                 (44)

     Unrealized mark-to-market valuations of positions held at year-end .....................                  85

     Other activity (2) .....................................................................                 (66)
                                                                                                      -----------

     Balance of net trading assets/(liabilities) at December 31, 2001 .......................         (Pounds)(74)
                                                                                                      ===========
</TABLE>

(1) Represents unrealized mark-to-market valuations of these positions
    recognized in earnings as of December 31, 2000.

(2) Includes current year payments or receipts of cash or other consideration,
    including option premiums, associated with trading positions and
    amortization of such amounts. This activity has no effect on unrealized
    mark-to-market valuations.

     Of the net trading asset/liability balance above at December 31, 2001, the
amount representing unrealized mark-to-market net gains that have been
recognized in current and prior years' earnings is (Pounds)95 million. The
remainder ((Pounds)169 million) of the December 31, 2001 balance is comprised
principally of amounts representing current and prior years' net receipts of
cash or other consideration, including option premiums, associated with trading
positions, net of any amortization. This includes, during 2001, amounts in
respect of the tolling agreement entered into as part of the disposition of the
Rugeley power station and on gas contracts entered into to lock in positive
mark-to-market positions. The following table presents the unrealized
mark-to-market balance at December 31, 2001 scheduled by contractual settlement
dates of the underlying positions (in millions).

                                      A-9

<PAGE>

                      TXU EUROPE LIMITED AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                  Maturity dates of unrealized mark-to-market balance at December 31, 2001
                                                ----------------------------------------------------------------------------
                                                 Maturity less                                Maturity in
                                                     than       Maturity of    Maturity of     Excess of
                                                     1 year      1-3 years      4-5 years       5 years           Total
     ----------------------------------------   --------------  -----------    ------------   ------------   ---------------
     <S>                                        <C>             <C>            <C>            <C>            <C>
     Pricing method:
       Prices actively quoted ...............              (11)          (1)             --             --               (12)
       Prices provided by other external
        sources .............................               47           28               7             --                82
         Prices based on models .............               32           (9)              3             (1)               25
                                                --------------  -----------    ------------   ------------   ---------------

     Total ..................................               68           18              10             (1)               95
                                                ==============  ===========    ============   ============   ===============

     Percentage of total ...................                71%          19%             11%            -1%            100.0%
</TABLE>

         As the above table indicates, 90% of the unrealized mark-to-market
valuations at December 31, 2001 mature within three years. This is reflective of
the terms of the positions and the conservative methodologies employed in
valuing positions in periods of decreased market liquidity and visibility. The
"prices actively quoted" category reflects exchange traded contracts with active
quotes available through 2011. The "prices provided by other external sources"
category represents forward commodity positions at locations for which
over-the-counter (OTC) broker quotes are available. The "prices based on models"
category contains the value of all non-exchange traded options, valued using an
industry accepted option pricing model. In addition, this category contains
other contractual arrangements, which may have both forward and option
components. In many instances, these contracts can be broken down into their
component parts and modeled by TXU Europe as simple forwards and options based
on prices actively quoted. As the modeled value is ultimately the result of a
combination of prices from two or more different instruments, it has been
included in this category.

Discontinued Operations

     Revenues for 2001 were (Pounds)323 million compared with (Pounds)371
million for 2000. The decrease reflects the impact of the OFGEM price review,
which was effective from late March 2001. Income from operations of this
discontinued business, after tax for 2001 was (Pounds)73 million compared with
(Pounds)92 million in 2000. The decrease reflects the reduction in revenues as a
result of The Office of Gas and Electricity Markets (OFGEM) actions and the
effect of restructuring costs incurred following the disposal of the Networks
business. The 2001 results also include (Pounds)7 million of income for the
period from January 1, 2002 through the final completion date of January 18,
2002 and (Pounds)36 million of income from the measurement date (November 18,
2001) to December 31, 2001.

Regulatory Issues

     Although the electricity and gas markets in the UK are now fully open to
competition, there are currently certain price restrictions on rates that may be
charged and other price restrictions for electricity supply businesses. OFGEM
has announced that these restrictions, which currently affect TXU Europe Group's
electricity supply business, will be removed in April 2002. TXU Europe Group's
natural gas supply business is not subject to price regulation.

Liquidity and Capital Resources

Year ended December 31, 2001 compared to 2000

     Net cash generated by operating activities was (Pounds)186 million for 2001
compared with (Pounds)507 million for 2000, a decrease of (Pounds)321 million.
Lower cash flows were driven by several factors, including reduced cash
operating profits in both the continuing and discontinued operations and lower
cash receipts associated with energy trading positions, including option
premiums (such positions are recorded as energy trading assets and liabilities).
Movements in certain operating assets and liabilities have been affected by the
significantly higher levels in 2001 of revenues and

                                      A-10

<PAGE>

                      TXU EUROPE LIMITED AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

energy purchased for resale resulting from increased trading activities and
changes in UK trading arrangements (during 2001, changes in UK trading
arrangements resulted in an increase in physical sales and purchases of power
and gas, which are recorded gross in revenue and energy purchased for resale,
and lower levels of financial contracts, which are recorded net in revenue).

     Cash provided by investing activities was (Pounds)980 million for 2001
compared with cash used of (Pounds)581 million for 2000. Acquisitions of
businesses in 2001 (Kiel and Ares) were (Pounds)153 million compared to
(Pounds)319 million in 2000 (primarily Norweb Energi). Capital expenditures were
(Pounds)262 million for 2001 compared with (Pounds)229 million for 2000. Cash
used for other investments in 2000 of (Pounds)238 million primarily reflects the
purchase of additional shares in Hidrocantabrico. Proceeds from the sales of
assets and other investments were (Pounds)1.1 billion for 2001 and (Pounds)137
million for 2000. In 2001, such proceeds were from TXU Europe's repositioning of
its portfolio through generating plant disposals or transfers and the sale of
TXU Europe's investment in Hidrocantabrico ((Pounds)325 million) and the sale of
the North Sea gas assets ((Pounds)106 million). In 2000, such proceeds were from
the sales of the metering business ((Pounds)36 million), the investment in SME
((Pounds)51 million) and the sale of other investments ((Pounds)50 million).

     Cash used by financing activities for 2001 was (Pounds)1.2 billion compared
with cash provided of (Pounds)452 million for 2000. For 2001, long-term debt
borrowings were (Pounds)558 million and repayments of long-term debt were
(Pounds)2.1 billion, which includes (Pounds)915 million of reductions in capital
lease and rent factoring obligations. Most of the debt reduction came from the
cash proceeds from the plant and investment sales. (See table below for
details.) In addition, there was (Pounds)95 million of Preferred Securities of
Subsidiary Perpetual Trust issued in March 2000. For 2000, borrowings of
long-term debt were (Pounds)1.4 billion and repayments were (Pounds)1.1 billion
(primarily to pay down the Tranche B borrowings under TXU Europe's Sterling
Credit Agreement, which was replaced in 2001). For 2001, changes in notes
payable - banks and other short-term loans, including changes in receivable
securitization, provided (Pounds)358 million compared with providing (Pounds)103
million in 2000. TXU Corp. intends to subscribe to an additional (Pounds)150
million of ordinary share capital in TXU Europe during 2002.

     The high levels of cash remaining on the balance sheet at the end of 2001
reflect the timing of the use of proceeds received from the disposal of the West
Burton generating facility and from the trading arrangement discussed above.
Short-term debt was paid off in early January 2002. The 2000 ending balance of
cash reflects the late-year (euro)500 million ((Pounds)301 million) bond issue
in anticipation of rent factoring payments and the Kiel acquisition occurring in
January 2001.

     Details of all TXU Europe's financing arrangements and facilities are set
out in the Notes to Consolidated Financial Statements.

Year ended December 31, 2000 compared to 1999

     Net cash generated by operating activities was (Pounds)507 million for 2000
compared with (Pounds)417 million for 1999, an increase of (Pounds)90 million.
This increase reflects higher cash receipts associated with energy trading
positions, including option premiums, in 2000 compared to 1999 and improvements
in net working capital.

     Cash used in investing activities was (Pounds)581 million for 2000 compared
with (Pounds)686 million for 1999. Acquisitions of businesses (primarily Norweb
Energi) were (Pounds)319 million in 2000. Capital expenditures were (Pounds)229
million for 2000 compared with (Pounds)385 million for 1999. Cash used for other
investments in 2000 of (Pounds)238 million primarily reflects the purchase of
additional shares in Hidrocantabrico. The (Pounds)282 million invested in 1999
was primarily for the investments in Powest and Atro Oyj in the Nordic markets.
Proceeds from the sales of assets and other investments were (Pounds)137 million
for 2000. Most of this came from the sales of the metering business ((Pounds)36
million), the investment in SME ((Pounds)51 million) and the sale of other
investments ((Pounds)50 million).

     Cash provided by financing activities for 2000 was (Pounds)452 million
compared with (Pounds)88 million for 1999. For 2000, long-term debt borrowings
were (Pounds)1.4 billion and repayments of long-term debt were (Pounds)1.1
billion (primarily to pay down the Tranche B borrowings). (See table below for
details.) In addition, there was (Pounds)95 million of Preferred Securities of
Subsidiary Perpetual Trust issued in March 2000. For 1999, borrowings of
long-term debt were approximately (Pounds)2.4 billion and repayments were
approximately (Pounds)1.5 billion, reflecting the refinancing of the original

                                      A-11

<PAGE>

                      TXU EUROPE LIMITED AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TXU Corp. acquisition financing. For 2000, changes in notes payable - banks and
other short-term loans, including changes in receivable securitization, provided
(Pounds)103 million compared with repayments of (Pounds)102 million in 1999.

Financing Arrangements

     Details concerning changes in long-term debt are presented below:

<TABLE>
<CAPTION>
                                                                                        Year Ended December 31,
                                                                       -------------------------------------------------------
                                                                            2001               2000                  1999
                                                                       ---------------   -----------------      --------------
                                                                                         ((Pounds) million)
<S>                                                                    <C>               <C>                    <C>
Borrowings under the:
    Revolving Credit Facility Agreement
       Tranche A due 2006 ....................................                     399                   -                   -
    Sterling Credit Facility - Term Facility .................                       -                   -                 750
    Sterling Credit Facility - Tranche B:
       Norwegian Kroner (NOK) ................................                       4                  53                 124
       Spanish pesatas .......................................                       -                   -                  51
       Pounds sterling .......................................                      50                 115                 133
       Euro's ................................................                      30                 362                 257
    Senior Notes .............................................                       -                   -                 921
    EMTN program - Notes:
        7.25% due 2007 .......................................                       -                  50                   -
        7.25% due 2030 .......................................                       -                 275                   -
        6.88% due 2001 .......................................                       -                 100                   -
      35 PUT 5 Resettable Notes due 2035 .....................                       -                 301                   -
    Other long-term debt .....................................                      75                  94                 187
                                                                       ---------------   -----------------      --------------
        Total  borrowings ....................................                     558               1,350               2,423
                                                                       ---------------   -----------------      --------------

Retirements of :
    Sterling Credit Facility - Term Facility .................                    (750)                  -                   -
    Sterling Credit Facility - Tranche B .....................                    (305)               (568)               (316)
    EMTN program - Notes .....................................                    (100)                (50)                  -
    Acquisition facility .....................................                       -                   -                (750)
    Loan notes ...............................................                      (3)                  -                 (48)
    Other long-term debt .....................................                    (919)               (459)               (415)
                                                                       ---------------   -----------------      --------------
        Total retirements ....................................                  (2,077)             (1,077)             (1,529)
                                                                       ---------------   -----------------      --------------
</TABLE>

     Other long-term debt retirements include (Pounds)725 million reduction in
capital lease obligations, primarily as a consequence of generating plant
transfers.

     At December 31, 2001, TXU Europe had a (Euro)2.0 billion Euro Medium Term
Note (EMTN) program, under which TXU Europe may from time to time issue notes in
various currencies. As of December 31, 2001, there were (Pounds)275 million of
7.25% Sterling Eurobonds due March 8, 2030 and (Pounds)301 million of 35 PUT 5
Resettable Notes due 2035 outstanding under the EMTN program. TXU Europe has
granted to the holders an optional put in 2015 in exchange for a waiver of a
provision that would have prohibited the disposition of the Networks business. A
similar provision in the Resettable Notes has been waived for a fee without any
further changes to the terms of the Resettable Notes.

     Revolving Credit Facilities Agreement - TXU Europe has a joint
sterling-denominated line of credit with a group of banking institutions under a
credit facility agreement (Revolving Credit Facilities Agreement), dated
November 19, 2001. There were three tranches in this facility. Tranche A is a
multi-currency, (Pounds)800 million five-year revolver, which allows for
short-term borrowings. Tranche B was not drawn upon and has been cancelled.
Tranche C was a short-term bridge facility. It was repaid ((Pounds)560 million
drawn at December 31, 2001) upon receipt of

                                      A-12

<PAGE>

                      TXU EUROPE LIMITED AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

the proceeds from the sale of the Networks business in January 2002 and
cancelled upon receipt of all bond waivers on February 26, 2002. As of December
31, 2001, the outstanding borrowings under Tranche A are (Pounds)589 million at
4.56% per annum of which (Pounds)399 million has been classified as long-term.
In January 2002, the (Pounds)190 million of Tranche A borrowings, which
represented the short-term portion, were repaid with proceeds received from the
West Burton disposal.

     See Notes 7 and 8 to Consolidated Financial Statements for more information
concerning available sources of short-term and long-term financing.

     TXU Europe's goal is to continue to maintain credit ratings necessary to
allow TXU Europe and/or its subsidiaries to access the short term financing
market. If TXU Europe and its subsidiaries were to experience a downgrade of
their respective credit ratings, access to these markets may no longer be
possible, resulting in the need to borrow under committed bank lines or seek
other liquidity sources.

     In order to borrow under these credit facilities, TXU Europe must be in
compliance with the applicable financial covenants and certain other conditions.
These covenants consist principally of a total debt to capitalization ratio and
an interest coverage ratio. Increases in the outstanding principal amount
borrowed are prohibited if a material adverse change, as defined in the
Revolving Credit Facilities Agreement, occurred. TXU Europe is in compliance
with these covenants and meets the required conditions at December 31, 2001 and
anticipates that it will remain in compliance. In the event TXU Europe were not
in compliance with the applicable covenants and other conditions, TXU Europe
might need to pursue alternative sources of funding.

     TXU Europe and its subsidiaries may also from time to time utilize these
short-term facilities to temporarily fund maturities and early redemptions of
long-term debt and other securities, as well as its other short term
requirements. If TXU Europe and its subsidiaries were unable to access the
capital markets to refund these short-term borrowings, additional liquidity
sources would be necessary.

     Sale of Receivables -- TXU Europe continuously sells accounts receivables
under a program with a commercial bank to replace those receivables that have
been collected. Under the program, TXU Europe has a receivables servicing
obligation but does not incur a measurable asset or liability. The program was
amended in the third quarter of 2001 and the overall limit was reduced to
(Pounds)300 million. At December 31, 2001, accounts receivable of TXU Europe
were reduced by (Pounds)181 million under the program and (Pounds)108 million of
future receivables sold were reflected as other short-term loans on the balance
sheet. The short-term loans bear interest at an annual rate, which was 4.13% at
December 31, 2001, based on commercial paper rates plus a margin. Debt
securitization discounts of (Pounds)11 million are included in interest expense.

     Long-term Contractual Obligations and Commitments -- The following table
summarizes the contractual cash obligations of TXU Europe for each of the
periods presented (see Notes 8 and 18 to Financial Statements for additional
disclosures regarding terms of these obligations.)

<TABLE>
<CAPTION>
                                                                                Payments Due
                                                     -----------------------------------------------------------------------------
Contractual  Cash Obligations                           2002        2003         2004         2005         2006        Thereafter
---------------------------------------------------  ----------- ----------- ----------- -------------  -----------  -------------
                                                                               ((Pounds)million)
<S>                                                  <C>         <C>         <C>         <C>            <C>          <C>
Long - term debt and capital lease obligations       (Pounds)274  (Pounds) 7 (Pounds) 29 (Pounds)  758  (Pounds)409  (Pounds)1,591
Operating leases ..................................           34          30          29             1            1              3
Power purchase and capacity payments ..............          341         344         316           304          287          1,102
Gas take-or-pay contracts .........................           99          92          90            88           88            142
Coal ..............................................           91          77          91            98           97            301
                                                     ----------- ----------- ----------- -------------  -----------  -------------
Total Contractual Cash Obligations ................  (Pounds)839 (Pounds)550 (Pounds)555 (Pounds)1,249  (Pounds)882  (Pounds)3,139
                                                     =========== =========== =========== =============  ===========  =============
</TABLE>

                                      A-13

<PAGE>

                      TXU EUROPE LIMITED AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS






      The following table summarizes the commercial commitments in effect at
December 31, 2001 by expiry date:

<TABLE>
<CAPTION>
                                         Total            Amount of Commitment Expiring Each Period
                                                          -----------------------------------------
                                        Amounts
Commercial Commitments                 Committed     2002     2003       2004       2005          2006       Thereafter
-----------------------------         ----------  ----------  ----       ----    ----------    ----------    ----------
<S>                                   <C>         <C>         <C>        <C>     <C>           <C>           <C>
Letters of credit ..................  (Pounds)575  (Pounds)326     -          -    (Pounds)199             -     (Pounds)50
Guarantees .........................          76           -     -          -             -             -            76
                                      ----------  ----------  ----       ----    ----------    ----------    ----------

Total Commercial Commitments .......  (Pounds)651  (Pounds)326     -          -    (Pounds)199             -    (Pounds)126
                                      ==========  ==========  ====       ====    ==========    ==========    ==========
</TABLE>

      The guarantees relate primarily to certain liabilities that may be
incurred and payable by the purchasers of TXU Europe's former US and Australian
coal business and US energy marketing operations sold in 1998 prior to
acquisition by TXU Corp.

      Letters of credit - At December 31, 2001 TXU Europe had outstanding
letters of credit of (Pounds)575 million. The letters of credit primarily
fulfill requirements necessary to trade energy on certain power exchanges and to
cover the potential termination values on cross border leases required under
plant disposal or transfers. TXU Europe has a commitment to provide, in respect
of the lease of gas-fired power stations to Centrica plc, an additional letter
of credit security of (Pounds)50 million in the event of notification from the
rating agencies of negative watch/downgrade on TXU Europe. TXU Europe has
facilities available to cover this.

Effect of Inflation


       Inflation in the UK and continental Europe was at a historically low
level in 2001, 2000 and 1999, and therefore inflation did not have a material
impact on results of operations for the periods presented.

CHANGES IN ACCOUNTING STANDARDS

       On January 1, 2001, TXU Europe adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and
SFAS No. 138. (See Note 2 to Consolidated Financial Statements.)

       SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", became effective for TXU Europe for
transfers on or after April 1, 2001. SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires additional disclosures in its financial statements.
These disclosures have been incorporated in the accompanying financial
statements.

       SFAS No. 141, "Business Combinations", became effective for TXU Europe on
July 1, 2001. SFAS No. 141 requires the use of the purchase method of accounting
for business combinations initiated and completed after June 30, 2001 and
eliminates the use of the pooling-of-interests method. All acquisitions of TXU
Europe Group have been accounted for by the purchase method.

                                      A-14

<PAGE>

                      TXU EUROPE LIMITED AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

       SFAS No. 142, "Goodwill and Other Intangible Assets", is effective for
TXU Europe beginning January 1, 2002. SFAS No. 142 requires, among other things,
the allocation of goodwill to reporting units for the purpose of assessing
potential impairment based upon the current fair value of the reporting units
and the discontinuance of goodwill amortization. The amortization of TXU
Europe's existing goodwill (approximately (Pounds)116 million on an annualized
basis) will cease after December 31, 2001.

       In addition, SFAS No. 142 requires completion of a transitional goodwill
impairment test within six months from the date of adoption. It establishes a
new method of testing goodwill for impairment on an annual basis or on an
interim basis if an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying value. Any goodwill impairment
loss during the transition period will be recognized as the cumulative effect of
a change in accounting principle. Subsequent impairments will be recorded in
operations.

       As part of its implementation effort to adopt SFAS No. 142, TXU Europe is
in the process of determining its reporting units as defined by SFAS No. 142,
the fair value of those reporting units and the allocation of goodwill to those
reporting units.

       SFAS No. 143, "Accounting for Asset Retirement Obligations", will be
effective for TXU Europe on January 1, 2003. SFAS No. 143 requires the
recognition of a fair value liability for any retirement obligation associated
with long-lived assets. The offset to any liability recorded is added to the
previously recorded asset and the additional amount is depreciated over the same
period as the long-lived asset for which the retirement obligation is
established. SFAS No. 143 also requires additional disclosures.

       SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", became effective for TXU Europe as of January 1, 2002. SFAS No. 144
establishes a single accounting model, based on the framework established in
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", for long-lived assets to be disposed of by
sale and resolves significant implementation issues related to SFAS No. 121.

       For standards not yet adopted, TXU Europe is evaluating the potential
effect on its financial position and results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

       Market risk is the potential loss TXU Europe may incur as a result of
changes in the market or fair value of a particular instrument or commodity. TXU
Europe is exposed to market risks associated with interest rates, foreign
currency exchange rates and commodity price risks in both energy trading
activities and non-trading operations. TXU Europe's exposure to market risk is
affected by a number of factors, including the size, duration, composition, and
diversification of its energy portfolio, the absolute and relative levels of
interest rates and foreign currency exchange rates, commodity prices, as well as
volatility and liquidity of markets. TXU Europe enters into derivative
instruments for non-trading purposes in order to manage exposures to changes in
interest rates, foreign currency exchange rates and commodity prices. Through
its energy trading subsidiary, TXU Europe assumes certain market risks in an
effort to generate gains from market price differences. It does so through the
use of derivative instruments, including exchange traded and over-the-counter
contracts, as well as through other contractual commitments in its energy
trading activities.

Risk Oversight

       TXU Europe manages the market, credit and operational risk of the
portfolio and its trading activities within limitations imposed by its Board of
Directors and in accordance with TXU Europe's overall risk management policies.
Market risks are monitored weekly by a risk management group that operates and
reports independently from the trading operations, utilizing industry accepted
mark-to-market techniques and analytical methodologies, which value the
portfolio of contracts and the hypothetical effect on this value from changes in
market conditions.

                                      A-15

<PAGE>

                      TXU EUROPE LIMITED AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

These techniques include, but are not limited to, sensitivity analyses and (from
2000 onwards) value at risk (VAR) methodologies using a Monte Carlo simulation
approach. This methodology is used to measure risk that can occur under normal
market conditions utilizing net open position, net mark-to-market value, term of
transactions and location of transaction. VAR is a mathematical estimate of a
portfolio's maximum potential for loss or gain due to market movements utilizing
standard statistical techniques and historical market price volatilities. TXU
Europe computes VAR on a weekly basis assuming a 95% probability or confidence
level and a five-day holding period where the risk profile remains constant (see
below). Stress testing of prices and volatility also is calculated and utilized
to simulate and address abnormal market conditions.

       Energy trading subjects TXU Europe to some inherent risks associated with
future contractual commitments, including market and operational risks credit
risk associated with counterparties, product location (basis) differentials and
market liquidity. TXU Europe continuously monitors the valuation of identified
risks and adjusts the portfolio valuation based on current market conditions.
Valuation adjustments or reserves are established in recognition that certain
risks exist until full delivery of energy has occurred, counterparties have
fulfilled their financial commitments and related financial instruments have
either matured or are closed out. Price and credit risks are further managed
within the established trading policies and limits established.

       Comparable information on a VAR basis is not available for the full year
of 2000. Therefore, in addition to disclosure of VAR for 2001, a measure of
market risk using the sensitivity analysis method is provided herein for 2000
and 2001 which measures the potential loss in earnings based on a hypothetical
percentage movement in energy prices.

       TXU Europe's parent company and its subsidiaries have a corporate risk
management organization that is headed by a global chief risk officer. The chief
risk officer through his designees, establishes and enforces the VAR limits by
region, including the respective policies and procedures to ensure compliance
with such limits and evaluates the risks inherent in the various businesses of
TXU Corp. and their associated transactions. Key risk control activities
include, but are not limited to, credit review and approval, operational and
market risk measurement, validation of transactions, portfolio valuation and
daily portfolio reporting including mark-to-market valuation, VAR and other risk
measurement metrics.

Commodity Price Risk

        TXU Europe is exposed to the impact of market fluctuations in the price
of electricity, natural gas, coal and other energy-related products marketed and
purchased. TXU Europe faces these exposures in both non-trading and trading
operations (see below).

Non-Trading Operations

       TXU Europe engages in commodity-related marketing and price risk
management activities in order to hedge market risk and exposure to prices of
electricity, natural gas and fuel. For financial reporting purposes,
"non-trading operations" are defined as the normal generation (including fuel
consumed), purchase, sale and delivery of electricity and natural gas for
ultimate resale to retail customers. The objective of risk management related to
non-trading operations is the limiting of price risk related to the traditional
asset-based generation, production, distribution, or transmission activities of
TXU Europe.

       The financial instruments used for non-trading purposes include primarily
forwards, swaps and options. The gains and losses related to these derivatives,
to the extent effective as accounting hedges, are deferred in the balance sheet
and recognized in the same periods as the settlements of the underlying physical
transaction. These realized gains and losses are included in operating revenues
and operating expenses in the accompanying consolidated statement of income. TXU
Europe's generation assets and retail customer arrangements are not derivatives
or trading contracts; therefore, TXU Europe uses accrual accounting for those
transactions.

       In the UK prior to March 27, 2001, electricity prices were established
through power pools which were controlled through an agreement with the licensed
generators and suppliers. Substantially all power generated was

                                      A-16

<PAGE>

                      TXU EUROPE LIMITED AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

sold into and purchased from the wholesale electricity trading Pool. In order to
manage the exposure to fluctuations in electricity Pool prices, TXU Europe
entered into both short- and long-term derivative instruments (contracts for
differences) whereby the pool price was fixed for an agreed-upon quantity and
duration by reference to an agreed-upon strike price. With the implementation of
NETA on March 27, 2001, the Pool was eliminated.

       The hypothetical loss in fair value of TXU Europe Group's contracts for
forwards, swaps, options and other contracts at December 31, 2001 and 2000
entered into for non-trading purposes arising from a 10% adverse movement in
future electricity prices is estimated at (Pounds)7 million and (Pounds)2
million, respectively, on a comparable basis (during 2001, some significant
power purchase arrangements changed from being derivative to non-derivative
contracts or were terminated; the previously reported hypothetical loss for
December 31, 2000 of (Pounds)270 million included the effect of these
contracts). This loss is calculated by modeling the contracts against an
internal forecast of future prices using discounted cash flow techniques. The
decrease in the hypothetical market movement results from the decrease in energy
purchase commitments during 2001. As these non-trading contracts are used to
hedge sales to retail customers, any adverse movement in wholesale electricity
prices does not directly affect the performance or profitability of TXU Europe,
which is more affected by price movements in retail markets.

Trading Operations

       For financial reporting purposes, trading operations are defined as those
activities with the objective of generating profits on or from exposure to
shifts or changes in market prices on the purchase and/or sale of electricity,
natural gas, fuel and other energy-related products. For TXU Europe this
consists of the energy trading subsidiaries which trade electricity, natural gas
and other energy-related products as a commodity. TXU Europe uses mark-to-market
accounting for energy trading operations (see Note 2 to Financial Statement).

       The contractual agreements and derivatives held by the energy trading
operations are exposed to losses in fair value due to changes in the price and
volatility of the underlying commodities.

       The hypothetical loss in fair value, arising from an adverse movement in
future prices of at least 10%, of TXU Europe's derivatives and other contracts
entered into for trading purposes in existence at December 31, 2001 and 2000,
using standard sensitivity analysis techniques, was:

                                                         December 31,
                                             -----------------------------------
                                                  2001                2000
                                             ----------------  -----------------
                                                     ((Pounds) millions)

           Electricity ...................         32                  30
           Gas ...........................          9                  24
           Coal ..........................         11                   -

       VAR -- The quantification of market risk using value-at-risk
methodologies provides a consistent measure of risk across diverse energy
markets and products. The use of this method requires a number of key
assumptions, such as use of (i) a 95% confidence level; (ii) an estimated
one-day holding period; and (iii) historical estimates of volatility or other
simulation based volatility estimates (such as the Monte Carlo simulation).

       At December 31, 2001, the total VAR for TXU Europe relating to energy
trading activities was (Pounds)7 million, based on a 95% confidence level and a
one-day holding period. Comparable information on a VAR basis is not available
for the full year of 2000. Therefore, a measure of market risk using the
sensitivity analysis method is provided herein for 2000 and 2001 which measures
the potential loss in earnings based on a hypothetical percentage movement in
energy prices.

Interest Rate Risk

       TXU Europe's exposure to interest rate risk is managed by maintaining a
level of fixed and floating rate borrowings within limitations imposed by the
Board of Directors of TXU Europe. 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.

                                      A-17

<PAGE>

                      TXU EUROPE LIMITED AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

       The table below provides information concerning TXU Europe's financial
instruments as of December 31, 2001 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 has
entered into interest rate swaps under which it has agreed to exchange the
difference between fixed-rate and variable-rate interest amounts calculated with
reference to specified notional principal amounts. The contracts require
settlement of net interest receivable at specified intervals which generally
coincide with the dates on which interest is payable on the underlying debt,
primarily semi-annually. When differences exist between the swap settlement
dates and the dates on which interest is payable on the underlying debt, the gap
exposure, or basis risk, is managed by means of forward rate agreements. These
forward rate agreements are not expected to have a material effect on TXU
Europe'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
                                       -----------------------------------------------
                                                                                              2001               2000
                                                                                          ----------------------------------
                                                                                There-             Fair                Fair
                                       2002    2003     2004      2005   2006   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)             243       2        2       751      2   1,052      2,052   2,107      2,333    2,321

       Average interest rate           6.16%   7.45%    7.42%     6.67%  7.40%   7.17%      6.87%      -       7.03%       -

     Variable Rate ((Pounds)m)           30       5       26         6    406     535      1,008   1,008      1,442    1,442

       Average interest rate           4.35%   4.94%    5.65%     4.94%  4.56%   3.75%      4.19%      -       6.77%       -

Interest Rate Swaps:
     (notional amounts)

     Fixed to Variable ((Pounds)m)      241       -        -       310      -     345        896      28        870       (2)

       Average pay rate                1.97%      -        -      1.97%     -    3.09%      2.40%      -       6.71%       -

       Average receive rate            6.15%      -        -      6.45%     -    6.04%      6.21%      -       6.48%       -

     Variable to Fixed ((Pounds)m)       216       -        -       398      -     329        943     (38)     1,759      (62)

       Average pay rate                6.57%      -        -      6.63%     -    6.57%      6.57%      -       6.65%       -

       Average receive rate            4.01%      -        -      4.01%     -    4.19%      4.07%      -       6.24%       -
</TABLE>

Foreign Currency Risk

       TXU Europe manages its exposure to changes in foreign currency exchange
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's contractual commitment is firm.

                                      A-18

<PAGE>

                      TXU EUROPE LIMITED AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

       The following table summarizes notional amounts at the contract exchange
rates, weighted average contractual exchange rates and estimated fair values by
contract maturity for contracts open at December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                                       Expected Maturity Date
                                       --------------------------------------------------------
                                                                                                   2001     2000
                                                                                There-             Fair     Fair
                                       2002    2003     2004      2005   2006   after    Total     Value    Value
                                       ----    ----     ----      ----   ----   ------  -------    -----    -----
                                               ((Pounds)millions, except exchange rates which are in US$)
<S>                                    <C>   <C>      <C>    <C>       <C>      <C>     <C>        <C>      <C>
Principal payments -(Pounds)            216       -        -       398      -     645      1,259     122       96
    Average exchange rate - $          1.62       -        -      1.63      -    1.86       1.75       -        -
Interest payments -(Pounds)              83      69       69        69     44     457        791      12        5
    Average exchange rate - $          1.63    1.63     1.63      1.63   1.62    1.62       1.62       -        -
</TABLE>

                           FORWARD-LOOKING STATEMENTS

       This report and other presentations made by TXU Europe contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Although TXU Europe believes that in making
any such 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 to differ materially from those projected in any
such forward-looking statement: (1) general economic and business conditions in
the UK and continental Europe; (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, 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 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.

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

                                      A-19

<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 its subsidiaries and other information
included in this report. The consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America. 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 a risk monitoring framework 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 Risk
Monitoring & Assurance team 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, 2001, 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. The Audit
Committee meets regularly with TXU Europe's management, the Risk Monitoring &
Assurance team and independent auditors to review matters relating to financial
reporting, auditing and internal control. To ensure auditor independence, both
the Risk Monitoring & Assurance team and independent auditors have full and free
access to the Audit Committee.

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

<TABLE>
<S>                                                       <C>
           /s/ PHILIP G. TURBERVILLE                                    /s/ PAUL C. MARSH
--------------------------------------------------        -----------------------------------------------
 Philip G. Turberville, Chief Executive Officer              Paul C. Marsh, Chief Operating Officer


           /s/ ROGER PARTINGTON                                         /s/ MARTIN STANLEY
--------------------------------------------------        -----------------------------------------------
          Roger Partington, President,                             Martin Stanley, President,
           Retail, Sales & Marketing                                  Trading & Production


            /s/ WILLEM SMIT                                             /s/ HENRY BIRT
--------------------------------------------------        -----------------------------------------------
      Willem Smit, Senior Vice President,                    Henry Birt, Principal Financial Officer
         European Business Integration


           /s/ HENRY DAVIES
--------------------------------------------------
   Henry Davies, Principal Accounting Officer
</TABLE>

                                      A-20

<PAGE>

INDEPENDENT AUDITORS' REPORT

     To the Board of Directors and Shareholders of TXU Europe Limited and
Subsidiaries:

     We have audited the accompanying consolidated balance sheets of TXU Europe
Limited and subsidiaries (TXU Europe) as of December 31, 2001 and 2000, and the
related statements of consolidated income, comprehensive income, cash flows and
shareholder's equity for each of the three years in the period ended December
31, 2001. 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 audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of TXU Europe Limited and
subsidiaries at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.

     DELOITTE & TOUCHE

     London, England
     January 31, 2002

                                      A-21

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME

<TABLE>
<CAPTION>
                                                                                       Year Ended December 31,
                                                                            ------------------------------------------
                                                                              2001             2000             1999
                                                                            -------          -------          --------
                                                                                        ((Pounds) million)
<S>                                                                         <C>              <C>              <C>
Operating Revenues ......................................................     8,691            4,517            3,663
                                                                            -------          -------          -------

Operating Expenses
     Energy purchased for resale and fuel consumed ......................     7,214            3,273            2,244
     Operation and maintenance ..........................................       993              775              914
     Loss on sale and transfer of plants ................................       142                -                -
     Depreciation and other amortization ................................       119              113              118
     Goodwill amortization ..............................................       116               95               80
                                                                            -------          -------          -------

    Total operating expenses ............................................     8,584            4,256            3,356
                                                                            -------          -------          -------

Operating Income ........................................................       107              261              307
Other Income - Net ......................................................        63               67                8
                                                                            -------          -------          -------
Income Before Interest, Income Taxes, Distributions and
  Minority Interest .....................................................       170              328              315

Interest Income .........................................................        68               59               63

Interest Expense ........................................................       336              317              291
                                                                            -------          -------          -------
Income (Loss) From Continuing Operations Before Income
  Taxes, Cumulative Effect of Change in Accounting, Distributions and
  Minority Interest .....................................................       (98)              70               87
Income Tax Expense (Benefit) ............................................       (84)              29               55
                                                                            -------          -------          -------
Income (Loss) From Continuing Operations Before Cumulative
  Effect of Change in Accounting, Distributions and Minority
  Interest ..............................................................       (14)              41               32

Discontinued Operations - Net of Taxes (Note 3)
     Income from operations of discontinued Networks business ...........        73               92              112
     Loss on disposal of Networks business ..............................       (34)               -                -
                                                                            -------          -------          -------
         Income from discontinued operation .............................        39               92              112

Cumulative Effect Of Change in SFAS No. 133 Treatment
  Related to DIG Issue effective July 1, 2001 (Net of(Pounds)1
  million tax effect) ...................................................        (3)               -                -

Distributions on Preferred Securities of Subsidiary Perpetual
  Trust .................................................................        (7)              (8)               -

Affiliate Interest in Subsidiary ........................................         3               (3)              (5)

Minority Interest .......................................................       (11)              (2)              (1)
                                                                            -------          -------          -------

Net Income ..............................................................         7              120              138
                                                                            =======          =======          =======
</TABLE>

See Notes to Consolidated Financial Statements.

                                      A-22

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
                                                                                                 Year Ended December 31,
                                                                                          -----------------------------------
                                                                                            2001         2000          1999
                                                                                          -------       -------       -------
                                                                                                   ((Pounds) million)
<S>                                                                                       <C>           <C>           <C>
Net Income .............................................................................        7           120           138
                                                                                          -------       -------       -------
Other Comprehensive Income (Loss) - Net change during period, net of tax effects:
      Investments classified as available for sale:
          Unrealized holding gains .....................................................       38            19             -
          Reclassification of net gain realized on sale of investments
            to other income ............................................................      (35)          (14)            -

      Cumulative currency translation adjustment .......................................        1             1             1

      Cash flow hedges (under SFAS No. 133):
          Cumulative transition adjustment as of January 1, 2001 .......................      (72)            -             -
          Discontinued cash flow hedges ................................................        2             -             -
          Net change in fair value of derivatives ......................................      (60)            -             -
          Amounts reclassified or realized in earnings during the period ...............       87             -             -
                                                                                          -------       -------       -------

          Total ........................................................................      (39)            6             1
                                                                                          -------       -------       -------

Comprehensive Income (Loss) ............................................................      (32)          126           139
                                                                                          =======       =======       =======
</TABLE>

See Notes to Consolidated Financial Statements.

                                      A-23

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS

<TABLE>
<CAPTION>
                                                                                              Year Ended December 31,
                                                                                          ------------------------------
                                                                                           2001        2000        1999
                                                                                          ------      ------      ------
Cash Flows - Operating Activities                                                               ((Pounds)million)
<S>                                                                                       <C>        <C>         <C>

    Net income ......................................................................          7         120         138
    Adjustments to reconcile net income to cash provided by operating activities:
         Cumulative effect of change in accounting principle ........................          4         (10)          -
         Depreciation and amortization ..............................................        273         261         260
         Deferred income taxes (benefit) ............................................       (199)         81          89
         Loss (gain) on sale of assets and investments ..............................        153         (65)          -
         Net effect of unrealized mark-to-market valuation (gains) ..................        (41)        (54)        (21)
         Other ......................................................................        (17)        (32)         (2)
         Changes in operating assets and liabilities:
             Accounts receivable ....................................................       (162)       (100)        113
             Inventories ............................................................        (30)         53          16
               Energy trading assets and liabilities ................................         11          98          41
             Prepayments and other assets ...........................................        (81)        (66)        (62)
             Accounts payable (including affiliates) ................................        345         182         (33)
             Provision for unfavorable contracts ....................................        (98)        (27)        (46)
             Other liabilities ......................................................         21          66         (76)
                                                                                          ------      ------      ------
                  Net cash provided by operating activities .........................        186         507         417
                                                                                          ------      ------      ------

Cash Flows - Investing Activities
   Acquisition of  businesses .......................................................       (153)       (319)          -
   Capital expenditures .............................................................       (262)       (229)       (385)
   Proceeds from sale of assets and other investments ...............................      1,054         137           4
   Change in restricted cash ........................................................        322          68         (23)
   Other investments ................................................................         19        (238)       (282)
                                                                                          ------      ------      ------
                  Cash provided (used) by investing activities ......................        980        (581)       (686)
                                                                                          ------      ------      ------

Cash Flows - Financing Activities
    Borrowings of long-term debt ....................................................        558       1,350       2,423
    Retirements of long-term debt ...................................................     (2,077)     (1,077)     (1,529)
    Issuance of preferred securities of subsidiary perpetual trust ..................          -          95           -
    Receivable securitization - net .................................................        103        (172)       (123)
    Change in notes payable - banks and other short-term loans ......................        255         275          21
    Retirements of advances from TXU Corp. ..........................................          -           -        (682)
    Debt discount and financing expenses ............................................         (5)        (11)        (22)
    Distributions on preferred securities of subsidiary perpetual trust .............         (9)         (8)          -
    Other ...........................................................................         (3)          -           -
                                                                                          ------      ------      ------
                  Cash provided (used) by financing activities ......................     (1,178)        452          88
                                                                                          ------      ------      ------

Effect Of Exchange Rates On Cash And Cash Equivalents ...............................          -           -          (1)

Net Change In Cash And Cash Equivalents .............................................        (12)        378        (182)
Cash And Cash Equivalents - Beginning Balance .......................................        663         285         467
                                                                                          ------      ------      ------
Cash And Cash Equivalents - Ending Balance ..........................................        651         663         285
                                                                                          ======      ======      ======
</TABLE>

See Notes to Consolidated Financial Statements.

                                      A-24

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                December 31,
                                                         -----------------------
                                                             2001        2000
                                                         ------------ ----------
                                                           ((Pounds) million)
<S>                                                      <C>         <C>
ASSETS

Current Assets
     Cash and cash equivalents ........................       651          663
     Accounts receivable ..............................       946          717
     Inventories - at average cost ....................        62           72
     Receivable of sale proceeds ......................       133            -
     Prepayments ......................................        59           29
     Energy trading assets ............................       573          586
     Other current assets .............................        75           41
                                                         ------------ ----------

         Total current assets .........................     2,499        2,108
                                                         ------------ ----------
Investments
     Restricted cash ..................................       358          672
     Other ............................................       394          675
                                                         ------------ ----------

         Total investments ............................       752        1,347
                                                         ------------ ----------
Property, plant and equipment - net ...................       774        1,526
Goodwill ..............................................     3,697        3,689
Net assets of discontinued operation  (Note 3) ........       411          360
Energy trading assets .................................       170          130
Deferred debits and other assets ......................       687          665
                                                         ------------ ----------

             Total ....................................     8,990        9,825
                                                         ============ ==========

LIABILITIES AND CAPITALIZATION

Current Liabilities
     Notes payable - banks ............................       793          375
     Long-term debt due currently .....................       274          862
     Short-term loans on accounts receivable ..........       108            5
     Accounts payable:
       Trade ..........................................     1,026          606
       Affiliates .....................................        55           52
     Energy trading liabilities .......................       634          623
     Taxes accrued ....................................        34            -
     Interest accrued .................................        44           30
     Other current liabilities ........................       142          213
                                                         ------------ ----------

       Total current liabilities ......................     3,110        2,766
                                                         ------------ ----------
Accumulated deferred income taxes .....................        64          333
Provision for unfavorable contracts ...................       431          573
Energy trading liabilities ............................       183          142
Other deferred credits and noncurrent liabilities .....       245          201
Long-term debt, less amounts due currently ............     2,794        3,658

Preferred securities of subsidiary perpetual trust ....        95           95
Affiliate interest in subsidiary ......................       208          208
Minority interest .....................................        92           50
Commitments and contingencies (Notes 18 and 19)
Shareholder's equity ..................................     1,768        1,799
                                                         ------------ ----------
         Total ........................................     8,990        9,825
                                                         ============ ==========
</TABLE>

See Notes to Consolidated Financial Statements.

                                      A-25

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDER'S EQUITY

<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                    ------------------------------------------------
                                                                         2001            2000              1999
                                                                    ---------------  --------------  ---------------
<S>                                                                      <C>             <C>            <C>
Common Stock  - authorized shares  - 3,000,000,000 shares at US
    $1 par and 100 deferred shares at(Pounds)1 par                                 ((Pounds)million)
                                                                    ---------------  --------------  ---------------
Balance at beginning and end of period (2,455,705,299 shares)......      1,467           1,467          1,467
                                                                    ---------------  --------------  ---------------
Retained Earnings
Balance at beginning of period ....................................        333             213             76
    Net income ....................................................          7             120            138
    Other .........................................................          -               -             (1)
                                                                    ---------------  --------------  ---------------
Balance at end of period ..........................................        340             333            213
                                                                    ---------------  --------------  ---------------
Accumulated Other Comprehensive Income (Loss) - net of Tax
 Unrealized holding gains (losses) on securities classified as
    available for sale
    Balance at beginning of period ................................         (3)             (8)            (8)
      Change in the period ........................................          3               5              -
                                                                    ---------------  --------------  ---------------
    Balance at end of period ......................................          -              (3)            (8)

  Foreign currency translation adjustments
    Balance at beginning of period ................................          2               1              -
      Change in the period ........................................          1               1              1
                                                                    ---------------  --------------  ---------------
    Balance at end of period ......................................          3               2              1
                                                                    ---------------  --------------  ---------------

  Cash flow hedges (SFAS No. 133)
    Balance at beginning of period ................................          -               -              -
      Change in the period ........................................        (42)              -              -
                                                                    ---------------  --------------  ---------------
    Balance at end of period ......................................        (42)              -              -
                                                                    ---------------  --------------  ---------------
  Total accumulated other comprehensive income (loss) .............        (39)             (1)            (7)
                                                                    ---------------  --------------  ---------------
Shareholder's Equity ..............................................      1,768           1,799          1,673
                                                                    ===============  ==============  ===============
</TABLE>

See Notes to Consolidated Financial Statements.

                                      A-26

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       Description of Business, Acquisitions and Dispositions

              TXU Europe Limited (TXU Europe) is an indirect, wholly-owned
         subsidiary of TXU Corp., a Texas corporation. TXU Corp. is a global
         energy services holding company and engages in electricity generation,
         wholesale energy trading, retail energy marketing, energy delivery,
         other energy related services and, through a joint venture,
         telecommunications services. TXU Europe is a holding company for TXU
         Corp.'s United Kingdom (UK) and other European operations. Almost all
         of TXU Europe's operating income is derived from, and consolidated
         assets are held by, TXU Europe Group plc (TXU Europe Group) and TXU
         Europe Group's subsidiaries.

              TXU Europe has one major business, energy, which is a single
         reportable operating business segment.

              The energy business manages an integrated portfolio of contracts
         and physical gas and generation assets. The contracts include those
         with sources supplying the energy retail business with electricity and
         gas as well as contracts with third party energy retailers, traders and
         wholesalers. Further, it provides retail electricity and gas to UK
         residential, industrial and commercial customers. It also has commenced
         retailing joint ventures in continental Europe.

          Acquisitions and Dispositions

                TXU Europe continually reviews its portfolio of businesses and
         investments and makes adjustments as considered necessary to meet its
         strategic objectives and to maintain financial and operational
         flexibility. As part of this review, capital may be redeployed within
         the energy portfolio to maximize returns across Europe.

                On January 18, 2002, TXU Europe completed the sale of its UK
         distribution business (Eastern Electricity Limited), and its 50 percent
         interest in 24seven Utility Services Limited (24seven) to London
         Electricity Group plc (LE Group). These operations have been accounted
         for as discontinued operations in all periods presented in the
         consolidated financial statements and related footnotes. For more
         information on the disposal, see Note 3 to Financial Statements.

                In December 2001, TXU Europe completed the sale of its 2,000 MW
         coal-fired West Burton power station to LE Group for (Pounds)366
         million in cash, including (Pounds)44 million for working capital
         amounts (fuel stock) realized through the disposal. In addition, LE
         Group will assume responsibility for the completion of the installation
         of a flue gas desulphurisation plant at the site already underway and
         has reimbursed TXU Europe for costs incurred to date.

                In October 2001, TXU Europe completed the transfer of its 380 MW
         Peterborough and 325 MW King's Lynn gas-fired generating stations to
         Centrica through a series of leasing arrangements. TXU Europe
         previously had a capital lease interest in each of the plants. The
         proceeds from the transfers were (Pounds)173 million. In addition, TXU
         Europe retained certain tax benefits.

                In July 2001, TXU Europe completed the sale of its 1,000 MW
         coal-fired Rugeley generating station to International Power for
         (Pounds)200 million. Cash received at closing was (Pounds)67 million
         and the remaining cash proceeds from the sale were received in January
         2002.

                In April 2001, TXU Europe received net proceeds of (euro)522
         million ((Pounds)325 million) from the sale of its 19.2% interest in
         Hidroelectrica del Cantabrico, SA (Hidrocantabrico) and recorded a
         pre-tax gain of (Pounds)51 million ((Pounds)36 million after-tax). In
         the year ended December 31, 2000, TXU Europe incurred (Pounds)7 million
         of costs associated with the offer for Hidrocantabrico. Both of these
         items are recorded in Other Income - Net.

                In February 2001, TXU Europe finalized the sale of its interest
         in the North Sea gas fields for (Pounds)138 million. From the date of
         the sale through December 31, 2001, TXU Europe received net cash
         proceeds of (Pounds)106 million after settlement of certain outstanding
         issues, and recorded a net pre-tax gain of (Pounds)9 million in Other
         Income - Net ((Pounds)6 million after-tax).

                In August 2000, TXU Europe purchased United Utilities plc's
         retail energy supply business, Norweb Energi (a division of Norweb
         plc), for total consideration, including direct costs of the
         acquisition, of (Pounds)340

                                      A-27

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         million. In the transaction, TXU Europe assumed certain of Norweb
         Energi's obligations. These include Norweb Energi's power purchase
         agreements, which have been integrated into TXU Europe's energy
         portfolio. The acquisition of Norweb Energi was accounted for as a
         purchase business combination. The final amount assigned to goodwill
         was (Pounds)628 million.

                The following summary of unaudited pro forma consolidated
         results of TXU Europe's operations reflect the acquisition of Norweb
         Energi as though it had occurred at the beginning of the periods
         presented.

                                                        Year Ended
                                                        December 31,
                                                -----------------------------
                                                    2000              1999
                                                -------------    -------------
                                                       ((Pounds)million)
              Revenues                             5,116              4,761
              Operating Income                       318                403
              Net Income                             142                166


                In August 2000, TXU Europe contracted its customer services
         operation to Vertex Data Science Limited (Vertex), United Utilities
         plc's customer services business. Customer services include call
         centers, billing, credit management and debt collection. TXU Europe's
         1,335 customer services staff were transferred to Vertex on September
         1, 2000.

                In May 2000, TXU Europe sold its metering business in the UK
         realizing a pre-tax gain of approximately (Pounds)29 million. In
         addition, in August 2000, TXU Europe completed the sale of its interest
         in the Czech utility, Severomoravska energetika, a.s. (SME), realizing
         a pre-tax gain of approximately (Pounds)20 million.

                In December 2001, TXU Europe acquired for (Pounds)2 million, 40%
         of the equity in two project companies and the holding company
         developing a 100 MW wind farm project in Aragon, Spain.

                In May 2001, Stadtwerke Kiel AG (Kiel) acquired all of the share
         capital of Ares Energie Direkt GmbH (Ares), based in Berlin, Germany,
         for approximately 24 million Deutsche Marks ((Pounds)8 million). The
         acquisition of Ares was accounted for as a purchase business
         combination. Ares is an electricity retailer that offers energy
         services to both business and residential customers throughout Germany
         and had 110,000 customers at the time of acquisition.

                In January 2001, TXU Europe completed the acquisition of 51% of
         Kiel for (Pounds)145 million. The acquisition of Kiel was accounted for
         as a purchase business combination. The process of determining the fair
         value of the assets and liabilities of Kiel was completed in the fourth
         quarter of 2001. TXU Europe's final valuation of goodwill is
         (Pounds)109 million. The results of operations of Kiel are reflected in
         the consolidated financial statements from the January 8, 2001
         acquisition date.

                The restructuring of the generating portfolio, including the

         sale of West Burton and Rugeley and the transfer of the Peterborough
         and King's Lynn generation stations, resulted in a pre-tax loss of
         (Pounds)142 million, recorded in operating and maintenance expense. The
         retention of certain tax benefits related to the stations and reversal
         of previously established deferred taxes resulted in a net tax benefit
         of (Pounds)132 million. The resulting after-tax loss on the sale and
         the transfer was (Pounds)10 million.

                Pro forma information for the years ended December 31, 2001,
         2000 and 1999, reflecting the acquisitions of Kiel AG and Ares, would
         not be significantly different from reported amounts.

                                      A-28

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 of
         America (US GAAP). Certain prior year amounts have been reclassified to
         conform to the current year's classification.

                Consolidation - The consolidated financial statements include
         the accounts of TXU Europe and all majority-owned subsidiaries.
         Minority interest represents the minority shareholders' proportionate
         share in the equity or income of TXU Europe's majority-owned
         subsidiaries.

                All significant intercompany items and transactions have been
         eliminated in consolidation. Investments in significant unconsolidated
         affiliates are accounted for by the equity method.

                Use of estimates - The preparation of TXU Europe's consolidated
         financial statements in accordance with US GAAP requires management to
         make estimates and assumptions about future events that affect the
         reporting and disclosure of assets and liabilities at the balance sheet
         dates and the reported amounts of revenue and expense during the period
         covered by the consolidated financial statements. In the event
         estimates and/or assumptions prove to be different from actual amounts,
         adjustments are made in subsequent periods to reflect more current
         information.

                Cash and cash equivalents - Cash equivalents consist of highly
         liquid investments, which are readily convertible into cash and have an
         original maturity of three months or less.

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

                Marketable securities - TXU Europe has classified all of its
         marketable securities as available for sale. Available for sale
         securities are carried at fair value with the unrealized gains or
         losses reported as a component of accumulated other comprehensive
         income or loss, net of tax. 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.
         Interest capitalized was (Pounds)7 million for 2001 and (Pounds)6
         million for 2000. No interest was capitalized in 1999.

                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.

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

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

         Buildings                                 Up to 60 years
         Leasehold improvements                    Shorter of remaining lease
                                                   term or estimated useful life
         Plant and equipment                       Up to 10 years

                TXU Europe 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. (See Note 21.)

                                      A-29

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                Valuation of long-lived assets - TXU Europe evaluates the
         carrying value of long-lived assets to be held and used when events and
         circumstances warrant such a review. The carrying value of long-lived
         assets would be 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.
         As of December 31, 2001 and 2000 there was no impairment of the
         valuation of long-lived assets.

                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 was amortized over a
         range of 20 to 40 years. Goodwill amortization ceased after December
         31, 2001 and is subject to an annual impairment-based review procedure.
         (See Changes in Accounting Standards below.)

                Derivative Instruments -- See Changes in Accounting Standards
         below for a discussion of the change in accounting for derivatives that
         became effective January 1, 2001. TXU Europe enters into derivative
         instruments, including options, swaps, forwards and other contractual
         commitments, for trading and non-trading purposes in order to manage
         market risks related to changes in interest rates, foreign currency
         exchange rates and commodity prices.

                The impact of changes in the market value of the effective
         portion of any derivative instruments designated and documented as
         accounting hedges is deferred in the balance sheet and recognized in
         earnings when the hedged transactions are realized, and the ineffective
         portion is recognized in earnings.

                Prior to adoption of SFAS No. 133 in January 2001, gains and
         losses on non-trading derivative instruments effective as hedges were
         deferred and recorded as a component of the underlying transaction when
         settled. Also, the energy trading business used mark-to-market
         accounting for its trading activities, which is consistent with the
         required accounting under SFAS No. 133 for trading transactions that
         are derivatives. If a derivative contract meets the criteria for the
         normal purchase and sale exception, TXU Europe can elect not to treat
         it as a derivative. The use of the normal purchase and sale exemption
         and the hedge accounting designation are elections that can be made by
         management if certain strict criteria for derivatives are met and
         documented.

                Mark-to-Market Accounting -- In accordance with Emerging Issues
         Task Force (EITF) Issue No. 98-10, TXU Europe accounts for its energy
         trading activities using the mark-to-market method of accounting. Under
         the mark-to-market method, energy-related trading contracts and
         derivative instruments are recorded at current fair value on the
         balance sheet as either energy trading assets or liabilities, and any
         unrealized gains or losses resulting from period-to-period changes in
         the current fair values are recorded net in revenues. TXU Europe values
         its portfolio of energy-related trading contracts and derivative
         instruments at current market prices, commonly referred to as "forward
         price curves". Such market prices normally are based on independent
         broker quotes and other trading information and are validated routinely
         under TXU Europe's risk management control policies. The availability
         of quoted market prices is dependent on the type of commodity (e.g.,
         natural gas, electricity, etc.), time period and location of delivery.
         In the absence of quoted market prices, forward price curves are
         developed internally using standard accepted modeling techniques based
         on market fundamentals (e.g., supply/demand, replacement cost, etc.),
         discounted using a risk-free interest rate.

                All trading positions are marked initially to the mid-point of
         the bid/ask spread (the mid-market value). Liquidity valuation
         adjustments are recorded as reductions of the mid-market value of open
         positions. In computing the liquidity valuation adjustments, each
         market (or curve) is split into liquid and illiquid portions. The
         liquid portion varies by region, time period and commodity. Generally,
         the liquid period is supported by broker quotes and frequent trading
         activity. In illiquid periods, normally little or no market information
         exists, and the fair value is generally estimated through market
         modeling techniques. However, as a matter of policy, TXU Europe
         generally does not recognize any income from these illiquid markets or
         from mark to model methodologies.

                A reserve is also established for costs to complete transactions
         and for various administrative costs associated with settling the
         contracts in the future, such as risk management, scheduling and
         accounting. In

                                      A-30

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         addition, a credit reserve is recorded to allow for the risk that the
         value of contracts may not be collected from the counterparties.
         Mark-to-market valuation adjustments and reserves (liquidity,
         performance and credit) are reflected in TXU Europe's balance sheet as
         a reduction in the value of the energy trading contract.

                Revenue recognition - TXU Europe records revenue for generation
         and retail and other energy sales and services under the accrual
         method, unless such sales are pursuant to derivative instruments, which
         are marked to market as required by SFAS 133. 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. As a result, unbilled revenues are
         subject to a degree of estimation which can be significant. For the
         years ended December 31, 2001 and 2000, (Pounds)452 million and
         (Pounds)410 million, respectively, of unbilled revenue was included in
         total revenues. Operating revenues are stated exclusive of value added
         tax, but inclusive of the fossil fuel levy.

                Foreign currencies - The financial condition and results of
         operations of each operating subsidiary are reported in the relevant
         local currency and then translated into GBP ((Pounds)) at the
         applicable currency exchange rate for inclusion in TXU Europe's
         consolidated financial statements. 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
         other comprehensive income. 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. In those circumstances where TXU Europe intends to
         reinvest the earnings of non-UK subsidiaries into those businesses, no
         provision has been made for taxes, which would be payable if such
         earnings were distributed to TXU Europe.

                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.

                Changes to Accounting Standards - SFAS No. 141, "Business
         Combinations", became effective for TXU Europe on July 1, 2001. SFAS
         No. 141 requires the use of the purchase method of accounting for
         business combinations initiated and completed after June 30, 2001 and
         eliminates the use of the pooling-of-interests method.

                SFAS No. 142, "Goodwill and Other Intangible Assets", is
         effective for TXU Europe beginning January 1, 2002. SFAS No. 142
         requires, among other things, the allocation of goodwill to reporting
         units for the purpose of assessing potential impairment based upon the
         current fair value of the reporting units and the discontinuance of
         goodwill amortization. The amortization of TXU Europe's existing
         goodwill (approximately (Pounds)123 million on an annualized basis)
         will cease after December 31, 2001.

                In addition, SFAS No. 142 requires TXU Europe to complete a
         transitional goodwill impairment test six months from the date of
         adoption and establishes a new method of testing goodwill for
         impairment on an annual basis or on an interim basis if an event occurs
         or circumstances change that would reduce the fair value of a reporting
         unit below its carrying value. Any goodwill impairment loss during the
         transition period will be recognized as the cumulative effect of a
         change in accounting principle. Subsequent impairments will be recorded
         in operations.

                As part of its implementation effort to adopt SFAS No. 142, TXU
         Europe is in the process of determining its reporting units as defined
         by SFAS No. 142, the fair value of those reporting units and the
         allocation of goodwill to those reporting units based upon their
         determined fair value.

                                      A-31

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                SFAS No. 143, "Accounting for Asset Retirement Obligations",
         will be effective for TXU Europe beginning January 1, 2003. SFAS No.
         143 requires the recognition of a fair value liability for any
         retirement obligation associated with long-lived assets. The offset to
         any liability recorded is added to the previously recorded asset and
         the additional amount is depreciated over the same period as the
         long-lived asset for which the retirement obligation is established.
         SFAS No. 143 also requires additional disclosures.

                SFAS No. 144, "Accounting for the Impairment or Disposal of
         Long-Lived Assets", became effective for TXU Europe on January 1, 2002.
         SFAS No. 144 establishes a single accounting model, based on the
         framework established in SFAS No. 121, "Accounting for the Impairment
         of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", for
         long-lived assets to be disposed of by sale and resolves significant
         implementation issues related to SFAS No. 121.

                For standards not yet adopted, TXU Europe is evaluating the
         potential effect on its financial position and results of operations.

3.       Discontinued Operations

                On January 18, 2002, TXU Europe completed the sale of its UK
         distribution business (Eastern Electricity Limited), and its 50 percent
         interest in 24seven to LE Group for (Pounds)1.3 billion, consisting of
         a cash payment of (Pounds)560 million and the assumption by LE Group of
         (Pounds)750 million aggregate principal amount of debt. TXU Europe
         recorded a one-time charge in December 2001 of (Pounds)87 million
         ((Pounds)61 million after tax) associated with the disposition
         representing the estimated costs to be incurred in closing out the
         business and related swaps. The distribution business sold by TXU
         Europe is the largest in the UK and consists of the assets and wires
         that deliver electricity through a 90,000 kilometer network in East
         Anglia and southeast England. 24seven, the former joint venture between
         TXU Europe and LE Group, operates and maintains the networks for both
         TXU Europe and LE Group. The transaction has resulted in approximately
         (Pounds)1.3 billion of debt reduction, consisting of (Pounds)750
         million of debt assumed by LE Group and approximately (Pounds)560
         million of debt being repaid using the cash proceeds from the sale. The
         ultimate proceeds remain open until the analysis of working capital and
         fixed asset amounts, as of the completion date has been finalized.

                Summary operating results for the discontinued Networks
         operations are as follows:

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                              --------------------------------------
                                                                 2001          2000           1999
                                                              -------      --------          -----
      <S>                                                     <C>          <C>               <C>
                                                                           (Pounds) million)


      Operating revenues................................          323          371               429
                                                              =======      =======           =======
      Operating income..................................          164          189               236
      Interest expense..................................          (48)         (53)              (56)
      Income tax expense................................          (35)         (41)              (56)
      Prior year depreciation...........................            -            7                 -
      Affiliate interest in subsidiary..................           (8)         (10)              (12)
                                                              -------      -------           -------
         Income from operations of Networks business -
         net...........................................            73           92               112
                                                              -------      -------           -------
</TABLE>


      Loss from disposal of Networks business

                                      A-32

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
        <S>                                                        <C>           <C>         <C>
        Loss on disposal (pre-tax)..............................    (87)           -            -
        Operating income during phase-out period................     43            -            -
        Interest expense........................................    (10)
        Income tax benefit......................................     16            -            -
        Affiliate interest in subsidiary........................      4            -            -
                                                                   ----          ----        ----
             Loss from disposal of Networks business - net......    (34)           -            -
                                                                   ----          ----        ----

      Income from discontinued operations.......................     39           92          112
                                                                   ====          ====        ====
</TABLE>

             Summarized balance sheet information for the discontinued Networks
operations are as follows:

<TABLE>
<CAPTION>
                                                                  December 31,
                                                             ---------------------
                                                               2001         2000
                                                             -------       -------
                                                                (Pounds) million)
      <S>                                                    <C>             <C>
      Current assets....................................          15            45
      Property, plant and equipment.....................       1,335         1,255
      Other non-current assets..........................         265           282
                                                             -------         -----
               Total assets.............................       1,615         1,582
                                                             -------         -----

      Current liabilities...............................         196           257
      Long-term liabilities.............................       1,008           965
                                                             -------         -----
               Total liabilities........................       1,204         1,222
                                                             -------         -----
      Net assets of discontinued Networks operations....         411           360
                                                             =======         =====
</TABLE>

4.       Restricted Cash

             At December 31, 2000, (Pounds)351 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
         Innogy plc (formerly National Power PLC), two of which were
         subsequently transferred during 2001. Additionally, (Pounds)325 million
         and (Pounds)317 million at December 31, 2001 and 2000, respectively,
         were used to cash-collateralize existing future lease obligations
         arising from cross-border leasing arrangements (considered as debt in
         the financial statements). As a consequence of the Networks business
         disposal, (Pounds)26 million of deposits were used to defease the TXU
         Europe Group debentures that form part of the Preferred Securities of
         Subsidiary Perpetual Trust issue (See Note 9). TXU Europe's investment
         in Eastern Norge Svartisen AS (Svartisen) includes (Pounds)5 million of
         deposits, which was classified as restricted cash at December 31, 2001.
         The remaining (Pounds)2 million of restricted cash is required as
         support for certain letters of credit.

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.

             In August 2000, TXU Europe sold its investment in SME and the
         amount of holding gains that were previously recorded in other
         comprehensive income has been reclassified as realized gains. (See Note
         1.)

                                      A-33

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                In April 2001, TXU Europe sold its interest in Hidrocantabrico
         to a consortium led by Electricidade de Portugal S.A., a Portuguese
         utility company, and Spanish savings bank Caja de Ahorro de Asturias
         for (euro)24 per share. TXU Europe received net proceeds from the sale
         of (euro)522 million (Pounds)325 million) and recorded a pre-tax gain
         of (Pounds)51 million in Other Income - Net(Pounds)36 million
         after-tax).

                Non-marketable investments at December 31, 2001 and 2000 consist
         principally of the investment in Powest Oy and investments in the
         offtake generated from water rights in hydro-electric power plants in
         Norway over a 55 year period. The investment in Powest Oy held by TXU
         Nordic Energy is the equivalent of a 14.7% ownership in Powest Oy and
         is carried at cost, which was(Pounds)190 million at December 31, 2001
         and 2000. The water rights investments, Svartisen and Kobbelv, amounted
         to (Pounds)136 million and (Pounds)141 million at December 31, 2001 and
         2000, respectively.

                Investments accounted for by the equity method, including the
         approximately 40% interest in Atro Oyj (formerly Savon Voima Oyj) that
         was acquired in November 1999, totaled (Pounds)47 million at December
         31, 2001 and 2000. The remainder of Atro Oyj is currently owned by 29
         local municipalities via an intermediate holding company, Savonenergia
         Holdings Oy. There are put options exercisable by the municipalities,
         which, if fully exercised, would automatically give TXU Europe Group a
         controlling stake. (See Note 1.) On February 21, 2002, an additional 5%
         interest in Atro Oyj was put to TXU Europe at a cost of (Pounds)6
         million, increasing TXU Europe's interest in Atro Oyj to 45%.

                The remaining other investments amounted to (Pounds)21 million
         and (Pounds)20 million at December 31, 2001 and 2000, respectively and
         are carried at cost.

6.       Related Party Transactions

                At December 31, 2001 and 2000, the balance of (Pounds)55 million
         and (Pounds)52 million, respectively, in the "Accounts payable -
         Affiliates" account arises primarily from payments of amounts by TXU
         Corp. on behalf of TXU Europe.

                The 10% holding in TXU Finance of (Pounds)208 million at
         December 31, 2001 and 2000, which is held by a wholly-owned subsidiary
         of TXU Corp., has been included in "Affiliate Interest in Subsidiary".

7.       Short-term Debt

                Short-term Debt - Weighted average interest rates at December
         31, 2001 and 2000 on notes payable to banks, including accounts
         receivable securitization balances, is 4.77% and 5.95%, respectively.

                Short-term Facilities - As of December 31, 2001, TXU Europe had
         several short-term facilities with commercial banks which provide for
         borrowings in various currency denominations and at current interest
         rates generally based on LIBOR.

                                      A-34

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                     Borrowings Under Facilities
                                                                                        at December 31, 2001
                                                                            ---------------------------------------------
                 Facilities                                                                                     Interest
              Expiration Date                    Facility Limits                       Outstanding               Rates
            ------------------                 -------------------          --------------------------------    ---------
                                                                                   Currency         (Pounds)
                                                                                                    millions
         <S>                          <C>                                   <C>                     <C>         <C>
          January 21, 2002(a)         (Pounds)800 million (multi-currency)    (Pounds)190 million     190         4.72%
           (Revolving  Credit
         Facilities Agreement -
         Tranche A)

          January 21, 2002(a)         (Pounds)600 million                     (Pounds)560 million     560         4.70%
           (Revolving  Credit
         Facilities Agreement -
         Tranche C)
</TABLE>

                (a) Revolving Credit Facilities Agreement - Tranche A is a
         five-year revolver that expires on November 18, 2006 and has both
         short-term and long-term borrowing capabilities. This portion was
         classified as short-term borrowings as of December 31, 2001 and was
         repaid on January 21, 2002. An additional (Pounds)399 million was
         outstanding at December 31, 2001 and classified as long-term debt. (See
         Note 8.) Tranche C was a bridge facility repaid on January 21, 2002 and
         cancelled on February 26, 2002.

                Nordic Finance - TXU Europe has a Euro term loan facility with a
         commercial bank available only to fund the investment in Atro Oyj. At
         December 31, 2001, there was (euro)50 million ((Pounds)31 million)
         outstanding at an annual interest rate based on Euribor of 4.34%.

                Accounts receivable securitization - TXU Europe has facilities
         with Citibank N.A. to provide financing through trade accounts
         receivable whereby TXU UK may sell up to (Pounds)300 million of its
         electricity and gas receivables and TXU Finance may borrow up to an
         aggregate of (Pounds)175 million, collateralized by future receivables
         of TXU UK, through a short-term note issue arrangement. The program has
         an overall limit of (Pounds)300 million. TXU UK continually sells
         additional receivables to replace those collected. Under the program,
         TXU UK has a receivables servicing obligation but does not incur a
         measurable asset or liability. At December 31, 2001 and 2000, accounts
         receivable of TXU UK of (Pounds)181 million and (Pounds)164 million had
         been reduced under the program, respectively. At December 31, 2001 and
         2000, (Pounds)108 million and (Pounds)5 million, respectively, of
         future receivables sold were reflected as other short-term loans on the
         balance sheet. Debt securitization discounts of (Pounds)11 million are
         included in interest expense. These short-term loans included in the
         program bear interest at an annual rate based on commercial paper rates
         plus a margin, which was 4.13% and 6.02% at December 31, 2001 and 2000,
         respectively.

                                      A-35

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.   Long-term Debt

              Long-term debt consisted of the following:

<TABLE>
<CAPTION>
                                                                                        December 31
                                                                              ------------------------------
                                                                                    2001            2000
                                                                              ----------------  ------------
                                                                                     ((Pounds) million)
<S>                                                                           <C>               <C>
     Notes and Bonds:
          $200 million 7.425% guaranteed notes due 2017 ................             138           134
          $300 million 7.55% guaranteed notes due 2027 .................             207           201
          $350 million 6.15% Exchange Senior Notes due 2002 ............             241           234
          $650 million 6.45% Exchange Senior Notes due 2005 ............             448           435
          $500 million 6.75% Exchange Senior Notes due 2009 ............             344           335
          7.25% Norwegian Kroner bonds due 2029 ........................              75            75
          EMTN Notes:
              7.25% Sterling Eurobonds due 2030 ........................             275           275
              6.88% EMTN Notes due 2001 ................................               -           100
              35 PUT 5 Resettable Notes due 2035 - 7.00% ...............             301           301
     Other:
          Revolving Credit Facilities Agreement:
              Tranche A  (weighted average interest rate of 4.72%,
              due 2006) ................................................             399            -
          Sterling Credit Agreement - due 2003:
              Term facility - 6.81% and 6.55% ..........................               -           750
                   Norwegian kroner - 8.10% and 7.13% ..................               -            53
                   Euro's - 5.80% and 4.04% ............................               -           168
          Rent factoring loans (weighted average interest rate of
            7.35%, due 2001) ...........................................               -           190
          Other unsecured loans, due in installments (weighted
            average rates range from 5.84% - 8.86% and 4.95% -
            10.8%) .....................................................             185           120
          Capital leases ...............................................               8           745
          CHPL project finance - Shotton - 4.94% .......................             122            87
          Cross-border leases (US$ denominated) ........................             325           317
                                                                              ---------------  ------------

     Total long-term debt ..............................................           3,068         4,520
     Less current portion ..............................................             274           862
                                                                              ---------------  ------------

     Long-term debt, less amounts due currently ........................           2,794         3,658
                                                                              ===============  ============
</TABLE>

          Lines of credit

          TXU Europe has a (euro)2.0 billion Euro Medium Term Note (EMTN)
     program, under which TXU Europe may from time to time issue notes in
     various currencies. As of December 31, 2001, a financing subsidiary of TXU
     Europe has (Pounds)301 million of 35 Put 5 Resettable Notes due 2035
     (Resettable Notes) outstanding under the EMTN program. The interest rate on
     the Resettable Notes is 7.00% per annum as of December 31, 2001. The issuer
     of the Resettable Notes has a call option to repurchase the Resettable
     Notes at par on November 30, 2005. This call option has been assigned to
     commercial banks for a consideration of approximately (Pounds)5 million per
     annum for five years. The Resettable Notes also include a put option that
     is exercisable at November 30, 2005 by the holder and a reset feature that
     permits the holder to remarket the Resettable Notes at a different interest
     rate if the put is not exercised. On the reset date, the new interest rate
     will be 6.25% per annum, plus a margin, in accordance with the terms of the
     Resettable Notes for the next 6 to 20 years. The Resettable Notes can be
     redeemed at principal plus accrued interest on November 30, 2005.

          As of December 31, 2001, there was (Pounds)275 million in 7.25%
     Sterling Eurobonds due March 8, 2030 also outstanding under the EMTN
     program. TXU Europe has granted to the holders of the 7.25% Sterling
     Eurobonds due 2030 an optional put in 2015 in exchange for a waiver of a
     provision that would have prohibited

                                      A-36

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         the disposition of the Networks business. A similar provision in the
         Resettable Notes has been waived for a fee without any further changes
         to the terms of the Resettable Notes.

                Revolving Credit Facilities Agreement - The disposition of the
         Networks business necessitated the termination of the old Sterling
         Credit Agreement, with all borrowings repaid along with associated
         interest. The Revolving Credit Facilities Agreement immediately
         replaced the old senior debt facility. This agreement is dated November
         19, 2001. There are three tranches in this facility. Tranche A is a
         multi-currency, (Pounds)800 million five-year revolver that can include
         long-term drawings. Tranche A was originally set at (Pounds)900
         million, however, following receipt of proceeds from the West Burton
         disposal, TXU Europe reduced the facility to (Pounds)800 million.
         Tranche B is a short-term (Pounds)230 million standby facility to cover
         waivers needed on two letter of credit facilities. This has not been
         drawn upon and was cancelled. Tranche C was a short-term (Pounds)600
         million bridge facility. This facility was repaid upon receipt of
         proceeds from the Networks disposal in January 2002 and cancelled upon
         receipt of all bond waivers on February 26, 2002. As of December 31,
         2001, the outstanding borrowings under this facility and the associated
         interest rates are as follows: Tranche A - (euro)564 million
         ((Pounds)345 million) at 4.06% per annum, 700 million Norwegian kroner
         (NOK) ((Pounds)54 million) at 7.75% per annum, both classified as
         long-term debt, and (Pounds)190 million classified as short-term debt
         (at 4.72% per annum); Tranche C - (Pounds)560 million at 4.70% per
         annum, all of which is classified as short-term debt.

                Other long-term debt - TXU Europe has a (Pounds)122 million
         facility, due November 2016, to pay for the Shotton Combined Heat and
         Power Station. The station was substantially completed during 2001 and
         was undergoing commissioning activities at December 31, 2001. As of
         December 31, 2001 and 2000, the amounts outstanding under this facility
         were (Pounds)122 million and (Pounds)87 million, respectively, bearing
         interest at rates based on LIBOR plus a margin, which were 4.94 % and
         6.85% per annum, respectively.

                Maturities - Long-term debt, as of December 31, 2001 excluding
         capital lease balances and debt assumed by the disposal of the Networks
         business, is repayable as follows:

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

         2002 ........................................         273
         2003 ........................................           7
         2004 ........................................          28
         2005 ........................................         757
         2006 ........................................         408
         Thereafter ..................................       1,587
                                                          ------------

         Long-term debt, excluding capital leases ....       3,060
         Capital leases ..............................           8
                                                          ------------

         Total long-term debt ........................       3,068
                                                          ============

                TXU Europe's debt agreements contain certain covenants,
         including leverage ratios, levels of net assets and interest coverage.
         At December 31, 2001 and 2000, TXU Europe was in compliance with all
         such covenants.

                Cross-border leases - Certain subsidiaries of TXU Europe Group
         have entered into cross-border leasing arrangements in respect of power
         stations formerly operated by TXU Europe Group but the operation of
         which was transferred during 2001 to Centrica plc through further
         leasing arrangements. TXU Europe Group's involvement in the
         cross-border lease arrangements remains. Certain debt and restricted
         cash is consolidated into the TXU Europe balance sheet. The debt is
         fully collateralized by restricted cash on deposit. (See Note 4.)

                At December 31, 2000, (Pounds)351 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 at that time from Innogy plc (formerly National
         Power). (See Note 4.)

                                      A-37

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.       Preferred Securities of Subsidiary Perpetual Trust

                In March 2000, TXU Europe Capital I, a statutory business trust,
         established as a financing subsidiary for TXU Europe, issued to
         investors US$150 million ((Pounds)95 million) of 9 3/4% Trust
         Originated Preferred Securities (Preferred Trust Securities), in
         6,000,000 units. In a series of related transactions, the proceeds from
         this issuance were invested in Preferred Partnership Securities issued
         by TXU Europe Funding I, L.P., a limited partnership of which TXU
         Europe is the general partner. TXU Europe Funding I, L.P. in turn, used
         those funds, along with a capital contribution of approximately US$26
         million ((Pounds)16 million) from TXU Europe, to purchase junior
         subordinated debentures issued by TXU Eastern Funding Company and TXU
         Europe Group. The Preferred Trust Securities have a liquidation
         preference of US$25 per unit. The only assets of the trust are the
         Preferred Partnership Securities. The Trust has a perpetual existence,
         subject to certain termination events as provided in its Amended and
         Restated Trust Agreement. The Preferred Trust Securities are subject to
         mandatory redemption upon payment of the Preferred Partnership
         Securities, which may be redeemed at the option of TXU Europe, in
         whole, or in part, at any time on or after March 2, 2005. TXU Europe
         has issued certain limited guarantees of the Preferred Trust
         Securities, the Preferred Partnership Securities and the junior
         subordinated debentures held by TXU Europe Funding I, L.P. The trust
         uses distributions it receives on the Preferred Partnership Securities
         to make cash distributions on the Preferred Trust Securities.

10.      Shareholder's Equity

                TXU Europe has two classes of shares outstanding, ordinary and
         deferred. Both classes are held by wholly owned subsidiaries of TXU
         Corp. Ordinary shares, which are US dollar denominated, have voting
         rights. The deferred shares, which are denominated in UK pounds
         sterling, 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. TXU Corp. has confirmed that,
         through its subsidiaries, it intends to subscribe to an additional
         (Pounds)150 million of ordinary share capital in TXU Europe during
         2002.

                Certain debt instruments of TXU Europe contain provisions that,
         under certain conditions, restrict distributions on or acquisitions of
         common stock. At December 31, 2001 and 2000, retained earnings were not
         restricted as a result of such provisions.

11.      Provision for Unfavorable Contracts

                As part of the purchase accounting for the 1998 acquisition by
         TXU Corp. of The Energy Group (TEG), the former owner of the TXU Europe
         businesses, TXU Europe made provisions for certain unfavorable
         long-term gas and electricity purchase contracts. As of December 31,
         2001 the electricity provision related to a contract that expires in
         2009, while the gas provision relates to a contract that expires in
         2008. The outstanding balance on these provisions at December 31, 2001
         was (Pounds)59 million.

                With the acquisition of Norweb Energi in August 2000, TXU Europe
         also assumed certain of Norweb Energi's obligations, including its
         power purchase agreements. Some of these agreements provide for
         purchases of power by TXU Europe at prices that were above market. As a
         result, TXU Europe recorded a liability for the fair value adjustments
         for these unfavorable power purchase agreements of (Pounds)451 million
         and (Pounds)19 million for related contracts for differences. The
         outstanding balance on these provisions at December 31, 2001 was
         (Pounds)372 million.

                During 2001 and 2000, an aggregate of (Pounds)98 million and
         (Pounds)27 million (net of imputed interest), respectively, of these
         provisions were released to offset expenses recognized under
         unfavorable electricity and gas contracts.

12.      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;

                                      A-38

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         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 consist 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 advice of independent qualified actuaries using the projected unit
         method. The benefits under these plans are primarily based on years of
         service and compensation levels as defined under the respective plan
         provisions.

                The pension information presented below has been adjusted to
         reflect the impact of the following events during 2001: the sale or
         transfer of the generating plants at Kings Lynn, Peterborough, Rugeley
         and West Burton. As a result of these events there has been a
         significant movement of employees out of the pension scheme. The net
         effect of these curtailments was a loss of less than (Pounds)1 million
         for 2001.

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                                --------------------------
                                                                   2001           2000
                                                                ------------  -----------
                                                                    ((Pounds)million)
         Change in benefit obligation:
         -----------------------------
<S>                                                               <C>            <C>
         Benefit obligation at beginning of year .............      903            882
         Service cost ........................................        8             10
         Interest cost .......................................       52             52
         Participants' contributions .........................        3              6
         Actuarial (gain) loss ...............................       29            (24)
         Termination liabilities .............................        9             17
         Benefits paid .......................................      (56)           (58)
         Effect of curtailments ..............................        -             (2)
         Net transfer of obligations from other plans ........        -             20
                                                                ------------  -----------
         Ending benefit obligation ...........................      948            903
                                                                ============  ===========
         Change in plan assets:
         ----------------------

         Fair value of plan assets at beginning of year ......    1,059          1,055
         Return on plan assets ...............................     (127)            12
         Employer contribution ...............................       16             22
         Participants contributions ..........................        3              6
         Benefits paid .......................................      (56)           (58)
         Net transfer of assets from other plans .............        -             22
                                                                ------------  -----------
         Ending fair value of plan assets ....................      895          1,059
                                                                ============  ===========
         Funded status:
         --------------

         Funded status .......................................      (53)           156
         Unrecognized net actuarial loss .....................      315             89
         Unrecognized prior service cost .....................       13             16
                                                                ------------  -----------
         Prepaid  benefit cost ...............................      275            261
                                                                ============  ===========
         Weighted average assumptions:
         -----------------------------

         Discount rate .......................................      6.0%           6.0%
         Expected return on plan assets ......................     6.75%          6.75%
         Rate of compensation increase .......................      3.5%           3.5%
</TABLE>

                                      A-39

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                         --------------------------------------

                                                            2001         2000         1999
                                                         ----------- ------------ -------------
                                                                   ((Pounds) million)
<S>                                                            <C>          <C>           <C>
         Components of net periodic pension cost
         ---------------------------------------
         (benefit):
         ----------
         Service cost .................................        8            10            10
         Interest cost ................................       52            52            47
         Expected return on plan assets ...............      (70)          (72)          (56)
         Net amortization .............................        1             1             5
         Net curtailments/settlement gain .............        1             -             -
                                                         ----------- ------------ --------------
             Net periodic pension cost (benefit) ......       (8)           (9)            6
                                                         =========== ============ ==============
</TABLE>

                In addition, TXU Europe has a defined contribution pension plan.
         Contributions made by TXU Europe to the plan were (Pounds)941 thousand
         in 2001, (Pounds)813 thousand in 2000 and (Pounds)827 thousand in 1999.


13.      Employee Share Plans

                Under the TXU Europe Group Long Term Incentive Plan (LTIP),
         awards of "phantom stock" in TXU Corp. may be made available to certain
         grades of management employees. 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 before the awards vest,
         their awards lapse.

                Awards are subject to achieving certain performance criteria.
         Awards made in 1999 and 2000 were subject to a performance period of
         one year, following which there was a deferral period, during which the
         participants had to remain with TXU Europe for their awards to become
         vested. For the awards granted in 1998, the deferral period for
         directors was one year. For other participants, 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 2000 and 1999, the deferral
         period for directors is one year and for the management group and
         senior managers is two years.

                In respect of awards granted in 1999 and 2000, at the end of the
         deferral period, TXU Europe 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.

                Awards granted in 2001 are subject to a three-year performance
         period, with no deferral period. There is no guaranteed price for the
         2001 awards. The amount that TXU Europe will pay to the participant, in
         cash, will depend upon the ranking of TXU, by reference to shareholder
         return, when compared to its industry peer group, and will range from
         zero to 200% of the initial award. Since the grants of the 2001 awards,
         employees of vice-president status and above no longer receive awards
         under the LTIP. Instead, they participate in the TXU Corp. Long-Term
         Incentive Compensation Plan (LTICP)

                TXU Europe granted awards under the LTIP of over 88,387 phantom
         shares in 2001, 168,461 in 2000, and 171,538 in 1999. For grants during
         2001, 2000 and 1999 the stock price of TXU Corp. on the date of grant
         was (Pounds)29.25, (Pounds)21.971 and (Pounds)28.06, respectively. The
         weighted average remaining contractual life of awards outstanding at
         December 31, 2001, 2000 and 1999 was 27 months, 10 months and 6 months,
         respectively. At December 31, 2001, 2000 and 1999, the closing market
         price of TXU Corp. common stock was $47.15 ((Pounds)32.48), $44.3125
         ((Pounds)29.67) and $35.5625 ((Pounds)21.99), respectively, per share.

                                      A-40

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                In 2001, 2000 and 1999, awards of performance-related restricted
         stock of TXU Corp. were made to certain officers and directors of TXU
         Europe under the LTICP. The awards represented 106,700 shares, 49,000
         shares and 26,000 shares, respectively, of TXU Corp. common stock with
         a valuation price of (pound)31.12, (pound)22.96 and (pound)26.62 per
         share at the date of grant, which were issued subject to performance
         and vesting requirements over a three- to five-year period.

              In addition, TXU Europe also has the following employee share
              plans:

                 (a)  The TXU Europe Group UK Sharesave Scheme, introduced in
                      1999, is available to the UK-based directors and employees
                      of TXU Europe Group who devote more than 25 hours a week
                      to their duties. Employees who participate in this scheme
                      enter into a monthly savings contract, for either a three-
                      or five-year period. At the end of that period, a
                      participant may elect within a period of six months to
                      apply the savings accumulated to the purchase of shares of
                      TXU Corp. common stock. Grants of options were made in
                      2001 and 1999. The exercise price for both grants was
                      based on a 15% discount of the TXU Corp. stock price on
                      the invitation date in respect of three-year options and
                      the five-year Sharesave Scheme exercise price was based on
                      a 20% discount.

                 (b)  The TXU Europe Group Overseas Sharesave Scheme, which
                      operates in the same manner as the UK Sharesave Scheme
                      save that options are granted over phantom shares. The
                      first grant of options was made in 2001.

                 (c)  The TXU Europe Group Loyalty Reward Scheme, provides for
                      grants for the issuance of additional shares of TXU Corp.
                      common stock to participants in the Sharesave Schemes
                      subject to the exercise of options, and in proportion to
                      the number of shares of stock acquired.

                                      A-41

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The changes in share awards outstanding were as follows:


<TABLE>
<CAPTION>
                                                                                                                         Long-term
                                               Sharesave      Sharesave       Loyalty        Loyalty       Long-term      Incentive
                                                Scheme          Scheme         Reward         Reward       Incentive   Compensation
                                                3 Years        5 Years        3 Years        5 Years          Plan         Plan
                                              ---------      -----------     ---------      ---------     -----------    ----------
     <S>                                      <C>            <C>             <C>            <C>           <C>            <C>
                                              --------       -----------     ---------      ---------     -----------    ----------
     Balance - December 31, 1998......               -                 -             -              -         130,159             -
                                              --------       -----------     ---------      ---------     -----------    ----------
              Granted.................         158,912           828,418        23,331        165,077         171,538        26,000
              Lapsed..................               -                 -             -              -         (27,178)      (11,000)
                                              --------       -----------     ---------      ---------     -----------    ----------
     Balance - December 31, 1999......         158,912           828,418        23,331        165,077         274,519        15,000
                                              --------       -----------     ---------      ---------     -----------    ----------
              Granted.................               -                 -             -              -         168,461        49,000
              Lapsed..................         (59,363)         (266,905)       (8,730)       (53,211)        (24,999)       (6,000)
              Exercised...............          (5,566)          (11,492)         (773)        (2,217)        (57,213)            -
                                              --------       -----------     ---------      ---------     -----------    ----------
     Balance - December 31, 2000......          93,983           550,021        13,828        109,649         360,768        58,000
                                              --------       -----------     ---------      ---------     -----------    ----------
              Granted.................          48,896           101,148         7,147         20,065          88,387       106,700
              Lapsed..................         (17,553)          (97,675)       (2,584)       (19,511)        (39,411)       (2,300)
              Exercised...............          (7,241)          (32,814)       (1,038)        (6,473)        (48,102)            -
                                              --------       -----------     ---------      ---------     -----------    ----------
     Balance - December 31, 2001......         118,085           520,680        17,353        103,730         361,642       162,400
                                              ========       ===========     =========      =========     ===========    ==========
     Exercisable/will vest - 2002.....          70,005                 -        10,328              -         118,864        15,000
     Exercisable/will vest - 2003.....               -                 -             -              -         154,391        43,000
     Exercisable/will vest - 2004.....          48,080           420,634         7,025         83,883          88,387       104,400
     Exercisable/will vest -
     thereafter......................                -           100,046             -         19,847               -             -

      Weighted average exercise price:

         Exercised....................   (Pounds)21.98     (Pounds)20.66             -              -               -             -
         Outstanding..................   (Pounds)24.31     (Pounds)21.72             -              -               -             -

     Weighted average  fair value of
         awards granted in:
         2001.........................   (Pounds)10.21     (Pounds)13.44 (Pounds)32.85  (Pounds)32.85   (Pounds)29.25 (Pounds)32.48

         2000.........................               -                 -             -              -   (Pounds)21.97 (Pounds)29.67

         1999.........................   (Pounds) 8.41     (Pounds)11.37 (Pounds)25.82  (Pounds)25.82   (Pounds)28.06 (Pounds)26.67
</TABLE>



                Total compensation expense recognized under the various employee
         share plans for 2001, 2000 and 1999 were (Pounds)8 million, (Pounds)7
         million, and (Pounds)5 million, respectively.

                TXU Europe 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 determined the
         potential impact of SFAS No. 123, "Accounting For Stock-Based
         Compensation" with regard to the recognition of compensation expense.
         Under SFAS 123, compensation expense is determined based upon the fair
         value at the grant date for awards. Had compensation expense for TXU
         Europe employee share plans been determined based upon the methodology
         prescribed under SFAS 123, TXU Europe's income would not have been
         significantly different from actual results.

                                      A-42

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14.      Taxation

                The components of TXU Europe's income tax expense (benefit) from
         continuing operations are as follows:



<TABLE>
<CAPTION>
                                                             Year Ended December 31
                                                      -----------------------------------
                                                         2001         2000        1999
                                                      ---------    ---------    ---------

                                                               ((Pounds) million)

<S>                                                   <C>          <C>          <C>
         Current:
            UK........................................  107             -           21
            US........................................    -           (18)           -
            Other Countries...........................   19             7            1
                                                      ---------    ---------    ---------
                                                        126           (11)          22
         Deferred:
            UK........................................ (217)           32           33
            Other Countries...........................    7             8            -
                                                      ---------    ---------    ---------
            Total income tax expense (benefit)........  (84)           29           55
                                                      =========    =========    =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                           December 31,
                                                                     ----------------------
                                                                       2001           2000
                                                                     --------       --------

                                                                        ((pound) million)
         <S>                                                         <C>            <C>
         Deferred tax assets:
            Leased assets and related items........................    176             242
            Tax loss carryforwards.................................    103              23
            Provision for unfavorable contracts and other..........    228             193
                                                                     --------       --------
              Total deferred tax assets............................    507             458

         Valuation allowance for deferred tax assets...............   (139)           (160)
                                                                     --------       --------
             Net deferred tax assets...............................    368             298
                                                                     --------       --------
         Deferred tax liabilities:

           Excess of book value over taxation value of fixed
             assets................................................    (71)             22
            Leased assets and related items........................    172             288
            Other items............................................    331             321
                                                                     --------       --------

              Total deferred tax liabilities.......................    432             631
                                                                     --------       --------

              Net deferred tax liabilities.........................     64             333
                                                                     ========       ========
</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 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 continually reviews
         the adequacy of the valuation allowance and is recognizing these
         benefits only as reassessment indicates that it is more likely than not
         that the benefits will be realized.

                                      A-43

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                Income from continuing operations before income taxes:


<TABLE>
<CAPTION>
                                                                   Year Ended December 31
                                                            ----------------------------------
                                                              2001          2000        1999
                                                            ------       -------        ----
                                                                     (Pounds) million)
         <S>                                                <C>          <C>            <C>
         Income from continuing operations
           before income taxes:
            UK..........................................      (155)          18          84
            Other Countries.............................        57           52           3
                                                            ------       ------         ---
         Total income (loss) before income taxes and
            minority interest...........................       (98)          70          87
                                                            ======       ======         ===
</TABLE>

                United Kingdom income tax expense at the statutory tax rate is
reconciled below to the actual income tax expense:

<TABLE>
<CAPTION>

                                                                           Year Ended December 31,
                                                                    ----------------------------------
                                                                      2001          2000          1999
                                                                    ------        ------         -----
         <S>                                                                     (Pounds) million)
         Tax at UK statutory rate.............................      <C>           <C>            <C>
           Tax effect of:                                             (29)           21            26
         Generating plant disposals/transfers.................
         Tax at statutory rate on loss on disposal of                (132)            -             -
            generating plants.................................
         Non-deductible goodwill and depreciation.............         43             -             -
         Effect of overseas tax rates.........................         35            28            24
         Distribution on preferred securities.................         10             -             -
         Resolution of prior year tax matters.................         (3)           (2)            -
         Movement in valuation allowance charged to expense...        (15)          (18)            -
         Other................................................          8            (2)           10
         Non-deductible expenses..............................         (3)           (4)           (7)
                                                                        2             6             2
                                                                    -----         -----          ----
         Income tax expense (benefit)
                                                                      (84)           29            55
                                                                    =====         =====          ====
</TABLE>

                Excluding the effects of the generating plant
         disposals/transfers, the effective tax rate was 109% in 2001 compared
         to 41% in 2000 and 63% in 1999.

                At December 31, 2001 and 2000, TXU Europe has net operating loss
         carryforwards of (Pounds)103 million and (Pounds)23 million,
         respectively, that are available to offset future taxable income. The
         net operating loss carryforwards have no expiration date.

                The tax effect of the components included in accumulated other
         comprehensive income for the year ended December 31, 2001 was (Pounds)
         18 million and (Pounds)2 million for the year ended December 31, 2000,
         and was a tax benefit of (Pounds)2 million for the year ended December
         31, 1999.

15.      Accounting for Derivatives and Hedging Activities

                SFAS No. 133 became effective for TXU Europe on January 1, 2001.
         SFAS No. 133 establishes accounting and reporting standards for
         derivative instruments, including certain derivative instruments
         embedded in other contracts, and for hedging activities.  It requires
         the recognition of derivatives in the balance

                                      A-44

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     sheet and the measurement of those instruments at fair value. Changes in
     the fair value of derivatives are recorded in earnings, unless (i) the
     normal purchase or sale exception or (ii) hedge accounting is elected.

          TXU Europe enters into derivative instruments, including options,
     swaps, futures, forwards and other contractual commitments for both
     non-trading and trading purposes. TXU Europe enters into derivative
     instruments for non-trading purposes in order to manage market risks
     related to changes in interest rates, foreign currency exchange rates and
     commodity prices.

          TXU Europe has designated, documented and assessed accounting hedge
     relationships which mostly resulted in cash-flow hedges that require TXU
     Europe to record the derivative assets or liabilities at their fair value
     on its balance sheet with an offset in other comprehensive income. Hedge
     ineffectiveness is recorded in earnings. Amounts are removed from other
     comprehensive income as the underlying transactions occur.

          TXU Europe utilizes treasury derivative instruments (i.e., interest
     rate swaps, cross currency swaps, etc.) in order to manage its exposures to
     changes in interest rates and foreign currency exchange rates. TXU Europe
     generally designates and uses hedge accounting for these treasury
     instruments.

          TXU Europe has numerous investments in foreign subsidiaries, and the
     net assets and earnings of these subsidiaries are exposed to currency
     exchange-rate volatility. TXU Europe has not entered into derivative
     transactions to hedge their material net investments in foreign operations,
     but has used foreign currency-denominated debt as the natural hedge. TXU
     Europe enters into currency swaps, options, etc., where appropriate, to
     manage foreign currency exposure.

          TXU Europe enters into physical and financial contracts to hedge
     market risks and exposures to prices of electricity, natural gas and fuel
     utilized for its generation assets and certain forecasted purchases and
     sales of power. TXU Europe uses hedge accounting for these non-trading
     commodity transactions.

          Financial Summary -- TXU Europe formally documents all relationships
     between accounting hedge instruments and hedged items, as well as its
     risk-management objective and strategy for undertaking various accounting
     hedge transactions. This process includes linking all derivatives that are
     designated as fair-value, cash-flow or foreign-currency hedges to specific
     assets and liabilities on the balance sheet or to specific firm commitments
     or forecasted transactions. The maximum term over which TXU Europe hedges
     its exposure to the variability of future cash flows (for all forecasted
     transactions, excluding interest payments on variable-rate debt) is 3
     years.

          In accordance with the transition provisions of SFAS No. 133, TXU
     Europe recorded, as of January 1, 2001, a cumulative effect of (Pounds)72
     million after-tax as a decrease to other comprehensive income to recognize
     the fair value of all derivatives effective as cash-flow hedging
     instruments. For the period from transition to December 31, 2001,
     substantially all of the (Pounds)87 million reclassified into earnings was
     attributable to the opening position of the cumulative transition net loss.

          Essentially all of the terms of TXU Europe's derivatives, which have
     been designated as accounting hedges match the terms of the underlying
     hedged items. TXU Europe experienced hedge ineffectiveness of less than
     (Pounds)1 million for the year ended December 31, 2001. This amount was
     reported in interest expense and represented the total ineffectiveness of
     all cash-flow hedges.

          With the implementation of the New Electricity Trading Arrangements
     (NETA) in the UK in March 2001, most of TXU Europe's derivative contracts
     used to hedge exposure to changes in Pool prices were renegotiated into
     bilateral contracts. Prior to NETA, these contracts, had been designated as
     cash flow hedges. The renegotiated bilateral contracts qualify as normal
     purchase contracts. In April 2001, the Financial Accounting Standards Board
     (FASB) finalized a conclusion that contracts with volume optionality do not
     qualify for the normal purchase or sale exception. As a result, certain of
     TXU Europe's gas option contracts have been accounted for as derivatives
     since July 1, 2001 in accordance with the transition provisions of such
     revised guidance, resulting in a net charge of (Pounds)3 million.

                                      A-45

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          Subsequently, the FASB approved a number of implementation issues
     regarding the normal purchase or sale exception. One of the issues applied
     exclusively to the electric industry and provided for the normal purchase
     or sale exception under specific circumstances. Under the new guidance,
     certain of TXU Europe's electricity contracts qualify for the normal
     purchase or sale exception from July 1, 2001, thus removing them from SFAS
     No. 133 classification as derivatives.

          As of December 31, 2001, it is expected that less than (Pounds)1
     million after-tax of net losses accumulated in other comprehensive income
     will be reclassified into earnings during the next twelve months. This
     amount represents the projected value of the hedges over the next twelve
     months relative to what would be recorded if the hedge transactions had not
     been entered into. The amount expected to be reclassified is not a
     forecasted loss incremental to normal operations, but rather it
     demonstrates the extent to which volatility in earnings (which would
     otherwise exist) is mitigated through the use of cash flow hedges.

16.  Energy Trading Activities

          In the course of providing comprehensive energy products and services
     to its diversified client base, TXU Europe engages in energy price risk
     management activities. In addition to the purchase and sale of physical
     commodities, TXU Europe enters into futures contracts; swap agreements,
     where settlement is based on the difference between a fixed and floating
     (index based) price for the underlying commodity; exchange traded options;
     over-the-counter options, which are settled in cash or in the physical
     delivery of the underlying commodity; exchange-of-futures-for-physical
     transactions; energy exchange transactions; storage activities; and other
     contractual arrangements. TXU Europe may buy and sell certain of these
     instruments to manage its exposure to price risk from existing contractual
     commitments as well as other energy-related assets and liabilities. It may
     also enter into contracts to take advantage of arbitrage opportunities. In
     order to manage its exposure to the price risk associated with these
     instruments, TXU Europe has established trading policies and limits and
     revalues its exposures against these benchmarks utilizing integrated energy
     systems to capture, value and understand the portfolio risks. TXU Europe
     also periodically reviews these policies to ensure they are responsive to
     changing market and business conditions.

          TXU Europe applies mark-to-market accounting for all of its energy
     trading, marketing and price risk management operations. Accordingly, these
     trading derivatives are recorded at fair value with unrealized gains
     (losses) recorded as a component of revenues. The recognized, unrealized
     balances are included in energy trading assets/liabilities.

                                      A-46

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17.  Fair Value of Financial Instruments

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

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                      --------------------------------------------------
                                                                                2001                          2000
                                                                      --------------------------------------------------
                                                                      Carrying         Fair       Carrying          Fair
                                                                       Amount         Value        Amount          Value
                                                                      --------        -----       --------         -----
                                                                                    ((Pounds) million)
     <S>                                                              <C>           <C>           <C>              <C>
     On balance sheet assets (liabilities):
          Restricted cash .........................................        358           358           672           672
          Interest rate swaps .....................................        (10)          (10)            -             -
          Non-trading derivatives .................................         17            17             -             -
          Foreign currency exchange contracts .....................        134           134             -             -
          Other investments .......................................        394           394           675           675
          Notes payable - banks (current) .........................       (793)         (793)         (375)         (375)
          Short term loans on accounts receivable .................       (108)         (108)           (5)           (5)
          Total long-term debt, excluding capital leases ..........     (3,060)       (3,115)       (3,775)       (3,763)

     Off balance sheets assets (liabilities):
          Interest rate swaps .....................................          -             -             -           (64)
          Non-trading derivatives .................................          -             -             -            24
          Foreign currency exchange contracts .....................          -             -             -           101
          Financial guarantees and letters of credit ..............          -          (651)            -          (655)
</TABLE>

          The carrying amounts for financial assets and financial liabilities
     classified as current assets and current liabilities approximate fair value
     due to the short maturity of such instruments.

          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 restricted cash, notes payable - banks and
            short term loans on accounts receivable 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.

     (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 letters of credit has been determined using their
            full notional amount.

     (vii)  The fair value of financial guarantees represent the maximum amount
            payable should TXU Europe fail to perform on all of its guarantees.
            The likelihood of this happening is considered remote.

                                      A-47

<PAGE>

TXU EUROPE LIMITED AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18.      Commitments

                TXU Europe has the following commitments under long-term energy
         purchase arrangements:
<TABLE>
<CAPTION>

          Contract Type         Annual Fixed Fees or Capacity Charges
                           ----------------------------------------------
                             2002   2003   2004   2005   2006  Thereafter  Total
                                           ((Pounds) millions)
<S>                       <C>    <C>      <C>    <C>   <C>     <C>      <C>
         Electricity ......   341    344    316    304    287     1,102    2,694
         Gas:
           Take-or-pay ....    99     92     90     88     88       142      599

         Coal .............    91     77     91     98     97       301      755
                             ----   ----   ----   ----   ----     -----    -----
              Total           531    513    497    490    472     1,545    4,048
                             ====   ====   ====   ====   ====     =====    =====
</TABLE>

                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) annual capacity fees included in the table
         above. In addition, TXU Europe Group will provide a (Pounds)288 million
         guarantee (declining over time), representing approximately one year's
         capacity payment, with a counterparty providing a (Pounds)170 million
         guarantee.

                Gas take-or-pay contracts - TXU Europe 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. To offset some of the exposures within its overall
         natural gas portfolio, which also includes a range of wholesale and
         retail customers, including TXU Europe Group's own power stations, TXU
         Europe Group has entered into a variety of longer term gas purchase
         contracts. Management does not consider it likely, on the basis of
         current expectations of demand from customers, that any material
         payments will become due for gas not taken.

                Coal contracts - TXU Europe has renegotiated two coal purchase
         agreements with a supplier that were in place at the end of 2000, with
         one single contract effective January 1, 2002 (included in the table
         above). The renegotiation of the coal purchase agreement was carried
         out to ensure that tonnage of coal to which TXU Europe was committed to
         take was such that there was no excess volume exposure against sales to
         third parties, use in tolling agreements or generation in TXU
         Europe-owned power stations.

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

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

         2002 .............................     34
         2003 .............................     30
         2004 .............................     29
         2005 .............................      1
         2006 .............................      1
         Thereafter .......................      3
                                                --
         Total ............................     98
                                                ==

                The operating lease commitments relate to coal-fired power
         stations. Rental expense for operating leases amounted to (Pounds)24
         million, (Pounds)24 million and (Pounds)23 million for the periods
         ended December 31, 2001, 2000 and 1999, respectively.

                                      A-48

<PAGE>

TXU EUROPE LIMITED AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19.      Contingencies

                TXU Europe is subject to business risks that are actively
         managed to limit exposures.

                Legal - On November 29, 2001, various subsidiaries of Enron
         Corporation (Enron) went into Administration (bankruptcy) in the UK.
         Prior to Enron's going into Administration, TXU Europe Energy Trading
         (TXUEET) had certain energy purchase and sales contracts with Enron,
         which had been entered into in the ordinary course of business. The
         terms of these contracts provided that they terminated automatically
         upon a party going into Administration. Also, on November 29, 2001 just
         prior to Enron going into Administration, TXUEET received a notice from
         Enron purporting to terminate these contracts for cause. TXUEET and the
         Administrator have had discussions regarding potential claims relating
         to contract termination; Enron has filed an action in the High Court,
         London, relating to interpretation of contractual provisions; and
         TXUEET plans to seek a judicial determination regarding contract
         termination. While the outcome of these matters cannot be predicted,
         TXUEET believes, consistent with the advice of external legal advisors
         in the UK, that the attempted termination of the contracts by Enron was
         without substance. Accordingly, TXUEET believes any related claims by
         Enron would be without merit.

                General - TXU Europe and its subsidiaries are involved in
         various legal and administrative proceedings arising in the ordinary
         course of its business. TXU Europe believes that all such other
         lawsuits and resulting claims would not have a material effect on its
         financial position, results of operations or cash flows.

                Financial guarantees - On May 19, 1998, TEG sold its US and
         Australian coal businesses and US energy marketing operations (Peabody
         Sale) prior to its acquisition by TXU Corp. TEG has guaranteed up to
         US$110 million ((Pounds)76 million) at December 31, 2001 of certain
         liabilities that may be incurred and payable by the purchasers of these
         businesses and operations with respect to the Peabody Holding Company
         Retirement Plan for Salaried Employees, the Powder River Coal Company
         Retirement Plan and the Peabody Coal UMWA Retirement Plan, subject to
         certain specified conditions.

                TEG entered into various guarantees of obligations of affiliates
         of its former subsidiary Citizens Power LLC, arising under power
         purchase agreements and note purchase agreements in connection with
         various Citizens Power energy restructuring projects, as well as
         various indemnity agreements in connection with such projects. TXU
         Europe and TEG continue to be either the guarantor or the indemnifying
         party, as the case may be, under these various agreements.

20.      Quarterly Financial Information - (Unaudited)

                In the opinion of TXU Europe, the information below includes all
         adjustments (constituting only of normal recurring accruals) necessary
         to a fair statement of such amounts. The amounts reported in previous
         quarterly reports have been restated to reflect the disposal of the
         Networks business as discontinued operations.

<TABLE>
<CAPTION>
                                                                            Income (Loss)from      Net Income from
                       Operating Revenues        Operating Income              Continuing            Discontinued
                       ------------------        ----------------              Operations             Operations
                                                                            -----------------      ---------------
         Quarter Ended  2001         2000        2001         2000          2001         2000        2001         2000
                       ------------------------------------------------------------------------------------------------
                                                               ((Pounds) million)

         <S>           <C>          <C>          <C>          <C>           <C>          <C>       <C>            <C>
         March 31       2,270       1,104         125           91           16           11          24           35
         June 30        1,870         788          72           58           22           22          20           10
         September 30   1,977         976        (127)          16          (41)         (24)         18           22
         December 31    2,574       1,649          37           96          (29)          19         (23)          23
                        -----       -----         ---          ---          ---          ---         ---          ---
                        8,691       4,517         107          261          (32)          28          39           90
                        =====       =====         ===          ===          ===          ===         ===          ===
</TABLE>

                                      A-49

<PAGE>

 TXU EUROPE LIMITED AND SUBSIDARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


21.      Miscellaneous

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

<TABLE>
<CAPTION>
                                                                        December 31,
                                                      ------------------------------------------------
                                                           2001             2000             1999
                                                      ---------------  --------------  ---------------
          <S>                                          <C>             <C>              <C>
          Dividends from cost investments...........           5                3               9
          Gain on sale of investments...............          55               35               -
          Gain (loss) on the sale of businesses.....          (2)              29               -
          Foreign currency transaction gain (loss)..          (1)               1              (8)
          Dividends from marketable securities......           2                6               2
          Equity in earnings of unconsolidated
            subsidiaries and joint ventures.........           3                -               -
          Hidrocantabrico offer costs...............           -               (7)              -
          Other.....................................           1                -               5
                                                      ------------------------------------------------
                  Total.............................          63               67               8
                                                      ================= ==============  ==============
</TABLE>


                Accounts receivable - At December 31, 2001 and 2000 accounts
         receivable are stated net of uncollectible accounts of (Pounds)41
         million and (Pounds)28 million, respectively. A provision for
         uncollectible accounts of (Pounds)13 million, (Pounds)19 million and
         (Pounds)16 million was recorded during the years ended December 31,
         2001 and 2000 and 1999, respectively. An additional (Pounds)7 million
         was added in 2001 relating to accounts receivable purchased in
         connection with the acquisition of Kiel and Ares and an additional
         (Pounds)8 million was added in 2000 relating to accounts receivable
         purchased in connection with the acquisition of Norweb Energi. TXU
         Europe did not realize any material recoveries during those periods.
         TXU Europe wrote off accounts receivable of (Pounds)11 million,
         (Pounds)18 million and (Pounds)18 million during the years ended
         December 31, 2001 and 2000 and 1999, respectively.

                Inventories -

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                     ------------------------------------
                                                                         2001                    2000
                                                                     -----------             -----------
                                                                               (Pounds) millions
         <S>                                                         <C>                    <C>
         Inventories - at average cost:
           Materials and supplies............................            14                       24
           Fuel stock........................................            48                       48
                                                                     -----------              ----------
                                                                         62                       72
                                                                     ===========              ==========
  </TABLE>

                Goodwill - Goodwill is stated net of accumulated amortization of
         (Pounds)364 million in 2001 and (Pounds)240 million in 2000.

                                      A-50

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

             Property, Plant and Equipment - consisted of:

                                                              December 31,
                                                              ------------
                                                             2001         2000
                                                           --------    ---------
                                                             ((Pounds) million)

        Electricity generating stations:
             Owned ...................................        365          519
             Under capital lease .....................          -          775
        Distribution systems (Kiel) ..................        149            -
        Upstream gas assets (sold in February 2001)...          -          144
        Other land and buildings .....................        134           97
        Plant and equipment ..........................        360          296
        Accumulated depreciation .....................       (234)        (305)
                                                           -------      -------
        Net property, plant and equipment ............        774        1,526
                                                           =======      =======


                Capitalized software costs totaling (Pounds)25 million as of
        December 31, 2001 and 2000, are included in plant and equipment.
        Amortization expense relating to software costs of (Pounds)4 million has
        been recorded in 2001 and 2000. An additional (Pounds)3 million of
        software costs associated with businesses that had been outsourced was
        written off in 2001.

                Letters of credit -- At December 31, 2001 and 2000, TXU Europe
        had outstanding letters of credit of (Pounds)575 million and (Pounds)281
        million, respectively. The letters of credit at December 31, 2001 are
        primarily to cover the potential termination values on cross border
        leases, required in the event of plant dispositions or transfers and to
        an option to provide future energy sales.

                Concentration of Credit Risk -- TXU Europe had no exposure to
        any one customer that represented greater than 5% of the gross fair
        value of TXU Europe's trade accounts receivable, energy trading assets
        and derivative assets at December 31, 2001. The largest share of the
        assets subject to credit risk are accounts receivable from the millions
        of residential and commercial customers associated with the retail sale
        of electricity and gas. Most of TXU Europe's energy trading
        counterparties are major energy companies or financial institutions. At
        December 31, 2001, (Pounds)509 million or 91% of the credit risk amounts
        are associated with energy trading counterparties considered to be
        investment grade, determined using publicly available information
        including a Standard & Poor's rating of a least BBB-, and (Pounds)19
        million or 3% are below investment grade. The remaining amount of credit
        risk is with counterparties that have no external ratings. TXU Europe
        monitors and reports its exposures and limits on a daily basis and
        provides regular reports to its regional and global risk monitoring
        committees and treasury subcommittees.

                The risk of significant loss to TXU Europe arising from
        non-performance by counterparties is considered unlikely.

                TXU Europe recorded a (Pounds)15 million after-tax charge
        related to TXU Europe's exposure to Enron.

                Based on TXU Europe's policies for managing credit risk, its
        exposures and its credit and other reserves, TXU Europe does not
        anticipate a materially adverse effect on its financial position or
        results of operations as a result of non-performance by any
        counterparty.

                                      A-51

<PAGE>

TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

             Cash flows - The following schedule details TXU Europe's
      cash-flow impact on certain investing activities:

<TABLE>
<CAPTION>
                                                                                 December 31,
                                                                   ------------------------------------

                                                                      2001          2000         1999
                                                                      ----          ----         ----
<S>                                                                  <C>           <C>           <C>
Supplemental Cash Flow Disclosures:
      Cash paid for interest ..................................        269          273           253
      Cash paid for income taxes ..............................         98           28            19

Non-Cash Transactions
      Receivable of sale proceeds .............................        133            -             -
      Acquisition of Kiel and Ares (2001) and Norweb Energi
      and Other Businesses (2000):
          Fair value of assets acquired                                127          302             -
          Fair value of liabilities assumed                            (93)        (605)            -
          Goodwill                                                     119          622             -
                                                                   ---------      --------      -------
                   Net cash used                                       153          319             -
                                                                   =========      ========      =======
</TABLE>

                                      A-52

<PAGE>

                                                                      APPENDIX B

                               TXU EUROPE LIMITED
                           Exhibits to 2001 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
                   and 333-82307-1                         Company.

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

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
                   and 333-82307-1                         May 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
                   and 333-82307-1                         May 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
                   and 333-82307-1                         May 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 333-82307-1                         and the exchange senior notes.

4(f)                   1-12833           4(rrr)            Amended and Restated Trust Agreement, dated as of
                   Form 10-K (1999)                        March 2, 2000, among TXU Business Services Company,
                                                           TXU Europe Limited, TXU Europe CP, Inc., and The Bank
                                                           of New York, The Bank of New York (Delaware), and the
                                                           Administrative Trustees of TXU Europe Capital I.

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

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

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

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

                                      B-1

<PAGE>

<TABLE>
<CAPTION>
                Previously Filed*
                -----------------

                      With File
 Exhibit               Number          As Exhibit
----------           ----------        ----------
<S>             <C>                    <C>           <C>    <C>
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,
                   Form 10-K (1999)                         between The Bank of New York and Funding.

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

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

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

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

4(q)                   1-12833            4(B)       -      Trust Deed relating to a (pound)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(r)                   1-12833            4(C)       -      Pricing Supplement with respect to (pound)225,000,000
                   Form 10-K (1999)                         7.25% Notes due 2030 issued pursuant to the EMTN
                                                            Program.

4(s)                  001-15709           4(a)       -      Pricing Supplement with respect to (pound)100,000,000
                      Form 10-Q                             6.88% Notes due 2001 issued pursuant to the EMTN
                    (Quarter ended                          Program.
                    September 30,
                        2000)

4(t)                  001-15709           4(b)       -      Pricing Supplement with respect to (pound)50,000,000
                      Form 10-Q                             7.25% Notes due 2030 issued pursuant to the EMTN
                    (Quarter ended                          Program.
                    September 30,
                        2000)

4(u)                   0-12833            4(F)       -      Pricing Supplement, dated November 27, 2000, with
                      Form 10-K                             respect to (pound)301,000,000 35 PUT 5 Resettable
                        (2000)                              Securities due 2035 issued pursuant to the EMTN
                                                            Program.

4(v)                   0-12833            4(G)       -      First Supplemental Trust Deed, dated November 29,
                      Form 10-K                             2000, with respect to (pound)301,000,000 35 PUT 5
                        (2000)                              Resettable Securities due 2035 issued pursuant to the
                                                            EMTN Program.

4(w)                   0-12833            4(H)       -      Remarketing Agreement, dated November 29, 2000,
                      Form 10-K                             relating to the 35 PUT 5 Resettable Securities due
                        (2000)                              2035 issued pursuant to the EMTN Program.

4(x)                   0-12833           4(uuu)      -      Second Supplemental Trust Deed, dated February 26,
                      Form 10-K                             2002, relating to the 7.25% Notes due 2030 issued
                        (2001)                              pursuant to the EMTN Program.
</TABLE>


                                      B-2

<PAGE>

<TABLE>
<CAPTION>
                Previously Filed*
                -----------------

                      With File
 Exhibit               Number          As Exhibit
----------           ----------        ----------
<S>             <C>                    <C>           <C>    <C>
10(a)                  0-12833            99(w)      -      Facility Agreement for (pound)900,000,000 Credit Facility
                      Form 10-K                             for TXU Europe Limited, dated November 29, 2001,
                        (2001)                              arranged by Barclays Capital, J. P. Morgan PLC,
                                                            Salomon Brothers International Limited and The Royal
                                                            Bank of Scotland

10(b)                  0-12833            99(x)      -      Supplemental Deed, dated as of January 19, 2001,
                      Form 10-K                             among TXU Europe Merchant Properties Limited, TXU
                        (2001)                              Europe Merchant Generation, Eastern Group Finance
                                                            Limited, TXU Europe Group plc, TXU Europe Power
                                                            Limited, Eastern Electricity plc, Barclays Bank plc
                                                            (as agent) and the banks listed therein

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

12(a)                                                -      Computation of Ratio of Earnings to Fixed Charges
                                                            for TXU Europe Limited for the years ended December
                                                            31, 2001 and 2000, and the period from formation
                                                            through December 31, 1998.

12(b)                 333-82307           12(b)      -      Computation of Ratio of Earnings to Fixed Charges
                   and 333-82307-1                          for TXU Europe Group plc and Subsidiaries (formerly
                                                            Eastern Group plc and Subsidiaries) (US GAAP basis).
</TABLE>

         *        Incorporated herein by reference.

                                       B-3