1. EEI Conference
C. John Wilder
Chief Executive Officer
November 8, 2005
2. Safe Harbor Statement
This presentation contains forward-looking statements, which are subject to various
risks and uncertainties. Discussion of risks and uncertainties that could cause actual
results to differ materially from management's current projections, forecasts, estimates
and expectations is contained in the company's SEC filings. In addition to the risks and
uncertainties set forth in the company's SEC filings, the forward-looking statements in
this release could be affected by the ability of the company to implement the initiatives
that are part of its operational improvement and cost reduction program and financial
and growth strategies, and the terms under which the company executes those
initiatives, the ability of the company to execute its share repurchase program and the
actions of its board of directors with respect to future dividends and other cash
distributions to shareholders, which will be based upon a number of factors, including
the company’s profit levels, operating cash flow levels and capital requirements as well
as financial and other business conditions existing at the time.
Regulation G
This presentation includes certain non-GAAP financial measures. A reconciliation of
these measures to the most directly comparable GAAP measure is included in the
appendix of the printed version of the slides and the version included on the company’s
website at www.txucorp.com under Investor Resources/Presentations.
1
3. Today’s Agenda
• The TXU Turnaround
TXU Today
TXU Today • Core Strategic Principles
• TXU Power
Business Unit
Business Unit • TXU Retail/Wholesale
Strategies
Strategies • TXU Electric Delivery
• Natural Gas
• Heat Rate
Risk/Market Outlook
Risk/Market Outlook
• Capital Allocation Principles
• Financial Outlook And Growth
Financial
Financial • Financial Sensitivities
Principles
Principles • Long-Term Sources And Uses Of Cash
2
4. January 2004: TXU Was Challenged By The Transition To Its New
Competitive Environment
Too Much Debt: Debt/Total Enterprise Value
Poor Returns: Annual TRS
Jan 04; Percent
Jan 94 - Jan 04; Percent
43%
43%
981% 65
11.9
37
1.1
Top quartile Top quartile
TXU
TXU
(S&P Electric) (S&P Electric)
Costly Operations: Nuclear Oper. Costs Poor Service: Average Speed To Answer
03; $/MWh 03; Seconds
18% 96%
18% 96%
280
12.0
9.8
12
TXU Best in class TXU Best in class 3
5. To Compete In This New Environment, TXU Designed And Is Executing A
Three Phase Improvement Plan…
Today
Phase 3:
Ongoing Value
Creation
Phase 2:
Performance Improvement
• Identified $1.3 billion in performance improvements over
3 years
• Identified $900 million in year one – outperforming plan
Phase 1:
Risk And Return Restructuring
• Sold disadvantaged businesses
• Quickly reallocated $14 billion to repair balance sheet
• Reduced major risks
4
6. …The Execution Of The Turnaround Plan Has Created Significant Value
For TXU Shareholders By Focusing On Three Key Levers
Based on price as
Gains Across The Board: TXU Value Creation of November 4th
05; $/share
94
5 5
7 276%
276%
20
3
19
4 23
26
26
25
25
Stock Share Hedge Commodity Gas plant Baseload CGE cost Other Stock
price repurchases removal increases improve- capacity reductions costs Price
Feb and asset ments factor (bad debt, Today
04 sales (dispatch sourcing,
and cost) SG&A)
Portfolio Risk Performance
management and management management
capital allocation
Total value creation is greater than $15 billion
Total value creation is greater than $15 billion 5
7. TXU’s Strategy Reflects Core Beliefs About What It Takes To Win In The
Energy Business
Principle Rationale
• Energy markets will continue to go through
cycles; only assets with a structural cost
Long-Term Success In The Energy advantage will win over the long term
1 Sector Is Based On Having Access
• Structurally advantaged positions provide
To Structurally Advantaged Assets better opportunities over the long term
• Superior operations and performance
management can drive a 200 basis-point
increase in ROIC
2 An Industrial Skill Set Is Crucial For
• Many companies in the sector have not
Continual High Performance
transformed their performance level to
reflect a competitive environment (delta
between median and top quartile is 10-20%)
• Just like in other capital intensive sectors,
scale is necessary to standardize
operations, gain critical mass, and extract
3 Long-Term Winners Must Leverage rent from suppliers
Not Only Scale But “Quality Scale”
• “Quality scale” is needed to gain access to
advantaged new build, and gain competitive
and regulatory leadership
6
8. Principle 1: TXU’s Core Businesses Are Structurally Advantaged Across
The Entire Value Chain
TXU Competitive Business TXU Regulated Business
Transmission and
Generation Retail
Wholesale
Distribution
TXU Power TXU Wholesale TXU Energy TXU Electric Delivery
2nd largest U.S. Access to largest Large scale 6th largest U.S.
deregulated output competitive retailer
ERCOT generation transmission &
fleet distribution company
Access to low cost Loyal customer
lignite reserves base
Access to largest Top quartile costs and
Structural
ERCOT retail reliability
advantages 63 TWh of Strong brand
position
recognition
baseload High growth NERC
region (2.0%)
production in a gas Incumbent
Superior service
on the margin expertise in
Efficient capital
market regulatory
recovery
advocacy and
market design No commodity
exposure
No retail customers
05E EBITDA $2.6 - 2.7 B $1.2 B
7
9. Principle 2: An Industrial Skill Set Will Help Drive Superior Returns
Throughout The Cycle
Operational Excellence Risk/Return Mindset
Market Leadership
• Superior customer service
• Top decile throughput • Strict capital allocation
and brand management discipline
• World class industrial
• Customer segmentation
production costs • Risk/return restructuring
and pricing
• Industry leading reliability • Commodity risk
• Distinctive commodity management
• Lean corporate SG&A
sourcing
Performance Management
• High performance culture
• Balanced cascading scorecards
• Employee development
• Incentives linked to key value drivers
8
10. Principle 3: Multi-Market Leadership Is Crucial As Demonstrated By
Similarities Between The E&P Sector And The Power Sector…
Characteristic E&P Power Generation Delivery
• Exploration and • Power marketing • Regulated model makes
development driven constrained to regional every transmission region
Multi-local by local geology and transmission grids different
infrastructure
• Minimum efficient • Minimum efficient • T&D companies can often
Capital investment > $1 investment > $750 invest up to 10% of their
billion million market cap in annual
intensive
capex
• Oil/gas price cycles • Power price cycle • Regulated returns cycle
driven by investment driven by gas price based on interest rate
conduct, declining volatility, fuel price cycle
Cyclical economics and volatility, demand
demand cyclicality growth, investment
conduct
• Country regimes • State/federal • All capex and rate
Importance of define development regulators approve structures must be
regulatory rules and economics development and approved by local/federal
competitive market regulators
relationships
rules
9
11. ...And Looking At The Characteristics Of The Most Successful E&P
Companies… Actual E&P
Companies
Shareholder Value Creation (SVC)… …has been driven by scale and quality of scale
91-01; $ billions
High A
A 61
B
D
B 61 E
Scale:
C 25 C
G
Equity
Cap
D 21
F
H
E 7
Low
F 6
Low High
Quality of Scale:
G 0
Percent of value in
“Market Leading”
H -5
positions1
10
“Market Leading” positions defined as having greater than 15% investment share in a basin with PVI > 2.
1
12. …The Winning Strategy In The Power Sector Will Require The
Combination Of Scale And Quality Of Scale
Key Principle Competitive Advantages TXU Application
• Standardization of operating • Applying TXU Operating System
practices across larger portfolio of assets
• Ability to take part in needed large • Taking part in infrastructure build out
Scale capital investments without “betting the company”
• Ability to extract excess rents from • Leveraging bulk purchases to reduce
equipment suppliers equipment supplier costs and increase
returns
• Better access to future • Taking advantage of sites like Oak
development opportunities Grove for new build
• Providing competitive leadership • Ensuring capital is invested
Quality of scale and capital discipline appropriately in needed infrastructure
• Providing regulatory leadership • Advocating that market rules (e.g.,
Nodal) develop to ensure fair
competition
In the E&P sector, the combination of both factors was
In the E&P sector, the combination of both factors was
needed to drive significant value creation over time
needed to drive significant value creation over time
11
13. Scale Is Needed To Take A Meaningful Part In The Next Infrastructure
Build Out
Project As Percent
Major Project Capex Equity Market Cap Of Market Cap
$ billions $ billions Percent
Exxon 370 1.1
Deepwater
GOM
development 4 BP 233 1.7
(e.g.,
Thunderhorse)
CVX 124 3.2
47 6.3
Exelon
2000 MW 3 Dominion 27 11.1
coal plant
24 12.5
TXU
While E&P leaders have the scale to take the risk of major new build projects, in the
While E&P leaders have the scale to take the risk of major new build projects, in the
deregulated power sector new build projects represent major bets
deregulated power sector new build projects represent major bets
12
14. TXU Electric Delivery’s Aspiration Is To Establish A Winning Position in
ERCOT/SPP
High Winning
Scale: Net T&D plant in service in Strategy Actual Delivery
Companies
ERCOT/SPP
TXU
Low
Low High
Quality of Scale: Percent of total assets in “Market Leading” positions1
Most delivery companies lack scale, despite some quality positions in aaparticular state
Most delivery companies lack scale, despite some quality positions in particular state
While aacouple of players have established leadership positions, none has taken aa
While couple of players have established leadership positions, none has taken
leading position across multiple regions
leading position across multiple regions
13
“Market leading” defined as percent of state T&D assets >30%.
1
15. TXU Power’s Aspiration Is To Follow The “Regional Market Leader”
Strategy And Replicate Its Quality Scale Position In Other Deregulated
Markets
High
Scale: Total merchant generation
Winning
Actual Power
Strategy
Companies
TXU
Low
Low High
Quality of Scale: Percent of value in “Market Leading” positions1
No deregulated company has been able to establish “quality scale” in multiple markets
No deregulated company has been able to establish “quality scale” in multiple markets
There are aanumber of companies that have high quality positions but lack the scale to
There are number of companies that have high quality positions but lack the scale to
extract “Market Leader” value
extract “Market Leader” value
14
“Market Leader” defined as solid fuel TWh >10% of NERC region merchant TWh.
1
16. Today’s Agenda
• The TXU Turnaround
TXU Today
TXU Today • Core Strategic Principles
• TXU Power
Business Unit
Business Unit • TXU Retail/Wholesale
Strategies
Strategies • TXU Electric Delivery
• Natural Gas
• Heat Rate
Risk/Market Outlook
Risk/Market Outlook
• Capital Allocation Principles
• Financial Outlook And Growth
Financial
Financial • Financial Sensitivities
Principles
Principles • Long-Term Sources And Uses Of Cash
15
17. TXU Power Has A Structurally Advantaged Portfolio In A Market With
Strong Fundamentals…
ERCOT Average Implied Heat Rate
Large Portfolio
05; TWh of deregulated generation 04; MMBtu/MWh Gas fleet provides
shaping and ancillary
24
178 services
Solid fuel capacity
21 provides low cost
18 baseload power
Gas
15 (10.2 GW)
12
62 62 Lignite
46 9 Nuclear (5.8 GW)
46 44 40 37 30 (2.3
6 GW) TXU units
3
EXC TXU NRG/ D PPL EME FE AYE ETR 10 20 30 40 50 60 70 80
Cumulative GWs
TGN
Source: Platts
Low Coal Prices1
Robust Wholesale Power Prices
05; $/MMBtu
05; $/MWh
4.0
75 3.8
3.5
3.5
65 61
60 56
54 54 53 52 50 2.6
2.3
2.1
1.7
NPCC ERCOT WECC SERC MRO MAPP ECAR FRCC MAAC
FRCC MAAC SPP MAIN ECAR TXU WECC SERC MAIN
16
Source: Platts Emissions-adjusted.
1
18. Based On Core Beliefs About Value Creation, TXU Power Has Designed A
Bottom-Up Business Unit Strategy
TXU Power
Gain Scale Outside The ultimate
The ultimate
Continue To Strengthen The
Of ERCOT And goal is to
goal is to
ERCOT Position
Build Market Leader Position develop
develop
sustainable
sustainable
Leverage TXU Operating competitive
competitive
Scale TXU Operating
System to continue to positions in
positions in
System to improve 3rd
drive increased value multiple markets
multiple markets
party assets
from Texas baseload fleet
Leverage creative
Take advantage of
transactional solutions
existing sites (Sandow,
with counterparties who
Oak Grove) to add new
share our vision
capacity in Texas
Develop deeper multi-
market wholesale
capabilities 17
19. In Coal Generation, TXU’s Goal Is To Redefine High Performance
Utilization While Simultaneously Achieving High Performance Costs
Capacity Factor For US National Coal Fleet1 (n=225) O&M For Non-Scrubbed Coal Fleet2 (n=160)
02-04; Percent 02-04; $/KW-year
17.0 21.0 25.7 32.3
82.1 76.2 68.7 58.6
100
100
08
90
90 05
03
80
80
70
70
60
60
50
50
40
40
05 03
30
30 08
20
20
10 10
0 0
1st Quartile 3rd Quartile 1st Quartile 3rd Quartile
4th Quartile
2nd Quartile 2nd Quartile 4th Quartile
Plant 05 08 EBITDA improvement Plant 05 08 EBITDA improvement
Total 90% 92% $69M Total $26 $21 $30M
TXU Power is driving increased production and cost reduction via the Operating System
TXU Power is driving increased production and cost reduction via the Operating System
Sample set includes all coal plants > 450 MWs.
1
18
Sample set includes all coal plants > 450 MWs, 2002-2004 non-scrubbed coal plants. TXU plants normalized for scrubbing & fuel type.
2
20. The Goal In Nuclear Is To Replicate Top Fleet Performance At A Single
Plant
Making Progress: Capacity Factor More Productive: Non-Fuel O&M
02-04; Percent 02-04; $/kW
95.4
95.1 101
94
89
79
92.6
91.3
Exelon TXU TXU TXU Exelon TXU TXU TXU
Large 03-05 06-08 08-10 Large 03-05 06-08 08-10
Plants1 Plants1
Closing the gap on capacity factor and cost will have
Closing the gap on capacity factor and cost will have
~$120 million upside relative to 03-05
~$120 million upside relative to 03-05
19
Exelon large plants include Byron, Braidwood, Lasalle, Limerick, and Peach Bottom.
1
21. TXU Has Access To Two Development Opportunities In Texas…
Oak Grove Steam Electric Station
Sandow Unit 5
Robertson County, Texas
Rockdale, Texas
Key Statistic
Key Statistic
Installed Capacity (MW) 600 Installed Capacity (MW) 1,720
Technology CFB Technology SCPC
Configuration 2X1 Configuration 2X2
Primary Fuel Lignite Primary Fuel Lignite
LI/ SNCR1
SO2 and NOX Controls FGD/SCR2
SO2 and NOX Controls
Key Milestones
Key Milestones
Air Permit In-Process
Air Permit Complete
Begin Construction 2 mos. after permit
Resume Construction April 06
Commercial Operation June 09/Dec 09
Commercial Operation Oct 08
LI refers to Limestone Injection; SNCR refers to Selective Non-Catalytic Reduction.
1
20
FGD refers to Flue Gas Desulphurization; SCR refers to Selective Catalytic Reduction.
2
22. …That Deliver Strong Returns With A Strong Expected Hedged Position…
Sandow 5 – 600 MW Oak Grove – 1,720 MW
06E-10E; $ millions 06E-10E; $ millions
06 07 08 09 10
06 07 08 09 10
EBITDA 165 575
EBITDA 45 165 160
Net income 30 285
Net income 15 70 70
Capex 260 740 650 250 15
Capex 230 265 165 5 5
Est. hedged Est. hedged
output-% 75 75 75 output-% 75 75
PV/I = 1.5 PV/I = 1.7
PV/I = 1.5 PV/I = 1.7
IRR = 11% IRR = 14.2%
IRR = 11% IRR = 14.2%
Cash payback = 99years Cash payback = 88years
Cash payback = years Cash payback = years
21
23. …Based On The Ability To Drive High Performance Across All Aspects Of
The Project
Respectable Returns: Oak Grove Project Economics - NPV
05; $ billions
1.7
0.4
0.1
0.7
0.3
0.3
(0.1)
Plant value Compression Reduction Access to Reduction in Increase in Optimized
based on of build in capex advantaged O&M by capacity value
“regulated” schedule by by $250/ fuel $10/kW- year factor by
performance 1 year kW 10%
Value -30 170 180 410 90 260 1,080
$/kW
IRR 5.6% 1.8% 2.3% 2.3% 0.5% 1.7% 14.2%
Percent
The difference between aaregulated new build and aaindustrial new build is
The difference between regulated new build and industrial new build is
significant; without both the commercial and operational skill set, new build
significant; without both the commercial and operational skill set, new build
economics will not work
economics will not work
22
24. Market Forces Have Converged To Create An Opportunity To Consolidate
And Improve Coal Generation…
Performance
Performance
Variability
Variability
Variances between 1st
and 4th quartile:
•Capacity factor: 57%
•Cost: 261%
Fragmented Wholesale Market
Fragmented Wholesale Market
Ownership Deregulation
Ownership Deregulation
Consolidation
Top 55merchant Competitive wholesale
Top merchant Competitive wholesale
Opportunity
players account for markets have aligned
players account for markets have aligned
only 12% of national incentives with risks
only 12% of national incentives with risks
coal capacity
coal capacity
Fundamental Gas
Fundamental Gas
Price Shift
Price Shift
Dark spreads are up 81%,
Dark spreads are up 81%,
driving plant values up
driving plant values up
over 100%
over 100%
Other asset-intensive industries that have
Other asset-intensive industries that have
had similar characteristics have consolidated and created value
had similar characteristics have consolidated and created value 23
25. Identifying The Value Opportunity Starts With Focusing On Assets That
Fit TXU’s Core Strengths…
US Fleet US Coal US Merchant US Merchant
Coal Coal >100 MW
# Plants 15,757 597 279 108
Capacity
959 GW 306 GW 95 GW 80 GW
(GW, 04)
Generation 530 TWh
3,950 TWh 1,950 TWh 550 TWh
(TWh, 04)
• Nuclear already • Greater • TXU Operating
Rationale
consolidated opportunity to System most
retain value in effective on
• Gas plants are a merchant fleet large plants
market timing bet
• TXU Operating • Quicker/cheaper • Small plants
System focused on transaction generally older
coal execution and marginal
24
26. …And Estimating The Performance Improvements By Replicating TXU’s
Performance Across The Entire Merchant Coal Fleet
EBITDA Improvement Potential For Targeted US Merchant Coal Fleet1 Value
creation
$ billions
0.8
4.9
0.5 $/kW
0.7
4.1
0.9
510
0.4
2.4 370
Aspiration
Target
Fuel
Capacity Env Gross
Non-fuel Heat Cost to Net value
cost
factor upgrades O&M value
rate achieve
Total improvement would be valued at over $40 billion
Total improvement would be valued at over $40 billion
25
Power prices estimated using 2010 forward price of $7.05 natural gas.
1
27. Applying These Value Levers To Individual Plants Produces A Targeted
Origination List Of Counterparties
EBITDA Improvement Relative Improvement
$ millions Percent
Operator Target Aspiration Target Aspiration
A 140 180 50 60
B 160 220 40 50
C 220 300 30 40
D 245 345 30 40
E 225 325 30 40
F 95 140 25 40
G 85 130 25 35
H 100 150 25 35
I 100 160 20 30
J 115 165 15 20
K 50 70 15 20
TXU will leverage creative transaction structures to minimize premiums
TXU will leverage creative transaction structures to minimize premiums
26
28. TXU’s Aspiration To Double The Size Of The Coal Portfolio Over The Next
5+ Years
Coal Coal Capital Oper.
capacity generation % of 2010 investment Earnings1
(GW) (TWh) target ($ billions) ($ billions)
0.02
36-47 1.0
2006 TXU 5.8 46
3-4 0.6 0.10
Sandow 5 0.5 4
11-14 2.0 0.35
Oak Grove 1.7 14
3-4 0.6 0.11
Other Texas existing sites 0.5 4
17-22 3.2 0.6
Organic growth 2.7 22
53-69 3.2 1.6
TXU today + Organic growth 8.5 68
31-47 3.9-7.7 0.8-1.6
Potential transactions 3.5-7.0 30-60
100 7.1-10.9 2.4-3.2
2010 Target 12-15.5 98-128
TXU is pursuing aamulti-pronged strategy of organic growth and
TXU is pursuing multi-pronged strategy of organic growth and
transactions to reach its portfolio goals
transactions to reach its portfolio goals
Based on $60/MWh power.
1
27
Does not include sustaining Capex.
2
29. TXU Retail/Wholesale Is The Largest Competitive Retailer In A
Growth Market
Large Competitive Customer Base High Growth
05; Millions of customers 05E-14E; Percent annual growth
2.8
2.4 2.4
1.9 2.0 1.9
1.7 1.7 1.6 1.6 1.6
1.3
0.9
0.2 0.1 0.1
TXU RRI Direct First Green
Gexa FRCC ERCOT MAAC MAIN ECAR
Energy Choice Mountain
WECC MRO SERC SPP NPCC
Source: NERC
Sources: KEMA, company filings
Highly Competitive Market Strong Demand
Oct 05; Number of certified ERCOT 03; Residential GWh/household
retailers 15 15 15 15 15 14
105
103
11 10 10
75
56 7 7
39
01 02 03 04 05 LA TN AL FL MS TX US OH PA NY CA
28
Source: PUC Sources: EIA, BEA
30. Based On Core Beliefs About Value Creation, TXU Energy Has Designed
A Bottom-Up Business Unit Strategy
TXU Retail/Wholesale
TXU Energy’s
TXU Energy’s
top priority is
top priority is
to restore
to restore
Return The North Texas Opportunistically Build
profitability to
profitability to
Consumer Franchise Profitable Businesses In
North Texas
To Profitability Other Customer Segments North Texas
TXU will
TXU will
Introduce innovative
Take advantage of higher continue to
continue to
products and pricing
headroom opportunities monitor
plans that meet customer monitor
in South Texas to acquire
opportunities
needs and provide opportunities
residential customers
sustaining margins outside of
outside of
Texas
Texas
Continue to redefine Focus on higher margin
customer service to customers in small,
distinguish TXU Energy medium, and large
from its competitors commercial segments
Continue to drive cost leadership to
Continue to advocate for a
enhance competitiveness across all
market-based structure that
segments
encourages competition 29
31. Although Margins In This Business Are Currently Negative Due To High
Gas Prices …
North Texas Residential Headroom vs. Gas Price Since Market Open
02-05; Mixed measures
Retail headroom1 Gas price2
$/MWh $/MMBtu
12-month
40 $12.00
Retail
forward gas
headroom
price
30 $10.00
20
$8.00
10
$6.00
0
$4.00
-10
$2.00
-20
-30 $0.00
Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct-
02 02 02 02 03 03 03 03 04 04 04 04 05 05 05 05
Based on average customer usage of 16,000 kWh/yr. with PUC-approved residential load profile; headroom defined as PTB rate – cost of energy (avg. NYMEX 12 mo. strip x 7.8 heat
1
rate x assumed 25% for load shaping, congestion, line losses and other ancillary costs) – avg. wires cost (based on published TXU Electric Delivery rates, excluding clawback).
30
NYMEX 12-month strip through 10/31/05.
2
32. … They Are Expected To Improve With The Approved Fuel Factor
Adjustment And Should Continue To Expand Over The Long Term Based
Upon The Current Gas Curve
Projected Headroom1
05E - 08E; $/MWh
27
3
10
Gross margin
Net margin (5)
05E 06E - 08E
Gas price2 $8.95 $9.71
The combination of the adjusted fuel factor and backwardation of the curve allow
The combination of the adjusted fuel factor and backwardation of the curve allow
headroom and net margins to recover to reasonable levels
headroom and net margins to recover to reasonable levels
Based on actual fuel factors through Oct-05 and $11.52/MMBtu for all future periods; assumes avg. customer usage of 16,000 kWh/yr.
1
31
Actual prices through Oct-05, forward prices based upon NYMEX curve as of 10/31/05.
2
33. Long-Term Headroom Of Approximately $25/MWh Is Needed To Allow
Competitors To Earn A Reasonable Risk Adjusted Return
Attacker Gross And Net Margins With 7% Discount Breakeven Payback For New
And Headroom Of $25/MWh1,2 Customer
07E; Months1,2
07E; $/MWh
Attacker discount; %
25 10
5% 7% 10%
Head-
2
$20 53 NA NA
10 room
($/MWh)
$25 12 21 NA
Net margin
9 2 Net
margin $30 7 9 17
North Com- Acquisition Attacker
Texas petitor cost gross
Reasonable payback
headroom discount margin
With an average customer life of three years and competitive discounts of at least 5 –
With an average customer life of three years and competitive discounts of at least 5 –
10%, headroom of over $20/MWh is needed for attackers to achieve positive economics
10%, headroom of over $20/MWh is needed for attackers to achieve positive economics
TXU Energy margins estimated using NYMEX 10/31/05 gas strip for calendar 06, average consumption of 16.0 MWh per year.
1
Attacker economics based on above, with discounts from PTB as shown, acquisition costs of $105/customer amortized over 36 months, marginal SG&A of $3/MWh, and bad debt of 1.3%.
2
32
34. The UK Experience Supports $20 - $30/MWh Headroom And Resilient
Market Shares
Incumbent Native Market Shares
01 - 04; Percent
69% 64% On an equivalent basis to
62% 61%
On an equivalent basis to
ERCOT, UK residential
ERCOT, UK residential
incumbents achieved
incumbents achieved
gross margins averaging
gross margins averaging
approximately $25/MWh
approximately $25/MWh
from 01 to 04
from 01 to 04
01 02 03 04
UK Retail Energy Gross Margins1 Six years after market
Six years after market
01 - 04; $/MWh open, UK incumbents
open, UK incumbents
$26 continue to hold the
$26 $25 continue to hold the
$24
majority of their legacy
majority of their legacy
customers, while acquiring
customers, while acquiring
new customers in other
new customers in other
areas
areas
01 02 03 04
Gross margins for combined electricity and gas customers (all major competitors offer both energy types and may discount either or both). Margins reported by Datamonitor and adjusted for
1
definitional differences between UK and TXU reporting. 01- 04 average FX of $1.60/£ assumed for all years.
33
Source: Datamonitor, PA Consulting, TXU Energy analysis
35. TXU Electric Delivery Has An Advantaged Structural Position…
Scope: Large Infrastructure
Size: Large Customer Base
04; Thousands of miles of primary distribution lines
04; Millions of customers
146
5.3 5.2
105
4.2 4.2
87
87
3.1 3.0 2.9 69
2.6 69 65 63
2.3 2.2 59 54
TXU
PCG EXC FPL SO ED TXU PGN ETR D DUK
Source: FERC Source: Proprietary benchmarking study
Demand: High Growth Supportive Regulatory Environment
05E-14E; Percent annual growth
2.8
2.4
2.0 1.9
1.7 1.7 1.6 1.6 1.6
1.3
Outstanding
FRCC ERCOT MAAC MAIN ECAR
Above Average
WECC MRO SERC SPP NPCC
Average
Source: NERC Source: Banc of America Securities Research
Below Average
TXU Electric Delivery is a scale player in a high-growth region
TXU Electric Delivery is a scale player in a high-growth region 34
36. …And A Unique Business Model That Makes It Look More Like A FERC
Transmission Or Pipeline System Than A Traditional Utility
Traditional T&D Gas LDC’s Pipeline FERC TXU Electric
comparables MLP’s Delivery
TransCo
Regulation State State FERC FERC State
Capital tracker No No No Yes Yes1
Commodity risk Yes Yes No No No
Retail customers Yes Yes No No No
TXU Electric Delivery has higher growth and more progressive investment recovery
TXU Electric Delivery has higher growth and more progressive investment recovery
mechanisms than typical regulated transmission and distribution peer companies
mechanisms than typical regulated transmission and distribution peer companies
35
For transmission and automated meter reading investments
1
37. Based On Core Beliefs About Value Creation, TXU Electric Delivery Has
Designed A Bottom-Up Business Unit Strategy
TXU Electric Delivery
Continue To Redefine Consolidate Regional T&D To
Excellence In Texas Extract Synergies TXU will
TXU will
continue to drive
continue to drive
Scale TXU’s distinctive asset
Focus on distinctive asset distinctive
distinctive
management capabilities
management: optimize performance in
performance in
over a larger grid
reliability and costs Texas while
Texas while
attempting to
attempting to
scale its
scale its
Take advantage of high Take a national role in operating edge
operating edge
growth market and technology through regionally
regionally
advantaged business leading technology
model to invest in needed consortium and third
infrastructure party infrastructure fund
Integrate BPL and AMR
into grid to help redefine
service quality
36
38. TXU Electric Delivery Has Achieved Top Quartile Reliability While
Simultaneously Maintaining Top Quartile Costs
Non-Storm SAIDI1 (n=33) O&M Costs2 Per Customer (n=33)
04; Minutes 04; $/customer
85.8 112.0 128.0 139.6
71.3 87.5 145.1 183.0
260 $220
234 $198
208 $176
182 $154
156 $132
130 $110 03 05
08
104 $88
05 03
78 $66
08
52 $44
26 $22
0 $0
3rd Quartile 3rd Quartile
1st Quartile 1st Quartile
2nd Quartile 4th Quartile 2nd Quartile 4th Quartile
Significant capital investments are planned to ensure consistent top quartile reliability,
Significant capital investments are planned to ensure consistent top quartile reliability,
while rigorous focus on cost efficiency will result in top decile cost performance by 08
while rigorous focus on cost efficiency will result in top decile cost performance by 08
TXU Electric Delivery is evaluating adoption of the IEEE 1366 standard for reporting reliability performance. Projected 2008 non-storm SAIDI calculated under this method would be 74.59.2.
1
37
Benchmark includes specific O&M accounts as well as maintenance capital.
2
39. Based On A Rapidly Growing Market, And The Importance Of Keeping
The Lights On, TXU Electric Delivery Is Investing In Needed Infrastructure
Upgrades Automated meters
Distribution
Transmission
North Texas Economic Cost Of One Minute
TXU Electric Delivery Capex Budget
of downtime1
03-08; $ millions
05: $ millions
9.6 850 875
7.3 825
75
750 75
75
25
600
350
350
543 325
375
300
300
2.2
450
425 425
350
300
243
0.1
Residential Commercial Industrial Total
03 04 05E 06E 07E 08E
••TXU Electric Delivery’s capital and technology deployment strategy is designed to
TXU Electric Delivery’s capital and technology deployment strategy is designed to
lower grid congestion, and increase system reliability
lower grid congestion, and increase system reliability
••About 50% of TXU Electric Delivery’s capital is eligible for expedited recovery
About 50% of TXU Electric Delivery’s capital is eligible for expedited recovery
Outage cost/Customer also influenced by time of the day, season, region and duration of outage.
1
38
Source: Lawrence Berkeley National Laboratory study, 2004
40. Today The ERCOT Grid Remains Fragmented . . .
All Too Small: Share Of Gross Transmission And Distribution PPE
04; Percent
100% = $25 billion
Publics and
Co-ops TXU
25% 38%
PNM
3%
CNP
AEP
22%
12%
Nearly 40 public power companies and
Nearly 40 public power companies and
co-ops comprise 25% of the ERCOT market
co-ops comprise 25% of the ERCOT market
39
Source: Energy Velocity
41. …Offering An Opportunity Through Improvements In Efficiency And
Reliability
Relative Cost Position Relative Reliability Position
SAIDI
Total Cash Cost Per Customer
04; Minutes
04; $/customer
26% 25%
26% 25%
475
100
350
75
Weighted Avg Rest of TXU Weighted Avg Rest TXU
ERCOT of ERCOT
Driving the market to TXU
Driving the market to TXU Reducing SAIDI by 25 minutes
Reducing SAIDI by 25 minutes
performance levels implies
performance levels implies could save the Texas economy
could save the Texas economy
potential annual savings of
potential annual savings of over $425 million annually
over $425 million annually
over $550 million
over $550 million
40
Source: Texas Public Utilities Commission, FERC Form 1
42. TXU Has Implemented A Process To Help Each Business Achieve Their
Strategic Aspirations
2006 2007 2008 2009
4th 1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd 3rd 4th
Transaction
Electric Delivery
• Technology consortium
• Infrastructure fund
• 1st Delivery transaction
TXU Power
• Sandow 5 online
• Oak Grove online
• 1st Power transaction
41
43. Today’s Agenda
• The TXU Turnaround
TXU Today
TXU Today • Core Strategic Principles
• TXU Power
Business Unit
Business Unit • TXU Retail/Wholesale
Strategies
Strategies • TXU Electric Delivery
• Natural Gas
• Heat Rate
Risk/Market Outlook
Risk/Market Outlook
• Capital Allocation Principles
• Financial Outlook And Growth
Financial
Financial • Financial Sensitivities
Principles
Principles • Long-Term Sources And Uses Of Cash
42
44. TXU Believes The Fundamentals Support Backwardation In The Natural
Gas Curve…
US And Canada Gas Supply And Demand Natural Gas Price Forecasts
(12 Bcfd LNG addition) 06E-10E; $/MMBtu
10E; $/MMBtu
12 $12.00
2010
demand
10 $10.00
NYMEX
8 $8.00
Price range=$5.50-$7.00
6 $6.00
PIRA
$4.00
4
$2.00
2
$0.00
0
06 07 08 09 10
0 10 20 30 40 50 60 70 80 90
Cumulative Capacity
Bcfd
While the gas curve is backwardated,
While the gas curve is backwardated,
fundamentals still support historically high prices
fundamentals still support historically high prices
43
45. …And Significant Heat Rate Recovery Over The Next Ten Years
ERCOT Market 7X24 Heat Rates (NYMEX)
06E-10E; MMBtu/MWh
Equivalent to
2010 Henwood an 8.5 HSC
estimate = 9.1 heat rate 9.9
1.0 0.1 0.1 0.4
8.1
0.0
7.7
2010
2006 Demand Demand Wind Unmothballing Baseload Long-term heat
heat
heat growth destruction generation of gas peakers capacity rate to support
rate
rate increases additions CCGT new
build1
Details • 2% yearly • 1.1 GW of • 1.8 GW • 2.4 GW • Sandow 5
demand destruction (0.6 GW)
growth • Oak Grove
• 1.7 GW per (1.7 GW)
year • S.A. Power
(0.8 GW)
The growth in ERCOT supports limited baseload expansion
The growth in ERCOT supports limited baseload expansion
44
Based on $5.00 gas prices.
1
46. Over The Next Three Years TXU Will Remain Relatively Neutral To Natural
Gas And Become Longer Heat Rate
Well Controlled: Natural Gas Position Growth Potential: Heat Rate Position
06E-08E; Million MMBtu 06E-08E; Million MWh
06E 07E 08E 06E 07E 08E
Current baseload 470 460 460 Current baseload 61 61 62
production production
Gas plants - - - Gas plants 5 5 6
Total “native long” 470 460 460 Total “native long” 66 66 68
position position
Retail “short” (380) (330) (300) Retail “short” (50) (42) (38)
position1 position1
PPAs/Tolls/Other (50) (80) (100) PPAs/Tolls/Other (3) 3 2
forward power and forward power and
gas sales gas sales
Expected underlying ~30-40 ~40-50 ~50-60 Expected underlying ~13 ~27 ~32
position position
Percentage hedged 91-98% 89% 87-89% Percentage hedged 80% 59% 53%
TXU has locked in ~ 90% of its natural gas exposure
TXU has locked in ~ 90% of its natural gas exposure
and is maintaining the majority of its long-term heat rate exposure
and is maintaining the majority of its long-term heat rate exposure
Assumes retail price remains constant
1
45
47. TXU’s EBITDA Is Expected To Remain Relatively Insensitive To Natural
Gas Price Changes And Heat Rate Changes
EBITDA Impact Of $1/MMBtu EBITDA Impact of 0.2 MMBtu/MWh
change in market heat rate1
change in natural gas
06E-08E; Percent 06E-08E; Percent
<1.5% <1.5%
<1.0% <1.0%
<1.0% <1.0%
06E 07E 08E 06E 07E 08E
Change in EBITDA ~30-40 ~40-50 ~50-60 ~30 ~50 ~55
$ millions
Over the next three years, TXU has a small sensitivity to natural gas price and
Over the next three years, TXU has a small sensitivity to natural gas price and
heat rate changes due to the benefits of market hedges and its integrated
heat rate changes due to the benefits of market hedges and its integrated
portfolio
portfolio
46
Based on 06 natural gas price = $11.00, 07 natural gas price = $9.65, 08 natural gas price = $8.49.
1
48. TXU Also Manages Risk Through Its “Cash Scrubber”
Retained for
Investment
Cash
Flow
TXU Business
from Excess Excess
Excess
Units
Oper- “Customer” Growth Financial Dividend
ations Capital capital Flexibility Payout
and
Asset
Yes Yes, if Yes, until
Sales Yes
in 06+
PV/ Investment Payout 30-40%
Quality service EBITDA/Interest:
PV/ Investment Payout 30-40%
Quality service EBITDA/Interest: Repurchases
threshold of 1.3 of operational
Production >5.0
threshold of 1.3 of operational
Production >5.0 or Distributions
25-35% cash earnings
reliability Debt/EBITDA:
25-35% cash earnings
reliability Debt/EBITDA:
returned <5 yrs <2.5
returned <5 yrs <2.5
Debt/MEV: 30%
Debt/MEV: 30%
to 50%
to 50%
Equity
Debt
Holders
Holders
The cash scrubber will govern the allocation of operating
The cash scrubber will govern the allocation of operating
cash flow and the deployment of growth capital
cash flow and the deployment of growth capital
47
49. Today’s Agenda
• The TXU Turnaround
TXU Today
TXU Today • Core Strategic Principles
• TXU Power
Business Unit
Business Unit • TXU Retail/Wholesale
Strategies
Strategies • TXU Electric Delivery
• Natural Gas
• Heat Rate
Risk/Market Outlook
Risk/Market Outlook
• Capital Allocation Principles
• Financial Outlook And Growth
Financial
Financial • Financial Sensitivities
Principles
Principles • Long-Term Sources And Uses Of Cash
48
50. TXU Is Focused On Achieving Balanced Financial Performance
Increased
Earning
Power
Increased
Value
Increased
Increased
Financial
Returns
Flexibility
TXU’s ultimate financial objective is to
TXU’s ultimate financial objective is to
simultaneously improve all three economic dimensions
simultaneously improve all three economic dimensions
49