1. ERCOT Competitive Market Assessment
and Overview of TXU Energy Retail
Organization
Overview
January 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 presentation could be affected by the
ability of the company to implement the initiatives that are part of its
restructuring, operational improvement and cost reduction program, and the
terms under which the company executes those initiatives.
1
4. Today’s Discussion
Key questions
How has restructuring impacted
Impact of
Impact of
other industries?
restructuring in
restructuring in
other industries
other industries
How has restructuring impacted
ERCOT market
ERCOT market the Texas wholesale and retail
restructuring
restructuring markets?
What are TXU’s strategic priorities?
Implications for
Implications for
TXU
TXU
2
5. Over Time Restructuring Allows Customers To Capture The
Benefits Of Open Markets And Competition
Efficiency
Increased
Increased
consumer
consumer
value
value
Investment Innovation
••Over the long term open markets allocate resources better than monopolies and
Over the long term open markets allocate resources better than monopolies and
regulators
regulators
••quot;Competition on its worst day is better than regulation on its best day.“ -Pat Wood,
quot;Competition on its worst day is better than regulation on its best day.“ -Pat Wood,
FERC Chairman
FERC Chairman
••“Markets can both price and allocate capital; not just allocate,” Financial Times
“Markets can both price and allocate capital; not just allocate,” Financial Times
3
6. Across Multiple Industries, Market Restructuring Has Led
To Increased Investment…
US Natural gas US Power generation
US Telecom
86-02; $ billions 95-04E; $ billions
86% 104%
93-04; $ billions 480%
86% 104% 480%
40
50 14
12
40
30
10
30 8
20
6
20
4 10
10
2
0 0 0
93 95 97 99 01 03 95 97 99 01 03
86 88 90 92 94 96 98 00 02
Wholesale
Telecom Order
competition
Act of 96 436/500
starts to flourish
Free markets provide the incentives for investment in infrastructure
Free markets provide the incentives for investment in infrastructure
and technology
and technology
4
Source: Company Annual Reports, 10-Ks, CIBC, Morgan Stanley, ITU, Gas Facts 2003, AGA, 2004, Energy Velocity
7. …Efficiency Gains…
Leaner cost structure:
Smaller workforce: Higher Utilization: Percent of Interstate trucking
British Telecom employees available airline seat miles filled operating costs
84-04; Thousands 77-00; Percent 77-93; Real $/mile (2004)
27%
27% 5.8
71
240
76%
58% 56 76%
58%
100
1.4
84 04 77 93
77 00
Pre-
Pre- Pre-
deregulation
deregulation deregulation
A competitive market provides clear incentives and accountability for
A competitive market provides clear incentives and accountability for
constant improvement
constant improvement
5
Source: British Telecom, Airline Form 41, Transportation Technical Services
8. …And Innovation Over Time
New products/technology Timeframe-years
post restructuring after restructuring
Increase from 30-300 channels
HDTV technology
Cable
Cable Internet broadband 3-5
Pay-per-view
Digital Video Recorder (DVR)
Parental controls
Call waiting
Caller ID
Telecom
Telecom 3-way calling 5-15
Digital Subscriber Line (DSL)
Cell phones
Voice over Internet Protocol (VoIP)
Swing option pricing
Horizontal drilling
Natural Gas
Natural Gas 10-20
More flexible storage
LNG liquefaction technology advances
Frequent flier programs
Ticketless travel
Airlines
Airlines 5-15
Online reservation (Sabre)
Regional jets with turbofan technology
Air limos 6
9. Restructuring Has Resulted In Lower Prices For Customers
Across Multiple Industries…
Airline retail prices US long distance Trucking prices (truckload)
Real yield index (1979=100) 80-02; Index of Real 67-97; Index of Real $/ton
79-94; No units revenue/minute (1980=100) (1967=100)
120 120
100
110
37%
37%
100
45% 86%
45% 86%
100 80
80
90
60
80 60
70 40
40
60
20 20
50
0
40 0
67 72 77 82 87 92 97
79 81 83 85 87 89 91 93 80 82 84 86 88 90 92 94 96 98 00 02
1980 Motor
Long
Airline Carrier Act
distance
restructuring
restructuring
A competitive market forces the efficiency gains through to the customer in
A competitive market forces the efficiency gains through to the customer in
the form of lower prices and value added services
the form of lower prices and value added services
7
Source: Airline Form 41, FCC, Transportation Technical Services
10. …Including Other Restructured Electric Markets
Retail electric prices
Real price index (1990=100)1
90-03; No units
120 Australia residential
110
100
Price reduction
90
12%
80
UK residential
70
33%
60
50
90 92 94 96 98 00 02
UK Australia
restructuring restructuring
In these foreign markets it took 3 – 5 years to see absolute price decreases
In these foreign markets it took 3 – 5 years to see absolute price decreases
1 Australia price index: 1994=100
8
Source: UK Department of Trade and Industry, Energy Supply Association of Australia, Australian Bureau of Statistics CPI data
11. Today’s Discussion
Key questions
How has restructuring impacted
Impact of
Impact of
other industries?
restructuring in
restructuring in
other industries
other industries
How has restructuring impacted
ERCOT market
ERCOT market the Texas wholesale and retail
restructuring
restructuring markets?
What are TXU’s strategic priorities?
Implications for
Implications for
TXU
TXU
9
12. Utilities Historically Have Been Integrated Monopolies
Across The Value Chain
Generation Transmission Distribution
Produce power Transmit power over Deliver power locally
long distances to customers
Generating Transmission Transmission Distribution Customers
station wires substation wires
Fuel
North Texas TXU/TNMP
Houston HL&P/TNMP
South Texas CP&L
West Texas WTU/TNMP
10
13. Texas Utility Restructuring Has “Unbundled” The Electric
Power Value Chain And Restructured Many Activities
Competitive
Transmission
Generation Distribution
Restructuring
Generation Transmission Retail
Distribution
59 active retailers
67 Generators 5 T&D
Examples ANP AEP Central Cirro
Calpine AEP North Constellation
Constellation CenterPoint Direct Energy
Exelon TNMP Entergy
FPL TXU Electric Delivery First Choice
Sempra GEXA
Texas Genco Green Mountain
TXU Power Reliant Energy
TXU Energy
Restructuring has brought aavariety of new players into the market
Restructuring has brought variety of new players into the market
11
14. Companies Have Actively Chosen Different Business Models
To Participate In ERCOT… Where companies participate
Model Segments Examples
T D
Participate in TXU Corp
G R
all segments
From an integrated model . . .
Participate in CenterPoint
T D
Genera- Trans- Distribu- G R
Retail T&D only AEP Central/North
tion mission tion
Participate in Reliant Energy
T D
G R
retail only
. . . to many functional combinations Green Mountain
Gexa
Participate in Centrica/Direct
T D
Transmission Distribution G R
retail and Energy
generation Calpine
Constellation
Generation Retail
Participate in Texas Genco
T D
G R
generation FPL
only
••Only time will tell which business models will succeed
Only time will tell which business models will succeed
••As the market continues to mature, the winning business model may continue to change
As the market continues to mature, the winning business model may continue to change
12
15. …As Evidenced By Recent Transactions
CenterPoint
CenterPoint
T D T D
CenterPoint
T D
Reliant Energy Texas Genco GC Power Acquisition
G
T D G G
TGN mothballs
G R 2.5 GW Generation business spun off Texas Genco (14 GW) sold to
from T&D private investor group
Reliant does not exercise option
Reliant Energy Reliant Energy
to buy TGN from CenterPoint
IPP’s build R R
over 20 GW Retail business spun
of CCGT off from T&D and
AEP AEP
generation businesses
capacity
T D T D
(98-02) Over 59
AEP AEP retains large retail active
and wholesale customers
T D retailers
G R
AEP Sempra in
Sempra
AEP mothballs 16 gas ERCOT
T D G G
fired plants (4 GW)
G R • AEP sells STP stake (0.6 GW)
• Sells non-nuclear portfolio to
Sempra/Carlyle/ Riverstone (4 GW)
Direct Energy Centrica/Direct Energy
R G R
AEP sells 850,000 residential and small Centrica buys Bastrop
business retail customers to Centrica power plant
TXU Corp TXU Corp
TXU Power
TXU Power pursues sale of
T D T D
TXU Power sells Handley mothballs 4GW of
other plants
and Mt Creek plants
G R generation
G R 13
16. ERCOT Was Designed So That Customers Could Capture
The Benefits Of Open Markets And Competition...
Implementation Effect
Large infusion of capital
Established bilateral
Wholesale market between Investment in state of the
Wholesale
art technology (efficient
generators and retailers
CCGT)
Expedited permitting and
Improved operational
interconnection for new
performance (5%-8%
build
improvement in
utilization)
PTB intended to provide Improved customer
sufficient headroom to service
Retail
Retail
spur competition Large number of
Low barriers for retail competitors (~60)
certification New products (“Green
Immediate competitive Power”, outage
pricing for large business notification, online
customers billing)
Competition has already spurred investment, increased efficiency and should
Competition has already spurred investment, increased efficiency and should
continue to encourage innovation and increase value to the consumer
continue to encourage innovation and increase value to the consumer
14
17. Restructuring Spurred Massive Generation Investment In
The ERCOT Market… In rate base
Not in rate base
Capacity additions
90-04; GW1
90-97 Additions= 6 GW 98-04 Additions= 26 GW
6.6
PURA 95 SB7 5.7
5.5
(wholesale (retail
4.4
competition) competition)
2.9
1.7
1.1
1.0 0.8 0.7
0.6 0.5
0.4
0.2 0.2
Year 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
Reserve
Margin (%) 27 29 27 23 23 17 16 9 8 7 12 28 35 32 33
From 98-04, more than $15 billion was invested in generation infrastructure –
From 98-04, more than $15 billion was invested in generation infrastructure –
none of which was in the rate base
none of which was in the rate base
1 GW = 1000 MW (1 MW serves approximately 1000 homes)
15
Source: Energy Velocity; NERC
18. …Bringing Efficient CCGT Capacity Into The ERCOT
Generation Portfolio… Average demand
ERCOT generation portfolio: Average variable cost1
98-04; $ / MWh
Internal
98
combustion
200
Gas/oil
150
100 Wind Coal
Nuclear
50 Restructuring led to
Average price ~ $80 Restructuring led to
the investment of
the investment of
0
over $15 billion and
over $15 billion and
0 20 40 60 80
the addition of the
the addition of the
04
22GW of efficient
22GW of efficient
Internal
CCGT capacity
200
CCGT capacity
combustion
Gas/oil
150 22 GW of new
efficient capacity
Wind Coal
100
Nuclear CCGT
50
Average price ~ $45
0
0 20 40 60 80
Cumulative Capacity
1 Based on a $6.00/ MMBtu gas price
GW 16
Source: Platt’s PowerDat
19. …Leading To A Significant Reduction In Market
Heat Rates...
ERCOT heat rate1 cycle
98-04; MMBtu/MWh
16
CCGT reinvestment economics
14
12
10
8
6
4
CCGT marginal heat rate
2
0
98 99 00 01 02 03 04
•• New capacity has led to a 40% increase in the efficiency of the marginal unit
New capacity has led to a 40% increase in the efficiency of the marginal unit
•• This would be akin to improving average automobile gas mileage from 20
This would be akin to improving average automobile gas mileage from 20
mpg to 35 mpg
mpg to 35 mpg
1 Heat rate is a measure of the efficiency of converting a unit of fuel (MMBtu) into a unit of electricity (MWh); lower heat rates implies higher efficiency
17
Source: MegaWatt Daily, Gas Daily
20. …And The Reduced Production From Conventional Gas
Units…
Annual production Total available capacity
98-03; TWh 98-04; GW
90 30
33%
33%
21
Other
8
63%
63% 20
AEP 15 4
7
CNP 22 33 8
1
9 5
4
TXU 32 8 10
7
Power 12
98 03 98 04
Over 10 GW of conventional gas generation has been mothballed or retired
Over 10 GW of conventional gas generation has been mothballed or retired
Almost $8 billion dollars has migrated away from these plants
Almost $8 billion dollars has migrated away from these plants
18
Sources: RDI
21. …Delivering Significant Savings To The Largest Power
Purchasers And To Competitive Customers Through REPs
Implied wholesale prices
44%
44%
04E; $/MWh 82
45
32
99 heat rates at 99 heat rates at 04 heat rate at 04
99 gas prices 04 gas prices gas prices
Gas price ($/MMBtu): $2.271 $5.832 $5.832
Heat rate (MMBtu/MWh): 143 143 7.84
Wholesale power prices may have been more than 40% higher if not for the influx of
Wholesale power prices may have been more than 40% higher if not for the influx of
significant new capacity
significant new capacity
1 Based on 99 average Henry Hub spot market price
2 Based on Henry Hub spot market average (January 2004-November 9, 2004)
3 Assumes heat rate = 14 MMBtu/MWh (99 ERCOT heat rate)
4 Assumes heat rate = 7.8 MMBtu/MWh (04 actual heat rate)
19
Sources: Bloomberg, MegaWatt Daily
22. ERCOT Was Designed So That Customers Could Capture
The Benefits Of Open Markets And Competition...
Implementation Effect
Large infusion of capital
Established bilateral
Wholesale market between Investment in state of the
Wholesale
art technology (efficient
generators and retailers
CCGT)
Expedited permitting and
Improved operational
interconnection for new
performance (5%-8%
build
improvement in
utilization)
PTB intended to provide Improved customer
sufficient headroom to service
Retail
Retail spur competition Large number of
Low barriers for retail competitors (~60)
certification New products (“Green
Immediate competitive Power”, outage
pricing for large business notification, online
customers billing)
Competition has already spurred investment, increased efficiency and should
Competition has already spurred investment, increased efficiency and should
continue to encourage innovation and increase value to the consumer
continue to encourage innovation and increase value to the consumer
20
23. ERCOT Has Seen Significant Switching Across All
Customer Classes
Total new entrant market share
June 04; Percent of load
While 20% of the market is
74% currently served by a new
entrant, up to 33% have
45% actively made a choice1
20%
14%
4%
Large Small and Residential Local Long distance
Business Medium telephone 3 3 years after
Business years after restructuring
restructuring
ERCOT retail switching
ERCOT has seen higher switching levels than other restructured industries
ERCOT has seen higher switching levels than other restructured industries
1 Based on TXU incumbent territory; 575,000 customers served by a new entrant; approximately 100,000 customers have switched back
21
Source: PUC, KEMA, TXU, FCC
24. Texas Is Leading The Nation In New Entrant Market Share…
Total new entrant large business market share1
June 04; Percent of load
74
56
48
39 38
31
26
21
13
TX ME NY DC MD MA CA OH PA
Large business customers quickly took advantage of competitive rates
Large business customers quickly took advantage of competitive rates
1 Figures represent an average of Commercial and Industrial switch rates
Source: PUC, KEMA
22
25. …And Residential Retail Competition
Total new entrant residential market share
June 04; Percent of load
20
10
7
6
3
2 2 2 1 1
1
TX DC NY PA MD OH MA CT ME CA
ERCOT has the most active restructured residential retail market in the US
ERCOT has the most active restructured residential retail market in the US
1 Excludes 17% attributable to municipal aggregation (based on CERA estimate) because municipal aggregation is not customer choice
Source: PUC, KEMA, CERA 23
26. Although Residential Switching Trails Large Customer
Switching, It Remains in Line With Other Successful
Restructured Markets…
Incumbent market share1
Years since restructuring; Percent
Local
100%
telephone
90%
80%
Texas3
70%
Long
distance
UK residential2
60%
50%
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
1 Market share estimates based on customer count
2 Estimates for 2003 and 2004
3 Average of North Texas and Houston market share
Source: PUC; OFGEM, FCC
24
27. …And Overall Awareness of Competitors And Choice is
High 2
02
042
Unaided awareness of competitive electric providers1
02-04; Percent
88
74 72
56
51
47
Dallas Houston Corpus Christi
Customer awareness of competition itself is nearly ubiquitous, with over 90%
Customer awareness of competition itself is nearly ubiquitous, with over 90%
of customers aware that they have a choice of supplier
of customers aware that they have a choice of supplier
1 Unaided awareness defined as percentage of customers who can identify at least one competitive retailer without prompting
2 02 data based on 2Q02 results; 04 data based on 3Q04 survey results
25
Source: TXU
28. Competition Has Already Forced Competitors To Respond
With Better Service
Average speed of answer
03-04; Seconds
489
280
96% 98%
96% 98%
52
16
10 12
03 Avg June 04 Baby Bell National
April 04 Oct 04
telephone financial
TXU ERCOT Competitor
company services
company
Source: TXU
26
29. Since Market Open Natural Gas Prices Have Increased By
More Than 150%
20 day rolling average of 12 month NYMEX gas strip
02-04; $ / MMBtu
$8.00
$7.00
$6.00
$5.00
$4.00
150%
$3.00 150%
$2.00
$1.00
$0.00
Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
Gas prices have risen drastically due to:
Gas prices have risen drastically due to:
• •Faster than expected declines in Eastern Canada, and the shallow water Gulf of Mexico, with higher
Faster than expected declines in Eastern Canada, and the shallow water Gulf of Mexico, with higher
cost replacement capacity
cost replacement capacity
• •Unexpected supply decreases due to 04 hurricanes
Unexpected supply decreases due to 04 hurricanes
• •Higher than expected demand growth in China
Higher than expected demand growth in China
• •Strong US economy combined with increased utilization of gas in US power industry
Strong US economy combined with increased utilization of gas in US power industry
• •Limited near term LNG supply
Limited near term LNG supply
27
Source: Bloomberg
30. Customers Have Already Begun To Reap The Benefits Of
Competition…
Average residential prices1 Average large business prices1
02-04; $ / MWh 02-04; $ / MWh
20%
93 66 20%
15%
15% 79 53
If regulation continued Competitive If regulation continued Competitive
••Customers have benefited from access to lower electricity prices than they would
Customers have benefited from access to lower electricity prices than they would
have experienced under regulation
have experienced under regulation
••Similar to other industries, over time competition will continue to force the residential
Similar to other industries, over time competition will continue to force the residential
price down
price down
••The Texas retail electric market is developing more quickly than other restructured
The Texas retail electric market is developing more quickly than other restructured
industries (e.g., telecom)
industries (e.g., telecom)
1 CompetitiveResidential price based on 15% discount to TXU PTB as currently offered by market competitors, e.g., Cirro (14.6%); Competitive large
business rates include 10% wholesale gross up and 5% net margin; Regulated world assumes 9.6 GW added capacity in the rate base (as opposed to
22GW actually built) at a cost of $600/kw, O&M costs approximately $36/kw-yr resulting in an average cost of $127/kw-yr in the rate base
Source: TXU, ECOM model
28
31. …Evidenced By The Competitive Large Business Rates…
Average large business rates1
02-04; $ / MWh
76
72
64
61
61
56
53
52
51
49
44
Xcel-SPS CPS San N Texas Houston Entergy Gulf City of Progress Entergy FPL Tampa El Paso
Antonio competitive competitive States - Austin Energy Louisiana Electric Electric
Texas
Annual load 12.0 --- 61.3 38.2 23.8 5.6 15.3 20.3 44.1 8.4 3.2
TWh
••Even with high gas prices, North Texas customers have access to some of the lowest
Even with high gas prices, North Texas customers have access to some of the lowest
rates in the Southern United States
rates in the Southern United States
••“Of the companies relocating jobs (from California), 35% are sending them to Texas ––
“Of the companies relocating jobs (from California), 35% are sending them to Texas
more than all of the other 48 states combined,” Dallas Business Journal
more than all of the other 48 states combined,” Dallas Business Journal
1 Based on a 2.5 MW customer with a 80% load factor; average monthly price weighted by load; assumes price remains constant Sep 04 –Dec 04
Source: PUCT, Florida PSC 29
32. …And Competitive Residential Rates
Average residential customer(1000 KWh/month) retail rates1
02-04; $ / MWh
108
94
86
83
83
82
81
81
81
79
76
68
Xcel-SPS CPS San N Texas Houston City of Entergy FPL Progress Entergy Gulf Tampa El Paso
Georgia3
2 2
Antonio competitive competitive Austin Louisiana States - Electric Electric
Texas
Annual load 3.3 7.3 42 21.5 3.6 128.0 8.8 50.9 18.8 9.5 8.0 1.9
TWh
Even with high gas prices residential customers in competitive ERCOT areas
Even with high gas prices residential customers in competitive ERCOT areas
have access to some of the lowest rates in the Southern United States
have access to some of the lowest rates in the Southern United States
1 Based on average monthly prices weighted by monthly usage; prices through Sep 04; assumes price remains constant through remainder of 04
2 Competitive Residential price based on 15% discount to TXU PTB as currently offered by market competitors, e.g., Utility Choice (14.9%), and Cirro (14.6%)
3Average of all rates in Georgia (Southern, Municipalities, Electric Membership Cooperatives)
Source: PUCT, Florida PSC, Georgia PSC 30
33. Although There Is Still Room For Improvement In ERCOT, It
Does Not Require Legislative Action
Market design or governance element Potential improvement
Establish additional tools and mechanisms for
Retail market retailers to control bad debt
Send clearer signals for generators to respond to
Wholesale market design
demand, manage production and balance load
Implement additional incentives or mandates to
Delivery regulation ensure adequate delivery capacity to meet market
needs
••The potential exists to create additional value for the customer by removing
The potential exists to create additional value for the customer by removing
inefficiency in the market
inefficiency in the market
••The SB7 framework remains sound; market participants and the PUC will
The SB7 framework remains sound; market participants and the PUC will
continue to work together to achieve greater efficiencies
continue to work together to achieve greater efficiencies
31
34. Today’s Discussion
Key questions
How has restructuring impacted
Impact of
Impact of
other industries?
restructuring in
restructuring in
other industries
other industries
How has restructuring impacted
ERCOT market
ERCOT market the Texas wholesale and retail
restructuring
restructuring markets?
What are TXU’s strategic priorities?
Implications for
Implications for
TXU
TXU
32
35. Incumbents Have Generally Had Problems Making The Transition
From The Regulated World To The Deregulated World
Annual total return to shareholders (CAGR)
83-03; Percent
13.0
6.9 5.7
5.8
3.5 3.1
-2.0
-5.1
-6.3
S&P 500 American Delta United AT&T Qwest MCI Ryder Yellow
Airlines Telecom Trucking
Deregulated incumbents have generally severely underperformed the broader
Deregulated incumbents have generally severely underperformed the broader
market
market
Source: Compustat
33
36. How Do We Prevent Ourselves From Falling Into The Same
Trap As Other Incumbents?
“The brief booms that airlines occasionally enjoyed in the
“The brief booms that airlines occasionally enjoyed in the
1980s and 1990s encouraged them to believe that radical
1980s and 1990s encouraged them to believe that radical
change wasn’t necessary. Change didn’t happen fast enough
change wasn’t necessary. Change didn’t happen fast enough
because it was always a moving target,”
because it was always a moving target,”
Alfred Kahn, Chairman of Civil Aeronautics Board
Alfred Kahn, Chairman of Civil Aeronautics Board
34
37. Relentless Focus On The Three Critical Performance Drivers
Is Critical
Operational Excellence Market Leadership
• Top decile reliability • Superior customer service/
brand management
• Industry leading capacity
factors • Value based pricing
• World class industrial • Asset/supply optimization
production costs • Commodity risk management
• Lean corporate SG&A • Profitable growth
Performance Management
• High performance culture
• Balanced cascading scorecards
• Incentives linked to key value drivers
35
39. TXU Energy Is One Of TXU’s Three Core
Businesses, With Similar Performance Levers
Strategy Objectives Implementation
• Cost leadership • Top decile cost • TXU operating
performance system(lean)
• Operational
excellence • Top decile production • Strategic
performance sourcing
TXU Power
• Commercial • Excellent customer service • Customer
excellence experience
• Retain and grow profitable Today’s
• Customer
• Cost leadership customer base Focus
segmentation
• Market leadership • Top decile purchased
power performance
TXU Energy
• Cost leadership • Achieve industry leading • TXU operating
safety performance system(lean)
• Operational
excellence • Top decile reliability • Strategic
sourcing
• Top decile cost
performance • Technological
TXU Electric
innovation
Delivery • Earn allowable return
1
40. Operational Earnings Performance Drivers
04E vs. 05E; $ per diluted share
Performance Driver 05E
04E operational earnings outlook range 2.65 – 2.70
Change in average diluted shares outstanding 0.90
TXU Power
Increased revenues from wholesale market price changes 1.45
Reduced O&M expenses (operating, benefit, lease, other) 0.20
Increased production from coal generation 0.11
Reduced fuel expense 0.04
Increased expenses related to two-unit nuclear outage (O&M, purchased power) (0.27)
TXU Energy
Increased expenses from wholesale market price changes (1.49)
Increased revenues from 04 fuel factor adjustments and out of territory growth 0.82
Reduced SG&A expenses (CapGemini Energy contract, bad debt) 0.37
Reduced expense – purchased power and gas plant optimization, restructured PPAs 0.28
Increased revenues from 2/05 fuel factor adjustment (50% of $6.92 fuel factor) 0.16
Increased margin in large business segment 0.15
Reduced O&M expenses (gas plants) 0.13
Reduced expenses and revenue losses due to hedge roll-off 0.11
Reduced wires expense 0.06
Reduced margin from mass market customer churn (0.04)
TXU Electric Delivery
Increased contribution margin 0.25
Corporate & Other (0.03)
Other 0.08
Interest expense (0.24)
05E operational earnings outlook range 5.65 - 5.85
1) Operational Earnings Per Share (a non-GAAP measure): Per Share (diluted) income from continuing operations, excluding special items and net of preference share dividends.
TXU forecasts earnings on an operational earnings basis because forecasts of material non-recurring items are not practical. TXU relies on operational earnings for
evaluation of performance and believes that analysis of the business by external users is enhanced by visibility to both reported GAAP earnings and operational earnings.
0
41. TXU PTB Gas Price Base Has Increased 210%
Since Market Open
Historical Gas Prices vs. Forward Curve
01-05; $/MMBtu 20 day rolling
8.50
average of 12
month forward
8.00
curve1
7.50
7.00
Current PTB
6.50
base = $6.52
6.00
5.50
5.00
4.50
4.00
3.50 Daily NYMEX gas prices
3.00
2.50
May-01
May-02
May-03
May-04
Nov-01
Nov-02
Nov-03
Nov-04
Jul-01
Sep-01
Jan-02
Mar-02
Jul-02
Sep-02
Jan-03
Mar-03
Jul-03
Sep-03
Jan-04
Mar-04
Jul-04
Sep-04
Jan-05
3
42. TXU Energy Consists of 3 Market-Facing,
Customer-Centered Businesses
Consumer Business Wholesale
Consumer Business Wholesale
Markets Markets Markets
Markets Markets Markets
(Retail residential (Retail small business (Wholesale
(Retail residential (Retail small business (Wholesale
customers) thru large industrials) counterparties)
customers) thru large industrials) counterparties)
Jim Burke Kevin Bohn Larry Leverett
Jim Burke Kevin Bohn Larry Leverett
Focus: Retain in- Focus: Retain PTB Focus: Optimize and
Focus: Retain in- Focus: Retain PTB Focus: Optimize and
territory PTB customers and balance supply and
territory PTB customers and balance supply and
customers and acquire profitably contract for load portfolios for
customers and acquire profitably contract for load portfolios for
out-of-territory non-PTB load lowest cost and
out-of-territory non-PTB load lowest cost and
customers highest margin
customers highest margin
…enabled by support functions and CapGemini Energy
…enabled by support functions and CapGemini Energy
Commercial Management: Dung Tran
Commercial Management: Dung Tran
Strategy and Communications: Brian Tulloh
Strategy and Communications: Brian Tulloh
Regulatory and Legal: Bill Moore
Regulatory and Legal: Bill Moore
4
43. Key Focus Areas For TXU Energy
• Retain in-territory customers
• Retain in-territory customers
• Capture profitable LCI, out-of-territory customers
• Capture profitable LCI, out-of-territory customers
• Reduce bad debt
• Reduce bad debt
• Lower cost of supply and ancillary services
• Lower cost of supply and ancillary services
• Lower business costs (operating systems and efficient
• Lower business costs (operating systems and efficient
business processes)
business processes)
• Improve performance management
• Improve performance management
• Participate in public policy issues (e.g., PTB)
• Participate in public policy issues (e.g., PTB)
• Develop growth opportunities
• Develop growth opportunities
5
45. Consumer Markets Overview
Planned Topics
Market Context
Organizational Approach
Pricing and Economics
Customer Service Initiatives
Marketing Initiatives
7
46. TXU Energy Is The Largest Retailer In A Growing
Competitive Market
Large competitive customer base High growth
03; Millions of customers 03 -12E; Percent annual demand growth
2.3
1.6
2.5 2.5 2.3 2.2 2.1 1.9
1.8 1.8 1.8
0.8 1.4
0.2 0.1
TXU RRI CPL/ First Green
ERCOT SERC WECC MAAC MAIN
WTU/ Choice Mountain
FRCC ECAR MAPP SPP NPCC
Direct
Energy
Source: KEMA Source: NERC
Highly competitive market TXU market share1
02 -04; Number of certified ERCOT retailers September 04; Percent
45
33
32
90
75
56
39
Residential Small Large
01 02 03 04E Commercial Commercial
TXU Load2
(TWh, 9 mos) 26.6 8.6 19.9
Source: PUC Source: TXU 10Q
1 Market share represents share of electric meters for residential and small commercial, share of sales volumes for large commercial.
8
2 TXU Retail load for 1st three quarters of 2004, per 10Q
47. In-Territory Consumer Retention Reversed The
Trends Of 03
Quarter-end consumer count (based on number of meters) – North and South Texas
Q4 02 – Q3 04; millions
2.5
2.3
5.0%
2.0 3.0%
1.8
1.5
Q402 Q103 Q203 Q303 Q403 Q104 Q204 Q304
NTX STX
Despite increased competitive switching in the summer months, year to date
Despite increased competitive switching in the summer months, year to date
In-Territory customer attrition is down 40% versus the same period of 2003
In-Territory customer attrition is down 40% versus the same period of 2003
9
48. The New Structure Drives Economics Throughout
Organization
SVP
Consumer
Markets
Products/ South Texas North Texas Marketing
Customer Ops
Services Region Region Services
What We Sell Integrated Business P&Ls Who and How We How We
Sell Deliver
Key Points
• Consumer organization primary focus on P&L, Marketing and Customer Experience
• Products and Services organization to innovate as well as manage existing portfolio (product mgmt)
• Region Teams specifically focused on decision-making, financial performance, and integration
• Marketing Services drives positioning, targeting, and channel management activities
• Customer Operations focused on customer experience and relationship with CapGemini Energy
10
49. Consumer Markets Initiatives
Initiatives Commentary
Complete team build out Capabilities to address retention, win-
People back, acquisition and cost to
serve/customer experience objectives
Deliver on aggressive Protect customer profitability and
In-territory
customer retention plan mitigate loss rates, utilize PTB
Retention
flexibility as needed
Deliver on Design and launch product Loyalty offerings, pre-paid meters,
competitive offerings beyond price to beat outage notification expansion, whole-
benefits house surge protection service
Refine output based Introduce gain-sharing, improve
CGE
performance metrics customer experience, customer
alliance
satisfaction, 1st call resolution
Out-of- Improve P&L focus and deliver Improve customer targeting, optimize
territory positive EPS available list, coordinate channels
profitability
Drive accountability for supply Deliver P&L alignment through more
COGS costs into the business and focus on biggest cost driver – cost of
deliver lower bad debt costs energy (applies also to Business Mkts)
11
50. Current Gas Prices Are Consistent With Our PTB,
Following Q4 Spike
Historical Gas Prices vs. Forward Curve
04-05; $/MMBtu
8.00
20 day rolling
average of 12 month
7.50 forward curve1
Filing threshold
7.00
(+5%) = $6.84
Current PTB base
6.50
= $6.52
6.00
5.50 Daily NYMEX gas prices
5.00
Jan-04 Apr-04 Jul-04 Oct-04 Jan-05
1 Assumes all future prices are equal to forward curve as of January 14, 2005
12
51. TXU Energy’s Headroom Remains The Lowest In Texas
Current; cents/KWh
14
PTB - Incumbent
TXU Energy-S TX Current
13
12
TXU Energy has
11
the lowest PTB in
the state.
10
9
Includes 12-15-05
PTB increase in
8
WTU CPL Centerpoint TNMP TXUE Reliant and TNMP.
13.06 12.41 12.19 11.70 10.98
PTB - Incumbent
12.01 11.42 10.00 10.12
TXU Energy-S TX Current Based on 1,000KWh
Estimated Headroom, %1 17-27% 20-24% 16-25% 10-24% 12-16%
Estimated Residential
~3 ~ 10 ~ 26 ~4 ~ 40
Market Size, TWh/yr
13
1 Source: TXU Energy estimates
52. Low And Volatile Headroom Creates Marketing
Challenges For Attacking Retailers
Margin history and outlook
02-06; Mixed measures
Retail headroom1 7x24 power price2
Percent $/MWh
40% $70
Forward wholesale
power price (right scale)
35% $60
30%
$50
25%
$40
20%
$30
15%
TXU retail headroom
$20
10% (left scale)
$10
5%
0% $0
02 03 04E 05E 06E
1 Headroom = (PTB – power cost – wires charges) / PTB; 02-04 based on actual headroom; 05+ based on rolling average of forward looking
12 months as of January 17th, 2005; assumes 7800 BTU/KWh heat rate
2 02-04 based on actual power prices; 05+ based rolling average of 12 month forward curve
14
53. We Are Measuring Our Service Performance
Through A More Robust Scorecard
03 Scorecard 05 Scorecard
ASA, seconds IVR transit time, seconds
Access
Service level, X% within Y seconds
ASA, seconds
Satisfaction with CCA, % Customer satisfaction with CCA, %
Interaction Satisfaction with IVR, % Customer satisfaction with IVR, %
Web customer satisfaction, %
Customer-reported FCR, % Customer-reported FCR, %
Problem
CCA QA First Call Resolution, %
Resolution
Repeat call within 24 hours, %
None Satisfaction with bill accuracy, %
Transaction Web transaction rate, %
Delivery “late rate”, %
Overall satisfaction with recent Overall satisfaction with TXUE, %
Overall call, % Satisfaction with value-price offer, %
Customer loyalty to TXU, %
CapGemini Energy relationship is focused on alignment with
CapGemini Energy relationship is focused on alignment with
performance expectations and improvements
performance expectations and improvements
15
54. Customer Service Continues To Show
Improvement …
Average Speed of Answer
03 - 04; seconds
500
450
400
350
300
250
200
150
100
50
0
Jan-03 Jul-03 Jan-04 Jul-04
1 Excludes June 1 and June 2, the peak period for the storm that affected more than 1.3 million customers
16
55. … Enabled By a Streamlined IVR
From: To:
A complex design A streamlined design
Play outage
message or directed
to CCA queue; ASA
15 seconds
Ways to
pay menu
Billing menu
Electric IVR 2.2.1 Account
2.1 Account
main menu balance
balance
2.2.2 Payment
1 2.2 Ways
1.0 Outage locations
to Pay
2.2.3 Mail
2.3 Make
time to Pay*
2.0 Billing 100
2
Directed to CCA
2.4 Other
queue; ASA
15 seconds
100
Existing
3.0 Existing
3 service menu
service Reconnect IVR
3.1 Re-
connect
3.2 Stop or Directed to CCA
4
4.0 New move queue; ASA
service services 15 seconds
100
100
Directed to CCA
queue,
ASA 15 seconds
•Simplicity and user friendly interfaces have enhanced the IVR
•Simplicity and user friendly interfaces have enhanced the IVR
•IVR transit times have improved by 32% since January 04
•IVR transit times have improved by 32% since January 04
17
56. Bad Debt Initiatives Are Expected To Drive Out
Transitional Inefficiencies
TXU retail bad debt expense
Initiatives to
99–04E; $ millions
reduce bad debt:
Start of
Start of • Tighter
deregulation
deregulation
disconnect rules
120
118 95- • More stringent
100 application of
credit policies
(e.g., deposits)
• Aggressive
~ 55
49 prosecution of
fraud
24 • Working with
16
stakeholders to
develop new tools
99 00 01 02 03 04E to manage bad
Long-term
Target debt (e.g.,
payment history
Key drivers of increase in bad debt expense:
Key drivers of increase in bad debt expense: database)
Ability of customers to change power providers to
Ability of customers to change power providers to
avoid loss of service
avoid loss of service
Insufficient disconnect options
Insufficient disconnect options
18
57. Brand Positioning Delivers On Core TXU Energy
Value Proposition Across Texas
Examples of how we deliver the value proposition
Enhanced self-service tools (e.g. web provisioning
with My Account) that allows customers more direct
Easy to do
control over their transactions
business with
Best-in-industry performance on key access measures
(convenience)
(i.e., 15 second ASA achieved, reduced IVR navigation
by 32%)
More timely/useful outage restoration information
(Option 1)
Whole House Surge Protection that protects all
TXU Energy consumer Dependable
household electronics from surges on three wires
value proposition service
(cable, phone, power)
Further expansion of Authorized Dealer Network
“Dependably serving our
Customers with superior
service, competitive pricing,
Rewards+ loyalty program for TXU customers
and innovative products”
Lowest PTB in Texas and In-territory rate is among
Competitive
lowest rates TXU offers throughout the state
price
Pricing incentives for Retention and Win-back of
valuable customers, with term commitments
19
58. TXU Energy Rewards+ Program Overview
Leverages AREP’s ability to offer “discounts” off PTB through loyalty program
Consumer Benefit
Only TXU Energy Customers can get savings at
thousands of hotels and resorts, magazines,
restaurants, and DVDs.
Up to 45% discounts by using TXU Energy
Reward Dollars
Customers earn rewards points monthly
Pilot in STX in 2004 for Residential and
Commercial
TXU Details
State-wide category exclusivity
Online program, with main TXU cost driven by
communication costs
Able to be leveraged for incentives for on-time
payment, ebill, tenure, recurring payment, win-
back
Pilot target will be random sample of current
customers
20