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energy future holindings _032905 energy future holindings _032905 Presentation Transcript

  • ERCOT Competitive Market Assessment and Overview of TXU Energy Retail Organization Overview January 2005
  • 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
  • TXU Strategy Competitive Market Assessment January 2005
  • 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
  • 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
  • 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
  • …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
  • …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
  • 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
  • …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
  • 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
  • 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
  • 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
  • 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
  • …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
  • 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
  • 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
  • …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
  • …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
  • …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
  • …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
  • 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
  • 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
  • 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
  • …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
  • 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
  • …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
  • 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
  • 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
  • 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
  • …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
  • …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
  • 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
  • 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
  • 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
  • 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
  • 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
  • TXU Energy Overview January 2005
  • 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
  • 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
  • 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
  • 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
  • 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
  • Consumer Markets Overview January 2005
  • Consumer Markets Overview Planned Topics Market Context Organizational Approach Pricing and Economics Customer Service Initiatives Marketing Initiatives 7
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • … 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
  • 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
  • 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
  • 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
  • Business Markets Overview January 2005
  • Business Markets Overview Planned Topics Market Context Organizational Approach Key Initiatives 23
  • Market Context ERCOT-wide SMB switching TXU delivered volumes to SMB (11/04) (TWh, YTD through Q3) 100% = 100% = ~13.9 GW1 0.96 million 10.0 Not with 8.6 24% Affiliate 62% REP 76% With Affiliate 38% REP 03 04 Load Source: TXU Corp. 10Q Meters Source: ERCOT ERCOT-wide LCI switching TXU delivered volumes to LCI (11/04) (TWh, YTD through Q3) 23.9 100% = 100% = 9.1 GW1 ~ 4,300 19.9 Not with Affiliate 64% 67% REP With Affiliate 36% 33% REP 03 04 Load Meters Estimated 39% 33% market share Source: ERCOT Source: TXU Corp. 10Q 24 1 Based on demand level at time of 8/7/03 ERCOT peak
  • North Texas Remains Intensely Competitive Market focus Key Competitor Activities (# of customers) • Aggressive mass advertising (e.g., Olympics) Res, SMB, LCI • Competing on service … investing in ASA (~1,800 K) • Aggressive business sales force in market • Moderate TV spend, with heavy use of brokers Res, SMB, LCI • Focusing on SMB and government aggregation (~900 K) • Developing cross-sell strategy • Started in Multi-Family, but majority of business is Res, SMB small and medium business. Pursuing single-family. (~100 K) • ‘Mid teens’ price discounting Res, SMB, some LCI • Moving up market into SMB and some LCI with PTB discount product (~PTB-10%) (~55 K) • Focused on “pollution free” and “green” products • Also beginning to offer conventional products • Developing community links (e.g., Richardson, Plano) Res, SMB • ‘High teens’ price discounting (~25 K) • Expanding direct sales force SMB, LCI • Aggressive pricing • Promoting ‘risky’ MCPE pricing products (<20 K) LCI • Aggressive pricing on select LCI customers • Limited sales force coverage (<10K) 25
  • TXU Has Revamped Its Business Markets Organization And Approach SVP Business Markets Small Business Medium Business Large Business Analytics and <100 KW 100-1,000 KW >1,000 KW Support Market Moderately Competitive Highly Competitive Highly Competitive Environment TXU Customer Market Sub-segments Individual Customers Individual Customers Focus Mostly Standardized Product Standardized Products Customized Products Products Offerings Multiple Channels Mostly Direct Sales Direct Sales Sales Model Business Optimize Execution Engage Customers Rationalize Business Priority Key Points • The Business Markets organization is structured around customer segments • Business performance is measured and managed within each segment • Linkages are established to leverage Consumer Markets capabilities 26
  • Business Markets Initiatives Initiatives Commentary Complete team build out Re-organization well under way People Restructure Reduce cost structure Even with Capgemini outsourcing we Operating significantly must continue to reduce costs to stay platform competitive (fuel, directs and indirects) Refine and launch products Business markets is our most Value and services that support our competitive segment with significant Proposition value proposition value at risk Rollout of direct sales/telesales Improved training and messaging, Restructure force targeting both retention overhaul sales channels, strengthen sales and acquisition performance management Increase accountability to Overhaul inbound customer service Business customer profitability and center, meet customer needs quickly, Processes customer service enforce business rules Capture profitable opportunities Execute using a more cost competitive OOT out-of-territory acquisition model Acquisition 27
  • TXU New Business Model Is Focused On Enhancing The Customer Experience … • Sales force geographical realignment • Enhanced and expanded sales force Business Sales coverage Improvements • New and expanded local sales offices • Increased face-to-face sales time, with dedicated sales support • Simplified and improved contracting process • Dedicated Account Service Representatives for large business customers • Service improvement initiatives • Focused training Customer Service • Improved Call Center targets, with positive Improvements results to-date: • Customers bypass IVR • 91% ASA improvement • 10% increase in satisfaction with customer rep • >50% decrease in number of dissatisfied callers • 16% improvement in first call resolution 28
  • … With An Improved Business Markets Value Proposition We have the history, industry expertise and Depend on account knowledge to help you with your energy needs TXU Energy for Experienced account executives EXPERTISE 100-year history of serving Texas Part of broader family of energy companies We continuously invest in innovation to offer Depend on You can new products TXU Energy for depend Automatic Outage Notification on TXU Flexible billing and payment options SOLUTIONS Energy Energy efficiency services We are committed to resolving your needs Depend on thoroughly and rapidly TXU Energy for Connect to live team of expert representatives in seconds RESPONSIVENESS 1-Call Resolution 29
  • Conclusion 30
  • 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 31