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  • 1. The Need For Power In Texas Natural Gas Fundamentals And Reliance On Gas-Fired …That Is Further Complicated By Rapidly Growing Demand Generation Have Placed Texas’ Power Supply At Risk… And An Aging Generation Fleet Growing supply deficit for US natural gas… …and increased reliance on foreign reserves… …that will deplete current reserve margins… Texas has a rapidly growing population… ERCOT reserve margins Total population growth 95-10E; TCF 05; Percent (100% = 6,338 TCF) 00-11E; Percent 00-15E; Millions of people Other Russia 6.3 5.7 25 5.2 30 27 US 29 Over 80% of Over 80% of 26 23 23 demand total world 41 total world 17 16 15 16 reserves are 21 reserves are 11 2.4 controlled by 2.0 2.0 9 controlled by 7 5 1.4 19 US foreign 1.1 1.1 0.9 15 foreign Iran supply governments 3 17 governments 14 CA TX FL AZ GA NC VA NV WA MD 00 02 04 06E 08E 10E U.S. 95 97 99 01 03 05 07 09 Qatar …and stress an aging generation fleet… …resulting in increasing heat rates …have driven high and volatile prices… …particularly in markets with gas on the ERCOT generation fleet age ERCOT generation supply margin 95-10E; $/MMBtu1 06; Percent of generation capacity 06; $/MWh @ $8/MMBtu gas 06; Percent of time gas is on the margin Peak demand 100% = 77 GW 150 06 10 12 343% 343% >50yrs 41-50yrs 10 92 2% 90+ 100 80 79 6% <10yrs 8 58 31-40yrs 22% 6 47 50 35% 40 4 2 0 0 20 40 60 80 0 19% FRCC ERCOT WECC NEPOOL Entergy SPP PJM 21-30yrs 16% 95 97 99 01 03 05 07 09 Cumulative capacity (GW) 1 2 10-20yrs 1 Projected prices from 06-10 based on calendar strip prices as of Aug 31, 2006 …And The Tradeoffs Associated With Each TXU Examined All Generation Technologies… Competitive Capital recovery technology Fixed O&M Horizon 1 Horizon 2 Emission cost Technology 0-5 years 5-15 years Levelized price to achieve full reinvestment economics Fuel and variable O&M 06; $/MWh Constructible Wind 86 Cost effective with subsidies 71-74 73 60 Constructible Gas 50-53 15 Reliable 71 45-48 2 58 25-28 0.2 Constructible Pulverized 4 7 43 Reliable 1.0 coal 0.6 Cost effective 8 20 18 15 7 Constructible 1 IGCC Wind Advanced IGCC CCGT Super-critical Reliable nuclear coal Cost effective Constructible Supercritical pulverized coal has a distinct advantage over the other technologies Supercritical pulverized coal has a distinct advantage over the other technologies Reliable Nuclear and could have a steep learning curve to widen the gap and could have a steep learning curve to widen the gap Cost effective 3 4 1Includes $3/MWh renewable energy credit (REC); does not include production tax credit (PTC)
  • 2. The Need For Power In Texas TXU’s Program Will Help Ensure Reliability And Reduce TXU’s Plan Will Help Meet These Challenges In Texas Reliance On Natural Gas In Texas… Historical and projected ERCOT Generation capacity by fuel type Ensuring reliability and reducing reliance of natural gas reserve margins 06-10E; Percent through a plan to bring on 9 GW of new capacity by 2010, 00-11E; Percent 1 40 rebalancing the Texas supply stack and helping to maintain 100%= 1,070 GW 77 GW 90 GW Impact of TXU Power adequate reserve margins through 2014 Generation Program 30 29 30 26 35 42 Other 23 58 19 Lowering prices by leveraging a scale power generation 20 17 16 17 16 2 15 program to displace high cost generation and share savings 11 12 12 with our customers 65 12 3 10 58 Gas 42 9 7 5 0 US Texas 06E Texas 10E 00 03 06E 09E Improving the environment through the largest ever 3 2000 – 2004 2005 – 2007 2008 – 2011+ Reduction in gas voluntary offset program and displacement of less efficient 2000 – 2004 2005 – 2007 2008 – 2011+ Reduction in gas 22 GW of natural gas fired Rapid Dangerously reliance and 22 GW of natural gas fired Rapid Dangerously reliance and generation capacity generation added; demand low supplies volatility by shifting generation added; demand low supplies volatility by shifting adequate supplies growth require 1.5 GW the stack away from adequate supplies growth require 1.5 GW the stack away from eliminates per year gas towards solid eliminates per year gas towards solid reserve fuel reserve fuel 5 6 Source: ERCOT, 10/1/05 and 6/19/06 …Allowing TXU To Deliver Lower Cost Power To Its …While Continuing To Improve The Texas Environment Customers… Estimated key emissions Breakeven power prices for TXU’s Power Generation Program Total annual ERCOT market SO2 NOX Hg Thousands of tons savings 06E; $/MWh 11E; $ billions 2005 emissions (nine existing facilities) 273.1 42.1 .0025 Forward power price 76-79 17 Emissions after new development and 1.7 218.5 33.7 .0020 voluntary reductions 5 4 Total TXU reductions 54.6 8.4 .0005 50-53 Reduction relative to 05 TXU emissions (20%) (20%) (20%) 3rd Additional reductions from displacement of 0.0 12.1 0.0 party units US ranking1 among 20 largest coal generators 1st 1st 2nd TXU emissions rates1 relative to US average (63%) (82%) (30%) Market savings Expectations Decreased Decreased Operational TXU for subscale capital costs fuel costs advantages target builder TXU has committed to the largest voluntary emissions reduction in U.S. history TXU has committed to the largest voluntary emissions reduction in U.S. history TXU’s plan will more than double its capacity in Texas while cutting key TXU’s plan will more than double its capacity in Texas while cutting key Without scale, it would be virtually impossible for TXU Without scale, it would be virtually impossible for TXU emissions by 20% and its emission rates by 70% emissions by 20% and its emission rates by 70% to deliver needed cost savings to its customers to deliver needed cost savings to its customers 7 8 1 TXU after new power generation development program and retrofits; relative to average US coal plant
  • 3. Coal Is The Fuel Of Choice …Today, Supercritical Coal Appears To Have The Economic While TXU Believes A Portfolio Of Technologies Is Needed To Advantage Meet America’s Energy Challenges… Horizon 1 Horizon 2 Capital recovery Technology 0-5 years 5-15 years Fixed O&M Levelized price to achieve full reinvestment economics Emission cost 06; $/MWh Constructible Wind Fuel and variable O&M Cost effective 86 with subsidies 71-74 73 Gas Constructible 60 Reliable 50-53 15 71 45-48 2 58 SCPC Constructible 25-28 0.2 Reliable Cost effective 4 7 43 1.0 0.6 Constructible IGCC 8 Reliable 20 18 Capacity additions 15 Cost effective 7 represent 12% of 06-20 1 Wind Advanced IGCC CCGT Supercritical coal US demand growth Constructible Reliable nuclear Nuclear Cost effective Technology GW Technology GW Supercritical pulverized coal has a distinct advantage over the other technologies Wind 3.0 Wind 1.5 Supercritical pulverized coal has a distinct advantage over the other technologies TXU aspiration: and could have a steep learning curve to widen the gap SCPC 30.0 SCPC 23.0 and could have a steep learning curve to widen the gap balanced portfolio of IGCC 6.0 IGCC 0.0 state of the art Nuclear 8.0 Nuclear 2.5 generation 1Includes 1 2 $3/MWh renewable energy credit (REC); Does not include production tax credit (PTC) Total 47.0 Total 27.0 …Wind Must Be Part Of The Solution While The Characteristics Of Wind Generation Make It Difficult To Meet Long-Term Baseload Demand… TXU plans to double its wind …furthering Texas as the nation’s portfolio by 2010… leader in wind generation capacity Wind availability versus hourly electricity demand in ERCOT 06; Percent TXU wind generation purchases Total wind generation capacity 05-10E; MW 06; MW 146% 146% 100 2,370 1,425 80 2,325 1,260 Hourly 1,100 At peak demand demand 930 60 periods wind averages less than 40 580 20% capacity Wind 825 800 capacity 20 0 1 5 9 13 17 21 06E 07E 08E 09E 10E TX CA IA MN Hours Not only does wind peak in the off-peak hours, it peaks in the shoulder months TXU is the largest purchaser of wind generation in Texas Not only does wind peak in the off-peak hours, it peaks in the shoulder months TXU is the largest purchaser of wind generation in Texas 3 4 Source: AWEA Second Quarter Market Report, July Source: AWEA Second Quarter Market Report, July
  • 4. Coal Is The Fuel Of Choice There Must Be Regulatory And Capital Breakthroughs To …As Well As Solutions For Long-Term Storage Of Spent Fuel Make Nuclear Generation Competitive In The Long Term… …and concerns about storage capacity have made Escalating costs with expectations of nuclear capacity additions uncertain additional increases…. Estimated U.S. used nuclear fuel accumulation Estimated construction cost for the High construction costs… …combined with long …result in a high total 00-50E; Thousands of tons of heavy metal (tHM) Yucca Mountain Project lead times… cost relative to coal 86-00; $ billion1 200 MIT “global growth” 76% Construction costs Installation time Breakeven power price 76% Nuclear scenario growth 06E; $/KW 06E; Months 06E; $/MWh 127% 167% 43% 127% 167% 43% 150 60 scenario Yucca Mountain 73 2,500 70-73 120 capacity according to DOE 01 study (83,800 20 tHM) 100 34 1,100 CO21 45 50-53 50 Yucca Mountain legal capacity (63,000 tHM) SCPC coal Nuclear SCPC coal Nuclear SCPC coal Nuclear 0 86 00 00 05 15 25 35 45 The lack of a long-term spent fuel solution also makes The lack of a long-term spent fuel solution also makes nuclear a longer-term generation solution nuclear a longer-term generation solution A solution for spent fuel must be defined before nuclear can be a long-term A solution for spent fuel must be defined before nuclear can be a long-term solution for America solution for America 5 6 1 Based on potential carbon scenario with current European ETS pricing 1 02 dollars Gas Fundamentals And Improvements In Supercritical Coal Today, IGCC Is Uncompetitive With The Supercritical Coal Make It The Winning Economic Technology Today Technology Coal is a relatively low cost fuel source… …in abundant supply in the US US reserves Commodity prices Breakeven power price of SCPC and IGCC in Texas 04; Years of remaining reserves 99-06; $/MMBtu 06; $/MWh 12 191% 1,900% 1,900% 200 2 3 71-74 9 1 4 Natural Gas 13 6 50-53 1 1 3 Coal 29% 10 0 Sep- Sep- Sep- Sep- Sep- Sep- Sep- Sep- 99 00 01 02 03 04 05 06 Gas Coal TXU PC Lower Lower Higher Lower Longer Longer Higher IGCC Coal technology has become more cost …and emissions have been reduced reference emissions heat rate capital capacity ramp up time to operating estimate effective… dramatically plant cost cost factor time build cost Improvements in construction cost NOX emissions from US power plants 9,130 PC ref plant Per TXU $1,100/KW 94% None 38 months $42/KW/yr MMBtu/ 95-05; Percent reduction 05; Lbs/MMBtu estimate nominal (online 01/10) MWh 8,520 $1,800/KW 6 Months 62 months $56/KW/yr Per TXU IGCC baseline 85% MMBtu/ nominal (online 01/12) 85% estimate 45 85% 104% MWh 0.33 104% 22 IGCC is unproven on coal available in Texas IGCC is unproven on coal available in Texas Longer construction time makes it difficult to hedge output Longer construction time makes it difficult to hedge output 0.03-0.13 0.05 Cost of carbon capture is not necessarily advantaged Cost of carbon capture is not necessarily advantaged US average TXU new Gas 7 8 Source: GE; EPRI, academic literature; press reports coal coal Gas Coal
  • 5. Coal Is The Fuel Of Choice …To Ensure The Plants Are Part Of The Environmental TXU Is Investing In The Newest Technology… Solution SO2 Building the most efficient plants in the country… …designed for potential future carbon capture Average emission rates NOX Coal plant steam outlet temperatures for plants 70-15E; Lbs/MMBtu under construction 4.37 06E; Degrees Fahrenheit Meet EPRI IEA requirements to be 1,085 1,085 advanced considered carbon capture TXU supercritical ready status standard Sufficient space in critical access locations >90% >90% 1,050 1,050 1,050 Options for CO2 storage 1.08 0.78 Design studies on potential 0.35 0.29 0.29 ~0.2 ~0.1 0.12 0.12 0.10 0.05 separation methodologies Pre-investments including TXU Plant Plant Plant Plant US Avg US Avg Texas CAIR Oak Grove, Reference plant siting reference A B C D 1970 2004 2004 2015 Sandow 5 plants plant TXU’s new plants will operate with the best available control technology, TXU is commercializing the most efficient coal plants and continues to ensure TXU’s new plants will operate with the best available control technology, TXU is commercializing the most efficient coal plants and continues to ensure reinforcing Texas’ proven environmental track record the plants will be able to be retrofitted with carbon capture technology reinforcing Texas’ proven environmental track record the plants will be able to be retrofitted with carbon capture technology 10 9 Source: EPA Acid Rain database and EIA TXU Is Proactively Investing In Next Generation Technologies As In Europe, TXU Believes These Advances Will Continue To Make Coal The Winning Technology TXU is investing across technologies… …while working to commercialize technologies across the entire value chain… Horizon 1 Horizon 2 Levelized breakeven power cost European announced new 0-5 years 5-15 years Generation Demand $/MWh build capacity Wind 11+; Percent (100%=54 GW) IGCC Gas Combustion Flue gas Customer Other Fuel Efficiency Gasification removal initiatives Coal 100 Wind Advanced coal Wind 5 • Coal • Waste to • R&D • Solid CO2 • Time of cleaning energy partnership capture use retail • Oxy- • Chilled IGCC products 80 Nuclear • CO2 free firing NH3 40 • MEA products 33 • • Efficiency Storage Nuclear study solutions 60 CCGT @ …acquiring the lowest-cost carbon offsets …and starting an environmental ventures 6.50/MMBtu SCPC across the world economy… fund to spur investment in this area 5 40 4 06; $/ton 13 Nuclear IGCC 0 5 10 15 20 25 30 35 TXU Natural 120 Transport Methane CO2 credit, $/ton efficiency gas 90 capture Bank $200M Advisory Industrial No-till 60 fund gas Board farming Equipment It would take a combination of low gas prices and high sustained carbon prices to It would take a combination of low gas prices and high sustained carbon prices to capture 30 supplier make the winning technology a non-coal technology make the winning technology a non-coal technology 0 Venture This gap will continue to widen as the coal construction learning curve is exploited This gap will continue to widen as the coal construction learning curve is exploited capital 0 1 2 3 4 5 6 7 8 11 12 CO2 reductions (Billion tons)
  • 6. TXU Development: Solving America’s Energy Challenges TXU Power Development Is Focused On Developing A TXU Announced 9.1 GW of New Coal Capacity To Meet The Pipeline Of Origination Opportunities Future Power Needs Of Texas To become the Net leading originator Capacity and constructor of Mission Unit MW Fuel County baseload generation throughout the US Oak Grove 1, 2 1,634 Lignite Robertson Valley Sandow 5 581 Lignite Milam Monticello Morgan Creek Martin Lake Big Brown 3 858 PRB Freestone Big Brown Tradinghouse Originate long-term Develop steady Construct baseload Lake Creek Oak Grove Monticello 4 858 PRB Titus off-take agreements pipeline of baseload generation 35% Sandow and equity sell Martin Lake 4 858 PRB Rusk opportunities to add cheaper and faster Objectives downs to ensure 30% 3 GW of new capacity and make 5% annual of construction is Morgan Creek 7 858 PRB Mitchell annually improvement sold forward Tradinghouse 3, 4 1,716 PRB McLennan PJM Development Proprietary Construction Muni/Co-op Solutions Program Whole System Approach Lake Creek 3 858 PRB McLennan Industrial Solutions Incumbent Customer Advantaged Relationships Valley 4 858 PRB Fannin Equity Partnership Solutions Strategy With Top Contractors and Solutions Manufacturers Industrial Partnerships Strategies TXU is using its current, advantaged sites to expand capacity in ERCOT Global Low-cost Country, TXU is using its current, advantaged sites to expand capacity in ERCOT National Advocacy Scaled Sourcing Program Initiative Learning Curve Codification 1 2 TXU Is Also Working With Regulated Entities To Deliver New TXU Has Focused Its Near-Term Ex-ERCOT Growth On The Generation At Lower All-In Costs Deregulated PJM and Northeast Markets Northeast coal investment return analysis Status of PJM development TXU’s current origination efforts include up to …to provide potential customers with long- 06; IRR effort 10 GW of new generation… term, low-cost power Breakeven power prices for TXU’s Power Generation Program Completed Outstanding 06E; $/MWh 76-79 Status Units GW 4 Target entry zones 5 3 GW of sites Final fuel plan 17 identified/secured Key Preliminary discussions 5 4 Preliminary stakeholder 50-53 transmission agreements Advanced discussions 4 3.5 studies complete completed by end of 2006 Site engineering Letters of intent1 3 2.5 complete Geo-technical evaluation Preliminary air Definitive agreements 0 0 modeling complete Permit levels Total 12 10 identified and discussed with states TXU Increased Increased Operational Regulated High target capital fuel costs disadvan- cost costs tages expecta- tions TXU has had more than 10 unsolicited requests for development projects in TXU has had more than 10 unsolicited requests for development projects in Low regulated markets regulated markets 1 Letter of intent signed or in approval process. 3 4
  • 7. TXU Development: Meeting America’s Energy Challenges …Potentially Opening Additional Markets For New Coal Improving New Build Construction Performance Could Plant Developments… Enable Displacement Of Existing, Inefficient Generation… US 7X24 power prices Designing a business 07E; $/MWh model for advanced coal to compete in markets Generation reinvestment economic comparison (PV/I = 1.3) with coal on the margin 06; $/MWh SOx SOx 71-74 73 emissions emissions 7 cost 60 cost 19 56 8 ~50 Variable 7 cost 43 7X24 40-43 43 21 10 prices 19 Fixed 53 58 4 High 45-48 cost 15 4 28 2 23-26 7 Capital 17-20 15 8 3 5 recovery CCGT Nuclear IGCC Advanced Advanced Nuclear Old CCGT Old un- ($6.50/ coal – TXU coal – (existing) ($6.50/ scrubbed MMBtu reference potential next MMBtu coal plant target1 gas price) wave gas price) plants reference plant2 Low If TXU could lower capital costs by ~30% and/or improve heat rate by 7%, TXU’s If TXU could lower capital costs by ~30% and/or improve heat rate by 7%, TXU’s next wave of coal plants could displace both gas and old coal plants next wave of coal plants could displace both gas and old coal plants Coal-on-coal competition represents a 78 GW market opportunity in the US Coal-on-coal competition represents a 78 GW market opportunity in the US 1 $1,100/KW cost to build, 9.13 MMBtu/MWh heat rate 2 $800/KW cost to build, 8.5 MMBtu/MWh heat rate 5 6 …By Creating An Opportunity To Replace Existing Coal TXU Believes That Tougher Environmental Standards… With New Efficient Advanced Coal …and CO2 emissions over the long-term TXU is redefining environmental standards US coal fleet ages US coal fleet heat rates for regulated emissions... 06; Percent of US coal generation capacity 06; Percent of US coal generation capacity CO2 emissions rate 100% = 313 GW 100% = 313 GW 20E; Tons/MWh 0.96 0.54 >12 HR >50yrs 8-9 HR <10yrs 41-50yrs 0.80 4% 2% For every incremental 1 ton of For every incremental 1 ton of 11-12 HR 8% 10-20yrs 16% 1% emissions of SO2, ,NOX, ,and Hg emissions of SO NO and Hg 9% 22% 2 X 0.42 from new generation, existing 34% from new generation, existing emissions in Texas must be emissions in Texas must be 9-10 HR reduced by 1.2 tons reduced by 1.2 tons 34% 32% Peaking Coal Reduction Long-term 31-40yrs 38% gas today levers vision - 10-11 HR 21-30yrs (11 HR) CCGT Almost 60% of generation capacity is more than 30 years old and has a heat Almost 60% of generation capacity is more than 30 years old and has a heat TXU is working across the power value chain to commercialize TXU is working across the power value chain to commercialize rate of above 10.0 rate of above 10.0 technologies that will economically improve environmental performance technologies that will economically improve environmental performance 7 8
  • 8. TXU Development: Meeting America’s Energy Challenges Captive Industrial Demand Provides Another Potential …Will Further Expand The Opportunity For New Coal Technology Channel For New Efficient Baseload Capacity Oil sands growth will create enormous demand for …however, the power demand from oil shale recovery power generation… will be almost double that of oil sands Capacity of advanced coal to replace old coal Capacity of advanced coal to replace old coal with 06; GW $20/ton CO2 tax Equivalent electricity capacity/boiler size requirement Projected production and power requirement 06; GW 06-20E; GW Increase Increase Power needed Future oil shale of New coal capital cost ($/KW) of New coal capital cost ($/KW) 8-12 GW for heating1 production emission emission new 10E-30E; GW 10E-30E; MMbpd cost build cost 800 900 1,000 1,100 800 900 1,000 1,100 40 4 10.3-14.1 0% 78 64 51 39 35 0% 135 109 86 71 8.4-11.5 30 3 Production 50% 186 162 141 125 50% 131 111 93 76 25 Power needed 5.5-7.5 100% 212 201 177 166 100% 170 157 141 124 20 2 15 2.7-3.7 10 1 5 0 0 10E 15E 20E 25E 30E 06E 10E 15E 20E Tighter environmental regulation will significantly increase the opportunity to Tighter environmental regulation will significantly increase the opportunity to Power demand growth in the oil sands and oil shale could total up to 50GW build cleaner advanced coal to replace inefficient old coal Power demand growth in the oil sands and oil shale could total up to 50GW build cleaner advanced coal to replace inefficient old coal 1Does not include electricity needs for freeze wall, production, or transport 9 10 Source: Shell Exploration and Production Company; Oil Shale Review (J. Laherrere); RAND; U.S. Congressional testimony; team analysis …And Is Positioned To Be A Long-Term Leader In TXU Has Line Of Sight Around 17 GW Of New Generation Low Power Development Development… High There is potentially an enormous …and TXU has line of sight around 17 GW of Key capability TXU Description opportunity to add new generation… development 06-20E; GW 06-20E; GW Internal group of professionals with global Development expertise experience in multiple technology developments 283 Internal group with development and nodal modeling Transmission expertise 16-23 capabilities across multiple regions 5-10 Incremental Valuation and risk Proven track record of value creation, capital 160 growth management allocation, and risk management 2-4 9 Construction expertise Advanced Proprietary Whole System Approach to construction coal replacing existing coal Global supply chain Successfully implemented global sourcing effort to 78 management reduce construction cost and time Advanced coal replacing Baseload operational and Track record of best in class performance and 45 existing gas fuel handling expertise experience in fuel handling and blending ERCOT Merchant Customer Total Total US growth PJM business Developing national capabilities to augment strong National advocacy opportunity (06-20) Texas skill base TXU is in substantive negotiations to develop 8 GW outside of ERCOT TXU is in substantive negotiations to develop 8 GW outside of ERCOT National regulatory Developing national capabilities to augment strong expertise Texas skill base 11 12
  • 9. TXU Construction: Redefining Generation Construction Redefining Baseload Construction Processes Are Key To TXU Has Implemented A New Business Model To Make The TXU Power Development Company Strategy Step Change Improvements In Construction Cost And Time To become the leading originator All-in construction cost estimates for announced US supercritical coal units and constructor of Mission 05-06; $/KW baseload generation throughout the US 1,700-2,000 1,733 30% 1,669 1,635 1,600 1,576 1,518 1,450 1,100 Originate long term Develop steady Construct baseload off-take agreements pipeline of baseload generation 35% and equity sell opportunities to add cheaper and faster Objectives downs to ensure 30% 3 GW of new capacity and make 5% annual of construction is annually improvement sold forward Recent Plant A Plant B Plant C Plant D Plant E Plant F Plant G TXU PJM Development Proprietary Construction Muni/Co-op Solutions anecdotes target Program Whole System Approach Industrial Solutions Incumbent Customer Advantaged Relationships Equity Partnership Time from 39 45 53 54 59 47 - 30-32 Solutions Strategy With Top Contractors And Solutions permit to Manufacturers Strategies Industrial Partnerships online Global Low-cost Country, National Advocacy Scaled Sourcing Program TXU has leveraged scale to achieve significant cost and time savings Initiative TXU has leveraged scale to achieve significant cost and time savings Learning Curve Codification 1 2 Scale Has Created Substantial Savings That Suppliers Were The Improvements Were Fundamentally Enabled By The Willing To Share With TXU Scale Of The Build The TXU program allowed suppliers to …translating to step change Cost to construct reference plants remove waste from their process… improvements in delivery time 06; $/KW Overall equipment effectiveness Number of units 34% Percent 31% 2,000 9 530 TXU reference 8 215 plant program 85 70 3 85 7 5 1,100 12 6 65 5 4 Typical Scale Design and Overhead Project TXU target 3 “brownfield” procurement specifications scale management Eight 2 individual build savings steam turbine estimate 1 unit build-out 0 Typical Reduced Reduced Reduced Optimized 10 14 18 22 26 30 34 38 42 46 50 equipment die speed rework equipment effectiveness change- losses effectiveness Months overs TXU’s goal is to translate its high performance construction model into a TXU’s goal is to translate its high performance construction model into a sustainable competitive advantage to support long-term growth By utilizing 100% of GE’s manufacturing space in Schenectady, TXU was able sustainable competitive advantage to support long-term growth By utilizing 100% of GE’s manufacturing space in Schenectady, TXU was able to move the turbine equipment off of the construction critical path to move the turbine equipment off of the construction critical path 3 4
  • 10. TXU Construction: Redefining Generation Construction …And Delivering TXU’s High Performance Schedule TXU Continues Progress Towards A Target Of $1100/KW Build Cost Via Major Equipment And Materials Sourcing… Sourcing status Key equipment Awarded In negotiation Estimated Initial Bechtel based on bids estimates received Power block 100% 0 0 0 Eng. Equipment 0% 17% 74% 9% Bulk Materials 31% 0 1% 68% Sub-Contracts 40% 0 0 60% Sub Total 56% 7% 12% 25% TXU plans to have the book closed by first quarter of 07 TXU plans to have the book closed by first quarter of 07 Construction on the Sandow 5 unit is progressing according to schedule Construction on the Sandow 5 unit is progressing according to schedule 5 6 TXU Has Already Seen The Potential For Improvement Construction Learning Curves In Other Industries Suggest Through Equipment Sourcing In Low-Cost Countries (LCC)… Strong Improvement Potential For Coal Plant Construction Coal plant component costs E&P example 06; $/KW Lower costs… …in less time 40% 26% 42% Platform costs 40% 26% 42% E&C time 96-98; $ thousands/ton 94-97; Years/platform 335 36% 44% Sourced in 14.4 5.3 US 11.3 9.2 195 3.0 Sourced in LCC 98 77 58 57 A B C 94 97 96 97 98 Boilers Turbines Balance of Other companies have created a distinct competitive advantage Other companies have created a distinct competitive advantage plant leveraging the scale of their construction investment to reduce leveraging the scale of their construction investment to reduce the costs and time of construction TXU sees even more potential to leverage LCC sourcing to reduce costs the costs and time of construction TXU sees even more potential to leverage LCC sourcing to reduce costs 7 8
  • 11. TXU Construction: Redefining Generation Construction …And Estimated Manufacturing Capacity Implies That TXU …Translating To Lower Construction Costs… Can Access These Markets “Generation equipment segment Normalized low-cost country construction cost Net new LCC coal capacity additions will experience a downturn after 06; $/KW 05-15E, GW the strong performance of ’06- ’07 due to fewer equipment orders in ‘08-’10 ” - Morgan Stanley Analyst 65 66 59 230 850 Current LCC OEM equipment 80 production capacity 43 540 42 42 Potential excess is 55 GW capacity 31 32 31 30 29 28 21 18 16 16 Low-cost Incremental US labor US normalized 00 01 02 03 04 05 06E 07E 08E 09E 10E 11E 12E 13E 14E 15E country coal environmental adjustment plant capital TXU has an opportunity to leverage LCC power equipment OEM network TXU has an opportunity to leverage LCC power equipment OEM network to realize far lower prices to realize far lower prices Accessing the low-cost countries for manufactured components may allow TXU to Accessing the low-cost countries for manufactured components may allow TXU to create aasignificantly lower cost plant create significantly lower cost plant 9 10 TXU’s Goal Is To Translate Learning Curve Improvements To Moving Down This Learning Curve Will Open Up New Make Other Technologies More Competitive Opportunities For Baseload Growth Breakeven conditions to displace other generation Improvement needed 06; $/KW capital cost Horizon 1 Horizon 2 to be competitive with Technology 0-5 years 5-15 years SCPC 2,200 Displace new gas 3 Constructible Wind 47% 1,800 Cost effective Displace existing gas 2 with subsidies 1,400 Gas 83% Constructible Reliable Today 1,000 SCPC Constructible n/a Displace old coal 1 Reliable Cost effective TXU vision 600 Constructible 7.5 8.0 8.5 9.0 9.5 50% IGCC Reliable Cost effective Plant heat rate $/MMBtu Constructible Reliable 44% Nuclear Next generation build will require step-change improvements as seen in other industrial Next generation build will require step-change improvements as seen in other industrial Cost effective construction programs construction programs 1 Cash cost of old coal: $43/MWh 2 Cash cost of old gas: $56/MWh, assuming $6.5/MMBtu gas and 8MMBtu/MWh heat rate 11 12 3 Long term breakeven power price of new gas is $60/MWh, assuming $600/KW cost to build, $6.5/MMBtu gas, and 6.5 MMBtu/MWh heat rate
  • 12. TXU Power: Achieving Operational Excellence TXU Power Has A Structurally Advantaged Portfolio In A TXU Is Redefining Excellence In Its Power Operations… Market With Strong Fundamentals To become the safest ERCOT full load average implied heat rate1 Large portfolio and most productive 05; TWh of deregulated generation 06; MMBtu/MWh Gas fleet provides Mission operator of baseload shaping and ancillary 151 142 Solid fuel capacity generation in the US services provides low cost Includes baseload power coal new Gas (10.2 GW) build Lignite 68 67 (5.8 GW) 63 Nuclear 50 45 44 42 (2.3 GW) 28 TXU units Achieve top decile Sustain year-over- Achieve industry 10 20 30 40 50 60 70 80 EXC TXU NRG/ PPL FE EME AYE D ETR reliability and year real productivity Cumulative GWs TGN Source: Energy Velocity Objectives leading safety operating cost improvements of 5% Low coal prices1 performance Robust wholesale power prices performance across all operations 07E; $/MMBtu 05; $/MWh 3.2 3.0 74 Safety First Attitude Reliability Optimization TXU Operating 2.9 65 2.6 59 Embedded In Culture Initiative System Phase II 57 2.3 53 51 49 2.0 2.0 39 1.7 Comprehensive Reliability Centered Industrial Training Program Maintenance Program Partnerships/ Global Best Strategies Safety Recognition Worldwide Supply Chain Practices and Incentive Management SERC FRCC RFC NPCC MRO SPP RFC FRCC Programs TXU Academy WECC SPP MRO TXU WECC SERC NPCC ERCOT Power Optimization Emissions-adjusted 1 Source: Energy Velocity, TXU Wholesale estimates Source: TXU Wholesale estimates Center Integration 1 2 …Maintaining Industry-Leading Safety Performance… …And Matching Long-Term High Performance Trends Across Other Heavy Industries Fossil plant lost time rate Nuclear lost time rate Industry productivity improvements (CAGR) 05-06; Incidents/200,000 hrs 05-06; Incidents/200,000 hrs 83-031; Percent 6.7 0.13 3.4 Target 0.08 2.4 2.3 2.3 1.5 Target 0.7 0.00 0.00 0.00 0.00 Steel Telecom Gas Railroads Refining US TXU Power (workers ($/line) pipelines ($/ton- (bpd Generation O&M 05-08E EEI top 05 YTD 06 EEI top 05 YTD 06 /ton) ($) mile) Through- O&M ($/MWh) decile decile put) ($/MWh) TXU Power continues to improve on its impressive safety performance record TXU Power is planning for continuous productivity improvement that matches TXU Power continues to improve on its impressive safety performance record TXU Power is planning for continuous productivity improvement that matches by setting targets well below top decile performance for fossil generation other competitive industries by setting targets well below top decile performance for fossil generation other competitive industries 3 4 1 Steel is for the period 1990-2001; Gas pipelines for 1980-2003; Refining for 1985-2004
  • 13. TXU Power: Achieving Operational Excellence Actual result …As Well As Nuclear Performance… TXU Has Dramatically Improved Its Coal Fleet Actual result Current plan Current plan Performance… Nuclear production Previous plan Previous plan 03-08E; TWh Lignite/coal fleet annual net production 03-08E; TWh1 47.6 47.2 19.9 1 19.6 1 06-08 19.6 1 06-08 19.4 46.1 19.1 Top decile 45.9 3% 3% performance 44.1 43.2 17.7 Top decile performance 03 04 05 06E 07E 08E 03 04 05 06E 07E 08E O&M2 Non-fuel 03-08E; $/MWh Lignite/coal fleet non-fuel O&M2 12.37 03-08E; $/KW (net current capacity) 12.04 27.42 06-08 26.43 06-08 25.93 1 11.01 15% 15% 1 9.69 24.36 Top decile 1 10.14 10.11 20.59 performance Top decile 21.57 performance 03 04 05 06E 07E 08E 03 04 05 06E 07E 08E 1 Normalized for multiple units refueled in the same year and the 65 day outage to replace Unit 1 steam generators in 07 1 Annual net production based on GADS meters 5 6 2 O&M Excludes one time expenses 2 Excludes environmental and new build costs …And Is Investing To Improve Its Emissions Performance The TXU Academy Will Develop Technical, Leadership, And Operational Excellence Across Its Fleet Of Operators NOx emissions Hg emissions SO2 emissions Technical Training Lbs/MMBtu Millionths of lbs/MMBtu Lbs/MMBtu 1 1 All training for new hires 63% 82% TXU1 TXU1 0.37 0.06 C 2.39 All training for new hires TXU1 30% before 2010 will 10+ technical courses, 3.00 A 0.47 B 0.10 before 2010 will including occur at Martin Lake F 3.08 B 0.49 G 0.20 occur at Martin Lake 3.12 0.66 0.24 P C F – Power block operations – Maintenance planning I 3.33 D 0.73 K 0.29 VA – Asset management Q 3.38 E 0.76 N 0.30 MO A 3.46 F 0.88 H 0.30 Multiple instruction methods D 3.79 0.95 0.32 G E EP 3.89 K H 0.98 J 0.33 – Control room simulator MC J 3.98 I 0.98 US avg 0.33 – Classroom ML – “Hands-on” in plant US avg 4.25 1.00 0.34 US avg L BB TH LC G 4.43 J 1.05 R 0.34 OG E 4.55 K 1.05 C 0.35 SA 4.91 H 1.23 0.35 L P Operating System Training O 5.08 M 1.26 D 0.35 L 5.11 Leadership Training N 1.27 Q 0.36 N 5.12 O 1.29 O 0.39 Basic to advanced courses R 5.41 in lean principles and 1.34 0.40 P I Operations and Project techniques 5.98 M Q 1.61 A 0.41 Management programs 6.31 1.67 0.42 B R M Focus on both teaching lean developed with McCombs tools and performance School of Business, Executive The combination of investment in the newest emissions control technology and The combination of investment in the newest emissions control technology and management/coaching Education at The University of an innovative voluntary retrofit program will make TXU’s coal fleet the techniques Texas at Austin an innovative voluntary retrofit program will make TXU’s coal fleet the cleanest large-scale fleet in the nation Leverages plants for “hands- CEO/senior executives lead cleanest large-scale fleet in the nation on” training modules 1TXU after new power generation development program and retrofits Source: 2004 EPA 7 8
  • 14. TXU Electric Delivery: Driving Utility Performance Across The US Successful Execution Of TXU Electric Delivery’s Long-Term TXU Electric Delivery Has An Advantaged Structural Position Growth Strategy Depends On Operational Excellence A unique business model that looks more like a Large customer base FERC pipeline than a traditional utility 05; Millions of customers Traditional To become the most 5.3 5.0 T&D Gas Pipeline FERC TXU Electric economical and 4.3 4.2 comparables LDC’s MLP’s TransCo Delivery reliable shipper of Mission 3.2 3.0 3.0 Regulation State State FERC FERC State 2.7 electricity in the US 2.3 2.2 Capital tracker No No No Yes Yes Commodity risk Yes Yes No No No Retail customers Yes Yes No No No EXC FPL ED PGN D PCG SO TXU ETR DUK Source: FERC Ensure operating Achieve congestion Achieve top-decile High growth Supportive regulatory environment performance goals reductions of 50% reliability with SAIDI 06E-15E; Percent annual growth while maintaining through grid Objectives of less than 60 top-quartile cost management and minutes per year 2.4 2.3 performance investment 2.2 2.1 1.9 1.6 Asset Rehabilitation InfrastruX Energy Grid Optimization 1.4 1.3 and Modernization Services Strategic through Wide Area Initiative Partnership Visualization Program Distributed Smart Self-Healing Network Grid Technologies via Smart Switches Transmission Grid Strategies Outstanding WECC MRO NPCC FRCC Capacity Initiative Above Average SERC ERCOT RFC SPP Broadband Over Advanced Technology Average Source: NERC Source: Banc of America Securities Research Power Line Network Development Initiative Processor-based Below Average Protection Systems TXU Electric Delivery is a scale player in a high-growth region TXU Electric Delivery is a scale player in a high-growth region 1 2 TXU Electric Delivery Is Investing In Technology And TXU Is Focused On Creating The 21st Century Grid Enabled Infrastructure To Improve Reliability And Drive Efficiency By The Newest Technology… Fiber Optics U.S. electric delivery company performance 05; SAIDI1 Improves grid control through real- time, two-way communications link Wholesale Power Provider Top quartile cost 300 Increases security through video surveillance of substations Transmission Substation 225 Substation 150 High-Voltage Transmission Lines Top quartile SAIDI Transformer Automated Meter Reading 75 TXU TXU Communicates outage instantly, 03 Target 06E eliminating need for phone call Collects billing information 0 Self-Healing Switches through power lines 50 100 150 200 250 Shortens outage time by Gathers data that will help retail sensing problems on lines, Distribution O&M and capital cost ($/customer) providers design new consumer isolating the outage cause, and municipal services and automatically restoring Residence TXU Electric Delivery has achieved top quartile cost and reliability TXU Electric Delivery has achieved top quartile cost and reliability power to most customers through an alternate path 3 4 1 Excluding major events and planned outages; System Average Interruption Duration Index is defined as the number of minutes per year that the average customer is out of electric service
  • 15. TXU Electric Delivery: Driving Utility Performance Across The US This Strategy Is Further Enabled Through An Innovative …And Is Investing To Enhance Reliability And Meet The Partnership With Infrastrux Energy Services… Growing Demand For Power TXU Electric Delivery IES Energizing the grid: Average annual capex investment 81-11E; $ millions 731 Asset Owner Asset Manager Asset Service Asset Owner Asset Manager Asset Service ERCOT estimates that at Business Excellence Asset Excellence Service Excellence 600 ERCOT estimates that at Business Excellence Asset Excellence Service Excellence least 20 GW of new least 20 GW of new generation will need to Transmission Grid Field Services generation will need to Finance & Accounting Management be connected to the grid be connected to the grid Engineering Communications by 2010 Distribution Operating Centers by 2010 407 Storm/Trouble Response Regulatory & Legal Investment Strategy & Electric Delivery will Construction Electric Delivery will Planning Rates spend more than $360 Maintenance spend more than $360 293 Maintenance Strategy 283 REP Relations million to enhance Environmental Lab & Waste million to enhance Technology Management Community/Customer Management service quality through service quality through Relations System Protection advanced technology Transformer Shop advanced technology Engineering Standards ERCOT Interface Supply Chain & Sourcing System Planning Human Resources Fleet Management Performance Management Environmental Standards Safety & Training & Policy Information Management Work Management 81-90 91-95 96-00 01-04 06-11E TXU has established more than 100 metrics to ensure continued high quality utility TXU has established more than 100 metrics to ensure continued high quality utility service to customers service to customers 5 6 …And Support Opportunities To Consolidate The …That Will Provide A Platform To Help Meet The Growing Fragmented National T&D Infrastructure Infrastructure Needs Across The US… Share of gross transmission & distribution PPE Historical and estimated T&D capex 05; Percent 94-10E; Nominal $ billions A 100% = $684 billion B 23.3 24.1 5 Increased capital spend growth from 5 C 22.6 reliability upgrades, new generation 20.6 21.4 5 connection, congestion relief, organic 19.6 D growth and technology advances 5 17.3 14.8 15.4 15.5 4E 15.9 Other 15.0 15.4 14.0 48 12.3 13.0 14.2 14.5 IOUs 4F 11.8 13.7 10.4 10.7 10.7 (n=93) 13.2 4G 11.6 11.4 10.4 11.1 Trans- 4 10.3 10.4 mission 9.2 H 8.4 8.7 8.3 3 33 I 8.2 7.9 7.6 6.9 33 6.4 5.9 J Distri- 4.1 4.1 3.8 3.7 3.6 2.6 2.6 2.3 2.1 2.0 2.0 L K TXU bution 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 In addition, more than 500 public power utilities representing over $100 In addition, more than 500 public power utilities representing over $100 Growth in annual investment through 2010 is projected to be about 7% for Growth in annual investment through 2010 is projected to be about 7% for billion in transmission and distribution plant operate in the US billion in transmission and distribution plant operate in the US transmission and 3% for distribution transmission and 3% for distribution 7 8 Source: Energy Velocity
  • 16. TXU Energy: Growing Through Innovation And Superior Service TXU Energy Will Leverage Its Core Capabilities In North TXU Energy Is The Largest Competitive Retailer In The Texas To Grow Its Business… High-Growth ERCOT Market Large competitive customer base High growth To become the Oct 06; Millions of customers1 06-15E; Percent annual growth national leader 2.0 in competitive 2.4 2.3 2.2 1.7 2.1 Mission retail 1.9 1.6 electricity 1.4 1.3 0.7 0.2 0.2 0.1 TXU RRI Direct Stream First Gexa Continue Enter new FRCC WECC MRO NPCC Achieve Achieve 40% Energy Energy Choice ERCOT SERC RFC SPP developing markets to 1 Residential customers = meters industry- market share Source: NERC innovative grow $50 Sources: KEMA, company filings Objectives leading in ERCOT customer million Highly competitive market Strong demand (annual consumption) customer residential solutions and business ex- Oct 06; Number of certified ERCOT 04; Residential MWh/household service retail market offerings Texas retailers 15.0 15.2 15.0 14.8 14.6 14.3 14.2 Worry-free Service North Texas Customer Loyalty Long-Term 14.1 Programs Positioning Three-year Price Commercial 106 10.9 10.4 102 Protection Contract Strategy 95 9.9 Differential Care, Predictive Modeling 72 7.0 6.9 Multi-channel Value-Added Enhanced 55 43 Strategies Offering Strategy Churn Minimization Hedging Program Products Strategies Strategies Self-service Proprietary Strategic Technologies Technology Customer Multi-Channel TN LA AL SC MS VA FL TX US OH PA NY CA Initiative Development Acquisition Partnering Strategy 01 02 03 04 05 06 Initiative Initiative 1Top 8 states by consumption and others by population 1 2 Sources: PUC, KEMA Source: EIA …In The Most Competitive Retail Electric Power Market In …With Extremely Competitive Margins… The US… North Texas residential net margin1 Net incumbent switch rates 4.9X local phone Sep 06; Percent of load1 02-08E; Percent 1.8X long distance 30 85 “I know of no 73 “I know of no TXU Energy expecting 5-10% society that has society that has sustainable net margins 20 34 been marked by a been marked by a 19 large measure of 7 large measure of political freedom, 10 political freedom, Large Small-Med Residential TX Local Long and that has not Business and that has not Business phone after 4 distance after 4 years also used 0 years also used ERCOT retail switching something something Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Net residential incumbent switch rates comparable to a comparable to a -10 Oct 05-Sep 06; Percent of load1 free market to free market to organize the bulk 34 Over 10X the nine region average organize the bulk -20 of economic of economic activity.” activity.” -30 Milton Friedman 10 Milton Friedman 8 3 3 2 2 0.3 0.3 Since the market opened, margins have been volatile and low and are 0.0 Since the market opened, margins have been volatile and low and are TX NY MA CT PA DC MD OH CA NJ expected to remain competitive in the future expected to remain competitive in the future 1Texas data as of 09/30/06 per ERCOT - business switching reflects load whereas residential reflects customer counts; NJ as of 7/06 from NJ Board of Public Utilities; PA as of 10/05 from PA PUC; data for other states from July/August 06 KEMA Retail Energy Foresight Report and ranges from 3/31/06-7/21/06. Ohio excludes load Based on average customer usage of 15,000 kWh/yr. with PUC-approved residential load profile; net margin defined as PTB rate – cost of energy (historical margins based on avg. 1 attributable to municipal aggregation per OPUC August 2005 report. NYMEX monthly spot price, future margins based on 10/24/2006 NYMEX forward gas curves (average of forward 12 months) x 7.8 heat rate x assumed 27.5% for load shaping, Sources: KEMA, FCC, CERA, NJ Board of Public Utilities, Ohio PUC, ERCOT, Texas PUC 2003 Scope of Competition Data Responses congestion, line losses and other ancillary costs) – avg. wires cost (based on published TXU Electric Delivery rates, excluding clawback) – SG&A costs – bad debt – customer 3 4 appreciation bonus (2006) – other operating expenses – Income Tax at 35%.
  • 17. TXU Energy: Growing Through Innovation And Superior Service TXU Energy Is Focused On Delivering Industry-Leading …That Texans Strongly Support Customer Service… Awareness of competition1 Support for competition2 Jun-Aug 06; Average percent Jun-Aug 06; Average percent TXU is committed to best in class …and resolving customer issues 86 85 84 91 87 service… immediately 87 First call resolution1 Average speed to answer (ASA) 03-YTD 062; Seconds 03-YTD 062; Percent 268 65 TXU Center- AEP TXU Center- AEP 61 Target 57 ED point Central ED point Central 51 choice3 rating4 AREP customer by AREP price/value Jun-Aug 06; Average percent Jun-Aug 06; Average percent 88 88 94 89 86 88 39 11 11 Target 03 04 05 YTD 06 03 04 05 YTD 06 TXU Reliant CPL TXU Reliant CPL 1 Awareness defined as percentage of customers who are aware of their ability to choose a provider 2 Support of competition defined as percentage of customers who are aware of competition and who moderately/strongly support Texas electric competition 3 Customers aware of electricity competition who say they have chosen to stay with the AREP 1 Survey of customers who responded that issue was resolved in one call 4 Customers who perceive the value of service in relation to price paid as fair, good, very good, and excellent 2 YTD is nine months ended September 30 5 6 Source: TXU Energy, random digit dial among all households in these areas (n=~250 respondents per TDSP) …And Developing The Most Innovative Offering Of New TXU’s Objective Is To Profitably Grow Volumes In Texas Low Cost Products And Potentially Expand Outside Of Texas * 100% Renewable TXU’s retail business model will …and provide the foundation for growth Active residential single family offers from incumbent providers3 support load growth in Texas… outside of the Texas market 06; cents/kWh Active competition ERCOT residential load Potential competition 06-10E; TWh WTU PTB1 19 Average Undiscounted PTB 16.4 cents/kWh 33 CPL 30 PTB1 18 RRI Out of 4 17 11 * PTB territory * 16 FC TXU * PTB2 PTB 15 Low 14 Income In 26 22 13 territory 12 06 10E Market 38% 40% Residential customers also have other offers available from new entrants Residential customers also have other offers available from new entrants share 1 Denotes full, undiscounted Price to Beat. CPL and WTU provide existing Residential customers as of 6/30/06 a discounted PTB (Direct Electricity PlanTM) which is priced at 16.0 and 16.3 cents/kWh respectively in the two service areas. Both price points are included on the chart. 2 The combination of unique product offerings, competitive prices, and First Choice Power has filed for a PTB fuel factor adjustment that will result in a lower PTB if approved by the PUCT. The combination of unique product offerings, competitive prices, and 3 For Residential customers with an average usage of 1,500 kWh per month (average for single family), excluding any applicable one-time incentives or clawback differentiated customer service will allow TXU to grow its retail business credits. Time periods for prices and offers shown varies. Shows all known offers currently available for customer enrollment by incumbent providers in their differentiated customer service will allow TXU to grow its retail business historical service areas including renewable products as of 11/02/06. TXU Energy low income discount funded by TXU Energy. Source: TXU Energy, Power to Choose website (11/02/06), retailer websites 7 8
  • 18. Risk Management TXU’s Gas Position Is Derived From Its Baseload While The Fundamental Drivers Suggest Short-Term Generation Fleet Weakness In Natural Gas… ERCOT generation portfolio: average variable cost 04-06E; $/MWh Increases in forecasted US supply … …and storage levels at or near historic 200 05-08E; BCF/d highs At $6 gas: At $12 gas: End of October US natural gas storage 1.8 Power price = $48 Power price = $96 1.8 Gas price= $12.00 00-06; TCF Coal margin = $32 Coal margin = $80 BCF/d BCF/d 150 Nuclear margin = $43 Nuclear margin = $91 3.5 Demand 3.3 3.2 63.7 63.0 62.5 3.1 3.1 3.1 61.9 100 2.7 Gas price= $6.00 50 0 0 10 20 30 40 50 60 70 05 06E 07E 08E 00 01 02 03 04 05 06 Wind Nuclear Coal CCGT costs Gas/oil costs costs costs costs Cumulative Capacity (GW) …price of If gas price wholesale …TXU Power’s Gas prices set goes… power goes… margin goes… A more rapid ramp up in supply coupled with benign storm season has led to ERCOT power A more rapid ramp up in supply coupled with benign storm season has led to short-term weakness in the gas market prices 95% of the short-term weakness in the gas market time = “Long” Gas 1 2 …The Long-Term Fundamentals Continue To Support Demand Growth Will Drive Short-Term Heat Rate Historically High Natural Gas Prices Recovery, Which Will Be Reset By The TXU New Build Long-term heat rate ERCOT market 7X24 heat rates (HSC) US and Canada gas supply and demand Natural gas price forecasts Long-term heat rate to support CCGT 06E-11E; MMBtu/MWh (12 BCF/d LNG addition) to support coal new new build 06E-10E; $/MMBtu build @$2,000/KW1 10E; $/MMBtu @$600/KW1 12 $12.00 2010 demand 0.1 1.0 10 1.0 0.0 0.1 0.1 $10.00 NYMEX 8.3 8 8.0 $8.00 Price range=$5.50-$7.00 6 $6.00 $4.00 4 CERA EIA PIRA 2006E Demand Demand Wind CCGT Unmothballed Baseload 2011E $2.00 2 heat growth destruction generation generation gas peakers capacity heat rate increases increases additions rate $0.00 0 Details 2.1% yearly 1.1 GW of 3.6 GW 1.3 GW 2.4 GW TXU coal 07 08 09 10 11 12 0 10 20 30 40 50 60 70 80 90 demand destruction (9.1 GW) Cumulative Capacity growth S.A. Power 1.5 GW per (0.8 GW) BCF/d year While the gas curve is slightly backwardated, Long-term heat rates must increase to send the economic signal for While the gas curve is slightly backwardated, Long-term heat rates must increase to send the economic signal for fundamentals still support historically high prices sub-scale builders to add capacity fundamentals still support historically high prices sub-scale builders to add capacity 3 4 $6.68/MMBtu based on 2011 HSC gas curve as of October 24, 2006 1
  • 19. Risk Management TXU Has Hedged A Significant Portion Of Its Near-Term While Retail Served As A Resilient Hedge In 05 And 06, The Natural Gas Exposure Long-Term Sustainable Margins Are Expected To Be 5-10% North Texas residential net margin1 Natural gas position Heat rate position 02-08E; Percent 07E-09E; Million MMBtu 07E-09E; Million MWh 30 07E 08E 09E 07E 08E 09E Expecting 5-10% Current baseload 475 485 485 20 sustainable net margins Current baseload 62 62 63 9 GW new build in Texas - - 195 10 9 GW new build in Retail/forward (300)- (230)- (160)- Texas - - 26 sales1 (370) (330) (320) 0 Natural gas Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 07 08 09 hedges (110) (150) (260) Retail/forward (34)- (19)- (16)- sales1 (42) (27) (31) -10 Planned power sales - - (30)-(60) Planned power sales - - ~(7) Expected -20 underlying ~(5) to ~5 to ~40 to Expected position 65 105 230 underlying position ~20-28 ~35-43 ~51-66 -30 Retail served as a hedge to natural gas moves in 05 (in a rising gas price TXU has mitigated 1.5 billion MMBtu of natural gas exposure through 2012 Retail served as a hedge to natural gas moves in 05 (in a rising gas price TXU has mitigated 1.5 billion MMBtu of natural gas exposure through 2012 environment) and 06 (in a falling gas price environment) while the retaining the majority of the underlying heat rate position environment) and 06 (in a falling gas price environment) while the retaining the majority of the underlying heat rate position Based on average customer usage of 15,000 kWh/yr. with PUC-approved residential load profile; net margin defined as PTB rate – cost of energy (historical margins based on avg. 1 1 Assumes that over time the native market retail position acts as a short position while net margin remains within sustainable range of 5 to 10%, NYMEX monthly spot price, future margins based on 10/24/2006 NYMEX forward gas curves (average of forward 12 months) x 7.8 heat rate x assumed 27.5% for load shaping, reflecting changes in underlying commodity prices, heat rates, TDSP charges, and other costs to serve retail load. Ranges reflect estimated congestion, line losses and other ancillary costs) – avg. wires cost (based on published TXU Electric Delivery rates, excluding clawback) – SG&A costs – bad debt – one-time appreciation bonus (2006) – other operating expenses – Income Tax at 35%. potential impact of net margins outside of sustainable range. Includes wholesale power positions and fixed LC&I contracts. 5 6 In The Long Term, TXU Will Continue To Evaluate Portfolio …As Well As Capitalization Through Its “Cash Scrubber” Options To Manage Risks… Potential Option Description strategies Retained for Investment Life of plant Sell forward power for the life of the plant to Texas new 1 PPAs municipalities/cooperatives build PPA Cash TXU Business Flow process from Excess Excess Excess Units “Customer” Growth Financial Oper- Dividend Equity sell Reduce the corresponding risk exposure Texas new ations Capital Capital Flexibility Payout 2 down proportional to percentage of equity sale build equity and Asset process Yes Yes, if Yes, until Sales Yes in 06+ Ex-ERCOT Diversify the portfolio through participation in PJM expansion PV/ Investment Payout 30-40% Quality service EBITDA/Interest: PV/ Investment Payout 30-40% Quality service EBITDA/Interest: 3 Repurchases expansion multiple markets with different market dynamics threshold of 1.3 of operational Production >5.0 threshold of 1.3 of operational or Distributions Production >5.0 and potentially different gas and CO2 regulation 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% Technology Access to multiple technologies changes the risk Nuclear Debt/MEV: 30% to 50% 4 diversification exposure and profile relative to gas price and to 50% IGCC carbon risk Merger or Executing a merger or divestiture provides a Ex-ERCOT 5 Equity divestiture means to eliminate exposure across markets, generator Debt technologies, and regulatory regimes Holders Holders The cash scrubber will govern the allocation of operating TXU will continue to optimize its portfolio to manage risks The cash scrubber will govern the allocation of operating TXU will continue to optimize its portfolio to manage risks cash flow and the deployment of growth capital cash flow and the deployment of growth capital 7 8
  • 20. TXU Earnings Drivers The Revised 07 Outlook Reflects Pricing Actions In Retail, Commodity and Capital Allocation Impacts Have Reshaped Generation Investments And Generation Productivity The Earnings Power Earning Power Impact 07 11 Improvements May business plan 5.75 9.75-10.001 Consolidated – operational EPS walk-forward Previous 07E to Revised 07E; $ per share after tax Lower wholesale power price reduce Income Statement gross margins for TXU Power and Commodities Commodities Performance Driver Category 07E reduce TXU Energy’s gross margin as lower wholesale prices passed on to ~5.75 Previous 07E indicative operational earnings customer; PRB increases ~(0.20) ~(1.20) Operating revenues, Productivity gains O&M expense 0.10 Increased growth investment, reduced Capital Capital Retail pricing and marketing actions; demand Operating revenues, OCF, and higher prices for share Allocation response SG&A expense (0.25) Allocation repurchases reduce the # of share repurchases Technology and development investments SG&A, Interest expense (0.05) ~(0.15) ~(0.50) Generation growth investments - change in Change in diluted shares Selldown reduces risks and improves timing/size of share repurchases outstanding (0.15) Selldowns Selldowns capital returns but reduces EPS - ~(0.45) Revised 07E operational earnings outlook1 5.25-5.55 November business plan2 5.25-5.55 7.55-7.85 Operational earnings for 07E are expected to be lower due to the effects of lower Operational earnings for 07E are expected to be lower due to the effects of lower TXU’s new build strategy enables a 5-year growth trajectory of 8-10% TXU’s new build strategy enables a 5-year growth trajectory of 8-10% commodity prices on retail prices and technology and generation growth investments commodity prices on retail prices and technology and generation growth investments 1 2010 indicative earnings as of May 06 2 Indicative pro forma for 2007 and 2011 reflects current targets for the 11 new generation units currently planned in Texas. Throughout this presentation, 2007E operational earnings estimate (and subsequent years) excludes fees, expenses, and interest associated with debt that is part of the expected TXU Power Development nonrecourse financing package. 1 2007E operational earnings estimate (and subsequent years) excludes fees, expenses, and interest associated with debt that is part of the 1 2 expected TXU Power Development nonrecourse financing package. Indicative 07E-08E Growth Rate Reflects Impact Of Retail The Texas Build Program Provides Strong Growth Over The And Hedge Prices, Higher Fuel Costs And Capital Next 5 Years Allocation TXU indicative long-term operational EPS growth with ERCOT generation development pro forma 07E-11E; $ per share, percent Operational EPS indicative growth rate Performance Driver 07E-11E 07E-08E; percent 07E outlook 5.25-5.55 Commodity price movements (roll-off of 07 hedges, open position) (0.48) Performance Driver Income Statement Category 07E-08E Retail pricing and marketing actions (0.32) Retail prices/differential between 07 and 08 Coal and nuclear fuel prices (0.33) hedge price levels Operating revenues (5.0) Performance improvements, retail and T&D growth 0.43 Fuel costs Contribution margin (2.5) Share repurchases/capital allocation model 0.85 Contribution margin, O&M 11E indicative operational EPS – existing businesses 5.40-5.70 Dual outage cost at Comanche Peak expense (0.5) Indicative earnings from ERCOT power generation development1 2.60 Change in diluted shares Impact of ERCOT plant sell-downs2 (0.45) Share repurchases outstanding 5.5 11E indicative operational EPS including power generation development 7.55-7.85 07E-11E annual growth rate (percent CAGR) ~8 to 10% 07E-08E indicative growth rate1 (2.5) Estimated 2011E sensitivity to +/- $1.00 natural gas price move3 +/-0.65 Including the impact of the ERCOT development program, Including the impact of the ERCOT development program, TXU’s estimated 5-year annual growth rate is ~8 to 10% TXU’s estimated 5-year annual growth rate is ~8 to 10% 1 Indicative pro forma for 2011; assumes announced 11 new units in operation for full year. The indicative pro forma will change as EPC, financing, hedging, equity sell-down and other terms are finalized and as the permitting and construction process unfolds, among other factors. Reflects forward natural gas/power curves as of 9/30/06. 2 Assumes equivalent of 3GW sell-down and that proceeds from sell-down are deployed using the company’s capital allocation philosophy. 3 Estimated sensitivity including base business portfolio and new build program, net of natural gas hedges and planned forward power sales; assumes retail load acts as a partial short position while net margin remains within sustainable range of 5 to 10% 3 4 1 2007E operational earnings estimate (and subsequent years) excludes fees, expenses, and interest associated with debt that is part of the expected TXU Power Development nonrecourse financing package.
  • 21. TXU Earnings Drivers Difference In Growth Rate Relative To May 2, 2006 View Difference In Growth Rate Relative To Nov 05 EEI View Reflects Commodity Prices, Fuel Costs, And Growth Reflects Commodity Prices, Productivity Improvements And Investments The Expansion Of The ERCOT Program Indicative 11E operational EPS, current plan, vs. 10E operational EPS, May 06 plan 07E-11E; $ per share, percent Indicative 11E operational EPS, current business plan, vs. 10E operational EPS, Nov. 2005 plan 07E-11E; $ per share Performance Driver May 06 plan – 10E operational EPS 9.75-10.00 Performance Driver 10E vs. 11E Base business Nov. 05 EEI plan – 10E operational EPS 6.10-6.40 Lower wholesale prices and retail prices (0.33) Commodity price movements 0.10 Higher fuel costs (0.28) Fuel costs (0.25) Performance improvements 0.11 Productivity improvements 0.45 ERCOT plant development Change in ERCOT power generation development1 0.80 Lower wholesale prices (11 vs. 10 hedge pricing) (0.29) Change in diluted shares outstanding/interest expense 0.35 Lower wholesale prices (open position) (0.14) Current business plan - 11E operational EPS 7.55-7.85 Higher fuel costs (0.32) Higher production (full year all plants), other expenses 0.04 Impact of potential ERCOT sell-downs (0.86) Redeployment of capital from ERCOT sell-downs 0.40 Capital allocation (operating cash flow changes, growth investments) (0.48) Current business plan - 11E operational EPS1 7.55-7.85 1 1 As of November 05, only Oak Grove and Sandow 5 units planned; as of November 06, 11 new units planned for Texas market, with estimated 3 GW planned sell- See slide 4 for current plan assumptions. down. Also see slide 4 for other current plan assumptions. 5 6 The Ability To Grow EBITDA In A Backwardated Commodity Differences In Capital Allocation Model, Current Vs. May 06 Environment View Potential EBITDA 7-14% Cash available for investment/distribution, current business plan vs May 06 plan 7-14% 11E-15E; $ billions CAGR 07E-11E; Mixed measures CAGR Performance Driver Cash flows Incremental 11E cash flow available under capital allocation model $ mm 1,000 11.2 2.5 Higher share price for repurchases ($5/share) $ mm (450) Lower cash from operational earnings (primarily wholesale prices, fuel)1 $ mm (750) 2.5 Growth investments, 07E-11E2 $ mm (1,500) 1.0 6.2 ~6.7 0.5 Total change – cash available for investment/distribution $ mm (1,700) 11E EPS impact from capital allocation $ EPS (0.48) Estimated proceeds from equity sell-downs $ mm 1,500 11E EPS impact of share repurchases following sell-down $ EPS 0.40 Net EPS impact from capital allocation $ EPS (0.08) TXU Backwar- Core business TXU 2015E Advanced Advanced 2015E 2011E1 dated performance in Texas coal on gas coal on coal potential (including commodity improvements only opportunity opportunity ERCOT environment scenario new build) Successful execution of the build strategy could provide a solid long-term Successful execution of the build strategy could provide a solid long-term EBITDA growth strategy overcoming the backwardated commodity environment EBITDA growth strategy overcoming the backwardated commodity environment 1 Also includes cash impact of special bonus to customers of ~$170 mm pre-tax associated with one-time bonus at year end 2006, payable over three quarters. 1 See slide 4 for current plan assumptions. 2 Includes approximately $500 mm investment in retrofits to reduce emissions in current coal plants and an estimated $1 billion investment in growth initiatives. 7 8