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energy future holindings txu2006ar

  1. 1. NEXT HORIZON TXU Annual Report 2006
  2. 2. table of contents 1 Management’s Letter 10 At A Glance 12 TXU Leadership 14 TXU Board Of Directors 15 Financial Definitions 16 Regulation G Reconciliations 17 Form 10-K Inside Back Cover Shareholder Information Who We Are TXU Corp., a Dallas-based energy company, manages a portfolio of competitive and regulated energy businesses primarily in Texas. The competitive TXU Energy Holdings segment includes the TXU Energy retail electricity sales operations, the TXU Power electricity generation operations, and the TXU Wholesale energy markets operations.1 TXU Energy provides electricity and related services to more than 2.1 million competitive electricity customers in Texas. TXU Power has over 18,100 megawatts of generation in Texas, including 2,300 MW of nuclear and more than 5,800 MW of coal-fueled generation capacity. TXU Wholesale optimizes the purchases and sales of energy for TXU Energy and TXU Power and provides related services to other market participants. TXU Wholesale is the largest purchaser of wind-generated electricity in Texas and fifth largest in the United States. TXU Corp.’s regulated segment, TXU Electric Delivery, is an electric distribution and transmission business that uses superior asset management skills to provide reliable electricity delivery to consumers. TXU Electric Delivery operates the largest distribution and transmission system in Texas, providing power to three million electric delivery points over more than 101,000 miles of distribution and 14,300 miles of transmission lines. Visit for more information about TXU Corp. 2 FINANCIAL AND oPerATING hIGhLIGhTs 2006 $ millions unless otherwise noted 2005 % change Financial Data $ 10,856 Revenues $ 10,662 2 $ 2,552 Net income available for common stock $ 1,712 49 $ 2,592 Operational earnings $ 1,628 59 $ 5.46 Net income available for common stock (per diluted share) $ 2.50 118 $ 5.55 Operational earnings (per diluted share) $ 3.35 66 $ 1.670 Dividends declared (per share) $ 1.256 33 $ 4,954 Cash provided by operating activities $ 2,793 77 $ 4,976 Normalized operating cash flow $ 2,902 71 $ 2,679 Normalized free cash flow $ 1,798 49 21.7 ROIC based on adjusted operational earnings (percent) 15.5 40 6.4 EBITDA/interest (ratio) 4.9 31 2.1 Debt/EBITDA (ratio) 3.1 (32) operating Data 52,050 Retail electricity sales volumes (GWh) 58,176 (11) 2,182 Total retail electricity customers (thousands) 2,325 (6) 107,098 Electric energy delivered (GWh) 106,780 – 3,056 Electricity points of delivery (thousands) 3,013 1 7,262 Employees 7,615 (5) tXU energy Holdings is managed as an integrated business; however, for purposes of operational accountability and performance management, the 1 business segment has been divided into three operations, each of which is conducted through separate legal entities. this annual report includes certain non-GaaP (Generally accepted accounting Principles) financial measures that management uses to measure 2 performance. financial definitions and reconciliations of these measures to the most directly comparable GaaP measures are included on pages 15 and 16. see Management’s Discussion and analysis of financial condition and Results of operations in form 10-K.
  3. 3. Dear Fellow ShareholDerS, needs. This is perhaps TXU’s most exciting transformation in a history that has touched three centuries and been so vital TXU has been on a journey of transformation from a monopoly to the development of Texas. to a competitive business capable of meeting Texas’ high expectations for the new world of customer choice for a New world electricity. Three years ago, we began a process to become As Texas took the bold step to restructure the power a leading industrial company. The progress we have made sector eight years ago, culminating in full retail competition has improved our company and translated into financial on January , 2007, customers looked forward to the same success for investors and better service and more choices for investment, efficiency, and innovation in the electricity customers. While we still have much to do, I’m incredibly markets that competition has brought to other industries. proud of what our employees have achieved so far in One of the main advantages of deregulation was shifting TXU’s transformation. the embedded risks from the consumer to the power Now we are approaching the next horizon on our journey. companies competing in the state. Early in 2006, we launched the final phase of our turnaround, Like most in the industry, TXU initially stumbled in tackling our strategy to grow to meet the energy needs of Texas. the challenges posed by the uncertainty of the competitive Our plan included building nine gigawatts of new power while markets. By 2003, aggressive acquisitions and leverage left substantially improving our generation fleet’s environmental TXU with insufficient financial flexibility for the commodity performance. Soon after we announced this plan, it became risk we faced. This precarious position was exacerbated by the apparent from healthy public debate that many consumers, fact that our businesses were operating at mediocre levels. shareholders, and public stakeholders strongly objected. Once We had poor returns, too much debt, costly operations, and again, they raised their expectations for how competitive poor customer service. We were under-delivering to our power companies will meet their energy needs. customers, shareholders, employees, and public stakeholders. The U.S. power sector is at a crossroads as our constituents To turn TXU around, we had to focus on the fundamentals. challenge our industry to deliver low-cost power and, at the In 2004, we implemented a three-phase plan to meet our same time, improve environmental performance and achieve obligations to all stakeholders. In Phase , we repaired the greater energy independence. The long-term answers will balance sheet and aggressively restructured the company require long-term solutions, particularly through innovation to focus on our core power business in Texas. Phase 2 and investment in promising but challenging technologies. implemented a continuous performance-improvement To succeed in this environment of rapidly evolving demands program across the core businesses that resulted in record from the public, we must continue to transform TXU. power production and substantially better customer service I am convinced our proposed merger with an investor group and product innovation. During Phase 3, we continued to led by Kohlberg Kravis Roberts Co. and Texas Pacific drive three to five percent annual long-term improvement Group, two of the nation’s leading private-equity firms, will in reliability, efficiency, and service through our power provide significant value to shareholders and will position TXU generation, electric delivery, and retail operations. We also to become more customer centered, innovative, and technology focused on our growth strategy to power the future of Texas. driven to better meet Texas’ growing and diverse energy t x u Annual Report 2006 |
  4. 4. Right to left, John Wilder, txu chairman and CEO; usha-Maria turner, txu environmental regulation manager; and Matthew J. Pistner, Alcoa Primary Metals location manager, at the construction site of txu’s new 581-megawatt Sandow 5 power plant. this state-of-the-art facility, scheduled for operation in 2009, and the existing Sandow 4 unit will replace three older Alcoa generating units to provide reliable, cleaner power to Alcoa’s adjacent aluminum plant and to texas consumers. the massive project is providing jobs and increasing economic vitality for nearby Rockdale and other Central texas communities. a Better Company customers who previously qualified for a state assistance program. TXU Energy is the only retailer to consistently Our turnaround has made us a better company. Thanks to the provide this discount since the state redirected funding in hard work of employees and a very talented management 2005. Also, we have increased our market-leading investment team, TXU is now a top performer in the power sector. Equity in energy efficiency to a level that has averaged $46 million value has increased by 220 percent, and share price has annually, benefited over 66,000 customers, and saved improved by more than 350 percent (more than 480 percent 320 megawatts. Communities have also benefited from our using the merger price). The business is now focused on rejuvenated United Way/TXU Energy Aid campaigns. Each core power operations, and TXU has gained the respect of campaign has been award winning, record setting, and goal many investors and operators across the country. surpassing, providing over $5.4 million back to our neighbors. We have also improved on TXU’s already-stellar record TXU’s campaign contribution has tripled, the total employee of corporate social responsibility. I am proud of our gift has virtually doubled, and membership in the United environmental performance. At the coal-fueled plants, Way Tocqueville Society, which comprises individuals employees have implemented innovative technologies to lower who contribute $0,000 or more annually, has increased emissions and improve fuel efficiency while operating the substantially. In return, United Way of Metropolitan Dallas plants at record production levels. We have also continued to has honored TXU with its Best in Campaign and Best New lead the way for renewable energy in Texas. Our purchases Alexis de Tocqueville awards (2004), CEO of the Year award have helped make Texas the nation’s largest producer of (2005), and Spirit of Caring, Rising Star, and Pacesetter wind-generated energy and TXU the state’s largest purchaser awards (2006). of wind power, with a commitment to double our contracts. Overall, we can be proud of what we have achieved during In addition, our innovative land reclamation practices were our turnaround. It will provide a good foundation to better recognized in 2006 with the mining industry’s highest honor, respond to the new competitive marketplace and the changing the U.S. Department of the Interior’s Director’s Award. and diverse needs of our customers. Over the past three years, we have reinvigorated TXU’s commitment to communities with a significant increase in a Volatile Year funding for bill-payment assistance, energy-efficiency Although we met Wall Street’s expectations in 2006, the programs, and philanthropy. One of the first turnaround volatile energy commodity markets challenged our financial actions was a pledge to provide $5 million over three years performance. The year saw a sharp drop in natural gas prices to TXU Energy Aid, TXU’s flagship assistance program. and a decrease in electricity consumption by our customers, This fourfold increase in funding has helped provide which negatively affected our performance versus plan. assistance to over 74,000 families. We have also committed Still, operational earnings were 59 percent above last year’s to funding up to $25 million in discounts for low-income 2 | t x u Annual Report 2006
  5. 5. PerFormaNCe SCoreCarD 2006 Performance Metric Measure 2003 % Improvement FINaNCIal PerFormaNCe2 5.55 450 Operational earnings per share $/share .0 4,976 168 Normalized operating cash flow $ millions ,860 2,679 212 Normalized free cash flow $ millions 860 21.7 234 Return on invested capital percent 6.5 6.4 113 EBITDA/interest ratio 3.0 oPeraTIoNal eXCelleNCe 43,837 6 Lignite generation gigawatt-hours 4,3 19,795 12 Nuclear generation gigawatt-hours 7,77 79.1 (7) SAIDI3 minutes 74.2 0.10 62 Safety4 rate 0.26 2,192 21 Total operating costs and SGA expenses5 $ millions 2,773 3,096 29 Fixed costs6 $ millions 4,359 marKeT leaDerShIP 11 96 Call answer time seconds 268 2.7 50 PUC complaints # thousands 5.4 1.0 44 Retail bad-debt expense/retail revenue percent .8 rISK/reTUrN mINDSeT 393 – Total shareholder return (3-year) percent (40) Based on actual 2003 financial results including subsequently discontinued operations. 1 See financial definitions and Regulation G reconciliations on pages 15 and 16. 2 System Average Interruption Duration Index: the number of minutes an average customer’s power is out during a year. 3 Based on Lost time Incident Rate: the number of injuries requiring time away from the job per 200,000 employee hours worked. 4 2003 includes $477 million related to discontinued operations. 5 Includes non-variable operating costs and SGA expenses, interest expense, and maintenance capital expenditures. 6 t x u Annual Report 2006 | 3
  6. 6. TEXAS HAS A DYNAMIC, HIGHLY COMPETITIvE RETAIL ELECTRICITY MARKET Sixty-two percent of residential customers have switched to a non-price-to-beat (PtB) product from their retail electric provider (REP), and 74 percent have made an observable choice.1 26% have not observably made a choice 37% have switched to competitive retailers 3% have chosen PTB from incumbent REP via switch 0% have chosen PTB from incumbent REP via move-in 25% have chosen a non-PTB product from incumbent REP Data is through February 28, 2007. Numbers do not add up to 100% due to rounding. 1 Source: Letter from Bret J. Slocum to Public utility Commission of texas, March 21, 2007. record levels, reflecting restructuring and performance cash flow and free cash flow have improved more than 65 improvements and the effectiveness of our risk-management and 20 percent. Our returns have also improved dramatically. program to hedge natural gas. While performance was at the Return on invested capital, which is a fundamental measure low end of our guidance and share-price performance trailed of how well we use the money we invest in our businesses, our peer group by over 50 percent, shareholder return since has more than tripled from 6.5 to 2.7 percent and is now top 2004 continues to rank in the top decile. But as we transform decile. Strong credit metrics are key to our systematic process from a traditional utility to a high-performing industrial of allocating capital. EBITDA/interest and debt/EBITDA, two company, delivering a consistent pattern of execution across key financial flexibility measures, have improved by 3 all our businesses will be critical. We must get to the point and 55 percent over the course of three years. Our improved where we hit all our targets all the time. cash flow, returns, and financial flexibility all signify a much stronger company. Turnaround Progress Operational Excellence We’ve made good progress in The company we have built is far from finished, but over the improving our operations and working more safely. Under the past three years, TXU’s turnaround has created more value leadership of Mike Greene and the TXU Power team, the than in the 20 years preceding it. In assessing our progress performance of our baseload solid-fuel generation fleet versus where we were in 2003, we have followed a rigorous (nuclear and coal plants) has improved each year. In 2006, it management approach that measures our performance against achieved its highest annual production. That translates into the hallmarks of the best industrial companies: operational an outstanding eight percent improvement relative to 2003. excellence, market leadership, a strict risk/return mindset for Last year, Mike Blevins, Rafael Flores, Mitch Lucas, and all key business decisions, and performance management. the rest of the nation’s top nuclear team also achieved the We believe that executing against these elements is necessary highest annual production in the history of the Comanche for delivering top-quartile financial and operating performance. Peak nuclear plant, along with the plant’s shortest refueling A high-level version of the comprehensive scorecard we have outage. Richard Wistrand, Jim Dixon, Ric Federwisch, used to monitor our performance against where we were in 2003 Gerry Pearson, and their teams contributed to coal-fleet appears on page 3. Here are my notes about how we’ve done: performance that was just shy of the 2005 all-time record. Financial Performance Our financial performance has The TXU Operating System, our method of lean been one of our more significant areas of progress since manufacturing and continuous performance improvement, 2003. Improvement in our cash flow measures has resulted in is helping TXU Power match the long-term, high-performance top-decile performance within the industry for operational trends across other competitive heavy industries. Steve earnings growth and operating and free cash flow. Operational Kopenitz and his team first applied the TXU Operating earnings have improved four and a half times, while operating System to the coal and nuclear operations, and now Paul 4 | t x u Annual Report 2006
  7. 7. COMPETITION HAS SPURRED AN INCREASING RANGE OF INNOvATIvE, CUSTOMER-DRIvEN BENEFITS FOR TEXANS Pre-restructuring Early restructuring Future 100% Renewable Multi-year Rate Time of Use Reduction Appreciation Prepaid Service Gas Tracker Bonuses One Simple Savings PTB Discount Rewards+ regulated Term Savings Energy Monitor price Summer Savings Indexed Savings Renewable Freedom Plan Rollover Surge Protection Weather Refund 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Texas retail competition begins Today Source: PuC, retailer Web sites. Market Leadership We have made good progress toward Dowden, who joined Mike’s team in 2006, is rolling it out to the rest of the company. achieving strong market performance in spite of the volatile At TXU Electric Delivery, Tom Baker, supported by Brenda commodity environment. Market-leading service plans, Jackson’s team, drove leading performance in 2006 in five cost management, and customer service improvements have out of seven key Public Utility Commission of Texas market highlighted TXU Energy’s progress as Jim Burke and his team metrics, and favorability increased 7 percent with the prepared for full retail competition. A retail price increase business’s retail electric providers. Solid cost management by in January 2006 that was driven by a sharp rise in natural gas Rob Trimble, Brenda Pulis, and others achieved top-decile prices helped us reach indicative long-term residential net performance for OM per megawatt-hour delivered, helping margins of 5 to 0 percent. These margins are finally support wires rates that are seven percent below the state comparable to margins achieved by retailers in other industries, average. Reliability performance remains top quartile but has many of which face significantly less volatility and risk. slipped in the past two years. It must get better. I am confident In just a short time, Texas has developed a dynamic, the three-year capital expenditure and technology program highly competitive electricity market that has delivered real Jim Greer is leading will allow us to reduce outages to 60 savings and innovative services to customers. With the launch minutes per year by the end of the decade. Under this plan, of 3 new customer offerings in 2006, TXU Energy offers more we are developing the nation’s first broadband-enabled electric choices to customers than any other provider in North Texas “smart grid,” a digitally controlled, intelligent delivery system. and has three times more products than any other incumbent We are in the vanguard of utilities seeking to improve service, provider markets in its traditional area. lower costs, and increase efficiency through technology. Customers can save up to 0 to 5 percent and choose what Our emphasis on driving down costs has paid off. OM is important to them from a wide range of “Pick Your Plan” expenses are 2 percent lower than in 2003, and fixed products and services that include cost savings, flexibility, costs are 29 percent lower. In a commodity business like ours, control, protection against price increases, green energy, and cost leadership is not an option; it’s a must. innovative energy-management tools. No longer are customers Let me close out the operational section with a word about shackled by a one-size-fits-all regulatory approach to our top achievement – the dramatic improvement in safety service offerings. Competition will continue to drive market performance. You cannot be a high performer without a priority innovations and offerings, creating even greater benefits on safety. We are top decile in lost-time rate, a key metric, for customers. Our plan to extend programs to manage and the trend in all our safety metrics, already in the top demand in 2007 will provide opportunities for further savings quartile, is headed to industry leading. We had our best safety through lower consumption or changes in consumption by year in history in 2005 and a very good year in 2006, but time of day. Assuming we close our planned merger, we have being high performing means we must always get better. also committed to a price reduction of 0 percent and price t x u Annual Report 2006 | 5
  8. 8. THE ERCOT WHOLESALE MARKET HAS ROBUST COMPETITION ERCOt Capacity Market Share by Company1 1998 ERCOt Capacity Market Share by Company2 2006 Suez Suez Tenaska Tenaska (Tractebel) (Tractebel) TXU TXU 3.5% 3.5% AEP AEP 1.2% 1.2% 18.2% 18.2% 10.9% 10.9% Wind Farms Wind Farms 2.5% 2.5% Austin Energy Austin Energy PSEG PSEG 5.7% 5.7% Mirant Mirant 2.4% 2.4% Other Other 0.7% 0.7% 18.1% 18.1% TXU TXU LCRA LCRA 37.1% 37.1% 2.4% 2.4% City of City of City of City of San Antonio San Antonio San Antonio San Antonio 8.3% 8.3% 7.4% 7.4% Brazos Brazos 2.2% 2.2% LCRA LCRA Austin Energy Austin Energy 3.6% 3.6% Calpine Calpine 3.9% 3.9% ANP ANP 7.8% 7.8% 2.7% 2.7% FPL FPL 5.3% 5.3% Reliant Reliant Sempra Sempra AEP AEP Direct Direct 27.2% 27.2% 3.7% 3.7% 0.9% 0.9% 0.3% 0.3% NRG NRG 16.8% 16.8% Depicts summer 1998 peak installed capacity by owning company. 1 Depicts summer 2006 peak installed capacity; includes all announced mothballed, retired, and planned capacity. 2 protection through September 2008 for residential customers of risk. We peeled back the bark to expose arrangements that in North Texas who haven’t already selected one of our translated into big risks, such as ineffective and out-of-the- other lower-priced offerings. This reduction is expected to money hedges and underfunded maintenance programs. In provide over $300 million in annual savings. Continuing addition, David Poole and the legal team resolved billions of to establish TXU Energy as the most innovative retailer in the dollars in potential litigation. Texas power market is absolutely critical for success in TXU’s business model is inherently volatile. Our solid-fuel the fully competitive market. Great work, Dave Hennekes, generation represents one of the largest commodity positions in Dan valentine, and a host of others. North America during a time of high volatility in the natural gas Superior service is also critical to success in a competitive market, which dictates Texas’ power prices. Tight supply market. This is an area where we can never stop raising our in this market creates a structural advantage for TXU, but only game, but it’s extraordinary how far we’ve come. Since 2003, if we stringently manage the risk. One of our most significant the average call answer time in our phone centers has dropped accomplishments during the turnaround is our commodity-risk 96 percent from nearly five minutes to an average of hedging program, David Campbell’s masterpiece. This long- seconds. And Kris Hillstrand and his group maintained this term program reduces exposure to changes in future electricity world-class status while handling over a million additional prices due to changes in the price of natural gas. It substantially calls in 2006. We have also reduced complaints to the Public reduces commodity exposure inside TXU and enables us to Utility Commission by 50 percent and improved our customer increase the certainty of our cash flows. The program has satisfaction metrics despite higher prices in 2006, increased already demonstrated huge benefits. As of the end of 2006, it call volume, and tougher credit policies that have helped had preserved more than $ billion in value in the face of a reduce bad debt as a percentage of revenue by 44 percent over commodity price drop of more than three dollars in 2006 alone. the turnaround. I’m proud of the progress TXU Energy has One of the largest such programs in the country, it requires close made in building its business. coordination between Mike McCall’s TXU Wholesale team and our risk and treasury groups, and they’ve done a great job. Risk/Return Mindset We’ve come a long way in monitoring, We have really honed our risk/return strategy, as our recognizing, and dealing with risk. Much of our work has cumulative shareholder return shows. Total shareholder return been about stripping TXU’s risks down to just those that are for the three-year period through 2006 was 393 percent, inherent in our core business, putting in place ways to manage compared to minus two percent for the 0 years prior to the them, and eliminating, reducing, or mitigating the rest. From beginning of the turnaround. Today, our risk/return mindset is the first day, we started improving our business mix and much better, but we are far from finished. We must continue performance because that’s the best way to reduce risk. We to refine our approach to managing and understanding the sold businesses that were non-core or underperforming, which risks that impact our business, including the dynamics of generated billions of dollars and eliminated a huge amount 6 | t x u Annual Report 2006
  9. 9. TXU CUMULATIvE TOTAL RETURNS IMPROvED SUBSTANTIALLY WITH THE TURNAROUND Cumulative total Returns for the Five Years Ended December 31, 2006 270 260 2001 2002 2003 2004 2005 2006 250 240 230 220 txu Corp. 100 41 54 149 238 265 210 200 190 180 170 SP 500 Index 100 78 100 111 117 135 Dollars 160 150 140 130 SP 500 Electric 120 100 85 105 133 157 193 utilities Index 110 100 90 80 70 60 txu Corp. SP 500 Index SP 500 Electric 50 utilities Index 40 2001 2002 2003 2004 2005 2006 public policy, which, frankly, we missed in 2006. Our proposed processes that will help our businesses, management, and SP 500 Electric TXU Corp. SP 500 Index merger partners will really help us here. Utilities Index employees grow. The top 60 officers have been through intensive assessment and development, and that information Performance Management Performance management has been incorporated into performance commitment letters – critical management systems and processes, people, culture, for each officer. The initial set of performance-management reputation, and controls – is what drives long-term business tools, which we rolled out in 2005, is maturing and becoming performance. Because performance management involves embedded into our culture. changing human behavior, it is the hardest hallmark to In a year punctuated with tough business and political improve. Building a great business takes top leaders, so issues, TXU employees continued to improve efficiency and we began our turnaround by transforming our management. work more productively. Today, we have approximately half About two-thirds of the officers with TXU three years ago the employees we had at the end of 2003, yet we have grown have departed, and more than 30 exceptional new executives operational earnings per share by 450 percent and market have joined us, including Riz Chand and his human capitalization by more than 220 percent. Our plants run resources team, who have really driven professionalism in better, we deliver reliable electricity, we have lowered our performance management. During 2006, we refocused OM costs, and our customers are better served, all thanks Mike Childers as CEO-Development, a role he is uniquely to the best people in the industry. qualified for, and we hired Chuck Enze as CEO-Construction and began to build a world-class construction-management Tone From The Top team. We promoted Jonathan Siegler to the senior leadership Much of our turnaround success has been due to the diligent team as the head of corporate strategy. We have also recruited and highly professional work of our board of directors and or developed strong leaders below the senior level, especially the guidance and wisdom they have brought. One of our first in retail sales, power plant development, lean/TXU Operating turnaround goals was to establish a tone of best-practice System, engineering/operational readiness, legal, strategy, accountability, transparency, and ethical compliance from the and human resources. very top of the organization. We created the role of corporate Setting high-performance standards and targets for all our governance officer, and after a national search, hired Kim businesses has also been a priority. We now have fact- Rucker. She and her team have reformed board practices and based benchmarks integrated into a true five-year plan. The company policies to assure regulatory compliance, effective operating plan is very tightly linked to our performance- approval structures, transparency, and good balance between management objectives, which is real progress compared to management and the board. The board has also recruited where we started. four new high-caliber, independent directors. Today, the TXU On the human performance side, we have put in place board is a much more effective, sophisticated, and capable more thorough and disciplined management-development t x u Annual Report 2006 | 7
  10. 10. group. They are far more independent with a breadth of industry and technical knowledge. I know I speak for the board experience and professional diversity that we couldn’t do in expressing appreciation for the opportunity to work with without as we meet challenges and make decisions outside and learn from Gail. All the TXU directors have my sincerest our traditional industry environment. appreciation for their contribution to TXU’s turnaround As with TXU’s management team, the board has provided success. Each of them has enlarged my vision and deepened strong counsel in many areas essential to the success of our my knowledge. turnaround. With his background as former chief financial The Next horizon officer at Centex, Lel Echols, one of TXU’s new board members, is a master at restructuring, risks, controls, and Our move to private ownership is the planned next step in governance. We’ve called on Kerney Laday’s management TXU’s ongoing transformation into a top industrial energy consulting and career in customer operations at Xerox for company. Kohlberg Kravis Roberts Co. and Texas Pacific advice on how to make our customer service and governance Group are truly world-class investors appropriate for a best in class. As our lead director, Jack Little’s deep company focused on building the industry leadership to tackle experience at Shell has provided invaluable insight into the substantial opportunities and challenges in our industry. commodities, construction, risks, and worldwide energy The challenges the energy sector faces today are vastly markets. Gerry Lopez, who joined our board last year, different from just a few years ago. The industry has brings incredible expertise about people, innovative people transformed very quickly from a regional business into a systems, public policy, and social responsibility from his national and even global one. Until recently, for instance, TXU years at Starbucks and other high-performance cultures. Jim mined all its coal here in Texas. We are now shipping coal Oesterreicher’s career at JCPenney gave him the expertise to ,500 miles from the Powder River Basin in Wyoming and be a true leader in marketing and human performance, two have evaluated importing coal from South America and key areas of successful companies. His years on Wall Street China. We are now competing against a world market for key with leading investment banks and private equity have made materials and equipment for our new plants. This new Michael Ranger the go-to person for deep industry, finance, world includes competition for scarce materials not just with and strategy knowledge as well as business transformations. other companies but with other countries like India and China. Len Roberts, another new independent director, brings great Natural gas prices, which set the price of power in Texas and savvy from RadioShack about marketing, public relations, other markets around the U.S., are linked not only to local human resources, and innovation. With his background at production but production in countries as far away as Russia Texaco, Chevron, and United Airlines, Glenn Tilton, our and Qatar. Ships carrying natural gas (in liquefied form) will fourth new director, is a true turnaround expert, with expertise actually make decisions on where to deliver the gas based on in commodities, risks, public policy, and restructuring. real-time price signals across the U.S., European, and Asian Finally, I want to thank Dr. Gail de Planque for her years of markets. Finally, the emissions discussion has moved from dedicated service to the board. As a consultant to the energy a local discussion of sulfur dioxide, nitrogen oxides, and and nuclear industries and a former commissioner of the U.S. mercury to a global discussion of greenhouse gases. While Nuclear Regulatory Commission, Gail brought a rare depth of the U.S. produces about 25 percent of the world’s man-made 8 | t x u Annual Report 2006
  11. 11. carbon dioxide emissions, countries like China may surpass Finally, the long-term energy answer will likely require this nation within a few years. Meeting energy challenges restructuring the entire fragmented power sector to create in this new environment will require a spirit of innovation, stronger, more efficient, and financially sound companies. expertise across the national and global markets, and This restructuring will be led by companies with a track record transactional excellence. Frankly, these are critical of transactional excellence. From maximizing liquidity to capabilities that TXU just doesn’t have today. Our proposed streamlining organizations to aligning incentives, our proposed new owners are expected to add them to our company. new owners have demonstrated the ability to efficiently execute Meeting customers’ demand for economical, reliable, and large and complex transactions across multiple industries environmentally efficient power requires innovation akin and countries. This skill could prove to be invaluable as the to electricity’s initial commercialization back at the turn of industry likely reshapes itself over the next decade. the 20th century. The right energy answer will take years The investor group also has a history of working with to unfold and require access to a source of capital willing to management teams to build great businesses. Their patience, invest in new forms of sustainable energy and products risk tolerance, and sophistication will enable TXU, as a to help customers use electricity more efficiently. TXU’s private company, to create a superior business model and a proposed new owners have a proven record of innovation and refocused, environmentally sensitive strategy to respond to the long-term capital deployment across many industries. uncertain industry environment. With their capital, expertise, The answer is going to require knowledge and credibility and resources, we can increase our focus on reliability, lower on the national and global stage. From forming international prices, outstanding customer service, innovative products, and sourcing partnerships to worldwide RD networks, the investments in long-term, environmentally sound technology. investor group brings a global network of partners and TXU is a proud company with a strong heritage that has relationships that will help TXU create a true competitive served Texas for more than 20 years. As shareholders, you advantage in the sector. The addition of board members like have played a critical role in TXU’s development and success. William Reilly, former EPA head and chairman emeritus I give you my sincerest thank you for your support. I am of the World Wildlife Fund, and an advisory chairman to honored to serve you. I hope you share in our excitement about the investor group like James A. Baker III, former U.S. this new direction in our company’s history. I think the view secretary of state, brings increased credibility in national and will be bright from TXU’s next horizon. international discussions surrounding energy security and the environment and will help us constructively shape national energy policy. Donald L. Evans, former U.S. secretary of commerce; James R. Huffines, chairman of the University of Texas Board of Regents; and Lyndon L. Olson Jr., former Texas state representative and former U.S. ambassador to Sweden, will also bring unique and powerful insights to C. johN wIlDer help push the company forward as members of our board of Chairman and CEO directors following the merger. t x u Annual Report 2006 | 9
  12. 12. TXU’S BUSINeSSeS aT a GlaNCe 2006 statistics unless noted. STrUCTUral aDVaNTaGeS TXU Power 2nd-largest competitive output ComPeTITIVe GeNeraTIoN/wholeSale/ Low-cost lignite reserves CoNSTrUCTIoN/DeVeloPmeNT 63 TWh of baseload production in gas-on-the- margin market Industry-leading performance and reliability Access to largest ERCOT generation fleet Incumbent regulatory advocacy and market design expertise 2.2-GW active development program TXU eNerGY Large-scale competitive retailer ComPeTITIVe reTaIl Loyal customers Strong brand recognition Superior service TXU eleCTrIC DelIVerY 6th-largest TD company reGUlaTeD TraNSmISSIoN DISTrIBUTIoN Top-quartile costs and reliability High-growth region Efficient capital recovery No commodity exposure No retail customers 0 | t x u Annual Report 2006
  13. 13. mISSIoN ProGreSS IN 2006 Meet customers’ power needs through Achieved TXU’s highest annual nuclear power production, record refueling outage, excellent cost control operation, origination, and construction of the most efficient and environmentally Achieved TXU’s second-highest coal power production while delivering on-plan cost friendly supply technologies Progressed toward industry leading since 2003, achieving an 8% improvement in baseload generation through the industry’s top employees and unprecedented success of the TXU Manage customers’ risks through wholesale Operating System products Achieved top-decile safety Become the safest and most productive operator of baseload generation in the U.S. Committed to retrofit coal-fueled generation fleet to reduce key emissions 20% below 2005 levels Initiated engineering design and pre-construction activities for 2.2 GW of new capacity Deliver best-in-class energy management services to internal and external customers Become a national leader in competitive Continued to provide world-class customer service: call answer time averaged seconds, a 96% improvement vs. 2003, and call satisfaction improved 0% vs. 2005 retail electricity by achieving industry- leading customer service and creating an Launched innovative “Pick Your Plan” service offerings, giving customers unprecedented choice innovative set of new products and and benefits, including control, savings, flexibility, price protection, green energy, and energy- usage tools services to meet customers’ needs, including using electricity more efficiently Increased number of customers in markets outside the traditional service area by 6% in 2006 Reduced SGA as a percentage of revenue vs. 2005 Remained the leader in assisting low-income customers, including distributing $5. million through the TXU Energy Aid program to assist customers with bill payment Continued up to $25 million in discounts for low-income customers, remaining the only retailer to consistently provide the discount since state funding was redirected Become the most economical and Achieved top-quartile reliability reliable transmission and distribution Continued to execute 3-year, reliability-centered capital expenditure plan, funded 75% through service company in the U.S. through growth or tracker mechanisms a commitment to redefine top-decile Constructed 300 circuit miles of transmission line and 500 circuit miles of distribution line reliability and cost performance Continued to transform the network into the nation’s first 2st-century broadband-enabled smart grid, including installation of over 23,000 advanced meters, 2,090 automated capacitor controls, and 225 automated smart switches Continued superior cost management, achieving top-decile performance for OM per MWh delivered, with wires charges 7% below the state average Achieved top-decile safety performance t x u Annual Report 2006 |
  14. 14. TXU leaDerShIP john wilder Shawn Glacken TXU wholeSale Tim hogan CEO Environmental Investor Relations mike mcCall ricky Goodwin Tony horton CEO – TXU Wholesale TXU Power Big Brown Kosse Mines Treasury manu asthana mike Greene wayne harris Scott leonard Asset Management CEO – TXU Power Monticello Generation Planning matt Goering Brian Ballard Steve horn Gayl mcmahon Fuel/Emissions Generation Development Operational Readiness Financial Reporting Kim Koonce john Barnett Freeman jarrell Barbara raxter Human Resources Winfield Mine Big Brown Generation Talent Change joel minton mike Blevins Don johnson Stan Szlauderbach Power Trading Nuclear Operations Asset Management Controller Bill moore Tim Bosecker Steve Kopenitz Gina Thomas General Counsel Martin Lake Mines Operational Readiness Tax Counsel Steve muscato Barry Boswell mitch lucas Gas Trading Martin Lake Generation Nuclear Engineering mike reed GeNeraTIoN ronald Bullock jeff mason Fundamentals DeVeloPmeNT Safety Thermo Mine Dung Tran mike Childers jim Dixon Del mcCabe Commercial Risk CEO – Generation Development Gas Generation Mining Operations jeff agee Paul Dowden Tony meyers Finance FINaNCe aND TXU Operating System Engineering Support PlaNNING Kevin Bohn ed elkins Simon Neicheril Development David Campbell Business Continuity Finance EvP Acting CFO David Faranetta Gerry Pearson Drew Cameron Finance Mining Operations Internal Audit ric Federwisch Steve Skidd riz Chand Coal Operations Sandow Generation SvP – Human Resources rafael Flores molly Thompson Nuclear Operations Human Resources Terry Gardenhire richard wistrand Mine Maintenance Fossil Operations 2 | t x u Annual Report 2006
  15. 15. ray harris TXU eNerGY TXU eleCTrIC Brenda Pulis DelIVerY Development TD Asset Services jim Burke Brad jones Curt Seidlits Tom Baker CEO – TXU Energy Development Governmental Affairs CEO – TXU Electric Delivery Patrick Dailey Gregory Kelly john Self Deborah Boyle Human Resources Origination Office of the Chairman Environmental/Safety john Detzel jeff Simmons Bob Shapard David Davis Large Business Markets Development Strategy Finance David hennekes mark ward Cheryl Stevens Debbie Dennis Residential Markets Development Diversity Outsourcing Management Kris hillstrand Brett wiggs rob Trimble Debbi elmer Customer Operations Development Operations Human Resources Nancy Perry David Gill Small/Medium Business Markets Regulatory matt Pond GeNeraTIoN STraTeGY jim Greer Finance CoNSTrUCTIoN merGerS Asset Management aCqUISITIoNS Brian Tulloh Chuck enze mike Guyton Corporate Affairs jonathan Siegler CEO – Generation Construction Customer Operations SvP – Strategy MA Dan Valentine michael Baur Brenda jackson Marketing Services amanda Colpean Planning Business Operations valuation Todd Kerschbaum Charles jenkins Tom Grace Projects GeNeral CoUNSel Grid Management Strategy MA Bill luyties David Poole Paul mcKaig lillian meyer Projects EvP General Counsel Regulatory Affairs valuation Analytic Ken Smith Safal joshi Paul Plunket Inderpreet Sangha Construction Management Corporate Legal General Counsel valuation Analytic Norman Spence Kim rucker Projects Corporate Secretary Von Thompson john Stewart Projects Litigation lisa winston Employment Law t x u Annual Report 2006 | 3
  16. 16. TXU BoarD oF DIreCTorS Listed in order as pictured below, from left to right. lelDoN e. eCholS Dallas, Texas mIChael w. raNGer New York, New York Director since 2005, 51. Director since 2003, 49. Private investments since July 2006. From June 2000 to June Senior managing director of Diamond Castle Holdings, LLC (private 2006, executive vice president and chief financial officer of Centex equity investments), since 2004. From 2002 to 2004, consultant Corporation (home builder). From 997 to 2000, managing partner to Credit Suisse First Boston Private Equity, overseeing private equity of Arthur Anderson LLP’s audit practice for North Texas, Colorado, investments in the energy and power industries. From 2000 to and Oklahoma. Committees: 1, 6 200, managing director, investment banking, of CSFB. From 990 to 2000, managing director and group head of global energy and KerNeY laDaY Dallas, Texas power group, investment banking, of Donaldson Lufkin Jenrette Director since 1993, 65. Securities Corporation. Committee: 3 President of The Laday Company (management consulting and business leoNarD h. roBerTS Fort worth, Texas development) since July 995. From January 99 to June 995, vice Director since 2005, 58. president of field operations of the Southern region of U.S. customer operations of Xerox Corporation and from 986 to 99, vice president Retired chairman of the board of RadioShack Corporation (consumer and region general manager. Committees: 2, 3, 4, 6 electronics) since May 2006. From May 999 to May 2006, chairman of the board of RadioShack Corporation, from January 999 jaCK e. lITTle houston, Texas to May 2005, chief executive officer, and from December 995 to Director since 2001 and lead independent director since 2004, 68. December 2000, president. Also director of J.C. Penney Company, Inc., Retired president and chief executive officer of Shell Oil Company and Rent-A-Center, Inc. Committees: 1, 2, 6 (oil and gas exploration) since July 999 and from 998 to 999, GleNN F. TIlToN Chicago, Illinois president and chief executive officer. From 995 to 998, president and Director since 2005, 59. chief executive officer of Shell Exploration Production Company. Also director of Noble Corporation. Committees: 1, 2, 5 Chairman, president, and chief executive officer of UAL Corporation and United Air Lines, Inc., a wholly owned subsidiary of UAL GerarDo I. loPez Seattle, washington Corporation (air transportation), since September 2002. From May Director since February 2006, 47. 2002 to September 2002, non-executive chairman of Dynegy, Inc. Senior vice president and president of Global Consumer Products of From October 200 to August 2002, vice chairman of ChevronTexaco Starbucks Corporation (retail coffee products) since September 2004. Corporation. From February 200 to October 200, chairman and chief From 200 to 2004, president of Handleman Entertainment Resources executive officer of Texaco Inc. and from 997 to 200, president of and from 2000 to 200, senior vice president and general manager. the global business unit. Also director of UAL Corporation and United From 999 to 2000, president of the international division of Air Lines, Inc. Committees: 3, 4, 5 International Home Foods and from 997 to 999, senior vice president C. johN wIlDer Dallas, Texas and general manager of southwest brands. Committees: 4, 6 Director since 2004, 49. j.e. oeSTerreICher Dallas, Texas Chairman, president, and CEO of TXU Corp. since May 2005. From Director since 1996, 65. February 2004 to May 2005, president and chief executive of TXU Retired chairman of the board and chief executive officer of J.C. Penney Corp. From 998 to 2004, executive vice president and chief financial Company, Inc. (retailer), since September 2000. From January 997 officer of Entergy Corporation. Also director of TXU Electric Delivery to September 2000, chairman of the board and chief executive officer Company and TXU Energy Company LLC. Committees: 2, 5 and from January 995 to January 997, vice chairman of the board and chief executive officer. From 992 to 995, president of J.C. Penney 1. Audit Committee 2. Executive Committee Stores and Catalog. Also director of Brinker International, Inc. 3. Finance and Business Development Committee Committees: 1, 2, 3, 6 4. Nominating and Governance Committee 5. Nuclear Committee 6. Organization and Compensation Committee 4 | t x u Annual Report 2006
  17. 17. FINaNCIal DeFINITIoNS Cash Interest expense (non-GaaP): Interest expense and related charges less amortization of discount and reacquired debt expense plus capitalized interest. Cash interest expense is a measure used by TXU to assess credit quality. Debt (non-GaaP): Total debt less transition bonds and debt-related restricted cash. Transition, or securitization, bonds are serviced by a regulatory transition charge on wires rates and are therefore excluded from debt in credit reviews. Debt-related restricted cash is treated as net debt in credit reviews. TXU uses this measure to evaluate its debt and capitalization levels. Debt/eBITDa (non-GaaP): Total debt less transition bonds and debt-related restricted cash divided by EBITDA. Transition, or securitization, bonds are serviced by a regulatory transition charge on wires rates and are therefore excluded from debt in credit reviews. Debt-related restricted cash is treated as net debt in credit reviews. Debt/EBITDA is a measure used by TXU to assess credit quality. eBITDa (non-GaaP): Income from continuing operations before interest income, interest expense and related charges, and income tax plus depreciation and amortization and special items. EBITDA is a measure used by TXU to assess performance. eBITDa/Interest (non-GaaP): EBITDA divided by cash interest expense is a measure used by TXU to assess credit quality. Normalized Free Cash Flow (non-GaaP): Cash provided by operating activities adjusted for unusual or nonrecurring items less capital expenditures and nuclear fuel. Used by TXU predominantly as a forecasting tool to estimate cash available for dividends, debt reduction, and other investments. Normalized operating Cash Flow (non-GaaP): Cash provided by operating activities adjusted for unusual or nonrecurring items. Used by TXU predominantly as a forecasting tool to estimate cash available for capital expenditures, nuclear fuel, dividends, debt reduction, and other investments. operational earnings (non-GaaP): Net income available to common shareholders adjusted for special items and income or losses that are not reflective of continuing operations (such as discontinued operations, extraordinary items, and cumulative effect of changes in accounting principles). Beginning in the fourth quarter of 2006, TXU has adjusted operational earnings for all periods to exclude all effects of recording unrealized gains and losses from cash flow hedge ineffectiveness and other mark-to-market valuations of positions in the long-term hedging program because management believes such presentation will more appropriately reflect the ongoing earnings of the business. 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. operational earnings Per Share (non-GaaP): Per share (diluted) operational earnings. TXU forecasts earnings on such operational earnings basis and is unable to reconcile forecasted operational earnings to a GAAP financial measure because forecasts of special items and material nonrecurring items are not practical. TXU relies on operational earnings per share 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. return on Invested Capital Based on adjusted operational earnings (non-GaaP): Twelve months ended operational earnings (non-GAAP) plus preference stock dividends and after-tax interest expense and related charges less interest income divided by the average of the beginning and ending total capitalization less debt-related restricted cash for the period calculated. This measure is used to evaluate operational performance and management effectiveness. Special Items (non-GaaP): Unusual charges related to the implementation of the performance improvement program, the effects of unrealized gains and losses from cash flow hedge ineffectiveness and other mark-to-market valuations of positions in the long-term hedging program, and other charges, credits, or gains that are unusual or nonrecurring. Special items are included in reported GAAP earnings, but are excluded from operational earnings. Total Debt (GaaP): Long-term debt (including current portion) plus bank loans and commercial paper plus long-term debt held by subsidiary trusts and preferred securities of subsidiaries. t x u Annual Report 2006 | 5