1. Transforming a 120 Year-Old
Regulated Utility
C. John Wilder
Chief Executive Officer
Southern Methodist University
June 24, 2005
2. Safe Harbor Statement & Regulation G
This presentation contains forward-looking statements, which are
subject to various risks and uncertainties. Discussion of risks and
uncertainties that could cause actual results to differ materially from
management's current projections, forecasts, estimates and
expectations is contained in the Company's SEC filings.
Financial Definitions
This presentation includes certain non-GAAP financial measures.
Definitions of these non-GAAP financial measures are included in the
appendix of the printed version of the slides and the version included
on the company’s website at www.txucorp.com under Investor
Resources/Presentations.
1
3. SMU Has Had A Distinctive Impact On TXU
Lead by example: Employees with SMU degrees
04; Percent
100%= 8,000 145 7
97 94 85
Others
15
3
SMU grads 6
Total TXU Management/ Senior
employees leadership leadership
team team
2
4. Today’s Agenda
From To
Overview An exciting and
100 years of history
Overview
challenging future
Competitive
Competitive A monopoly’s paradise No more free lunch
Landscape
Landscape
Transformation
Transformation A regulated monopoly An industrial
energy company
2005+
2005+ A year of turnaround Defining industry
Objectives
Objectives performance
3
5. TXU: A Dynamic History And A Bright Future
Yesterday… Today…
4
6. TXU Is Focused On Three Businesses With Structural
Advantages Across The Entire Value Chain…
Transmission
Generation and Retail
Distribution
Business TXU Power TXU Electric Delivery TXU Energy
2nd largest U.S. 6th largest U.S. T&D Large scale
competitive
deregulated output company
retailer
Access to low cost Top quartile costs
Structural
Loyal customer
lignite reserves and reliability
advantages
base
60 TWh of baseload Highest growth NERC
production in a gas region (2.5%) Strong brand
on the margin recognition
Efficient capital
market
recovery Superior service
$10.8 billion $9.9 billion $3.5 billion
Assets
5
7. …With Advantaged Scope And Scale
Financial Metrics for S&P Electric Utilities Index
05E; Mixed measures
4th Quartile 3rd Quartile 1st Quartile
Median Top
20.1
#3
Market Cap
$ billions 3.9 8.2 11.2 32.5
15.5
28.5
#3
Enterprise value
$ billions 6.9 14.4 18.8 23.4 42.5
1.7
#2
Free cash flow
$ billions
2.1
-0.1 0.1 0.5
-1.2
TXU ranks #177 on the Fortune 500
TXU ranks #177 on the Fortune 500
6
8. Today’s Agenda
From To
Overview An exciting and
100 years of history
Overview
challenging future
Competitive
Competitive A monopoly’s paradise No more free lunch
Landscape
Landscape
Transformation
Transformation A regulated monopoly An industrial
energy company
2005+
2005+ A year of turnaround Defining industry
Objectives
Objectives performance
7
9. Utilities Historically Have Been Integrated Monopolies Across
Upstream And Downstream Functions In Electric Power
Generation Transmission Distribution
Produce power Transmit power over Deliver power locally
long distances to customers
Generating Transmission Transmission Distribution Customers
station wires substation wires
Fuel
Downstream
Upstream
8
10. Utility Restructuring Has “Unbundled” The Electric Power
Value Chain Creating New Competitive Businesses
Competitive
Transmission
Generation Distribution
Restructuring
Wholesale Retail
Generation Transmission
trading and Energy
Distribution
marketing Services
Large Super-regional Regionally Franchises Mass market,
regional to national franchised with chain, niche,
markets markets longstanding and large
local service commercial/
territories industrial
customer
markets
Restructuring has created extremely competitive wholesale and retail markets
Restructuring has created extremely competitive wholesale and retail markets
•• Almost 70 competitive companies producing power in Texas
Almost 70 competitive companies producing power in Texas
•• Almost 60 competitive retailers selling power to consumers in Texas
Almost 60 competitive retailers selling power to consumers in Texas
9
11. In The Generation Market, Competition Has Spurred
Investment And Improved Efficiency…
TXU owns 10,300 MW of
gas/oil generation
ERCOT generation portfolio: Average variable cost • 9,400 MW of gas
04; $/MWh • 900 MW of CT’s
200
Internal
TXU owns 8,100 MW of
combustion
solid fuel generation:
• 5,800 MW of lignite
150
• 2,300 MW of nuclear
Gas/oil
22 GW of new efficient
100 capacity
($15 billion investment)
Wind
Coal CCGT
50
Nuclear
0
0 10 20 30 40 50 60 70 80 90
Cumulative Capacity
GW
Wholesale prices are 40% lower than they would have been under regulation
Wholesale prices are 40% lower than they would have been under regulation
10
12. … In The Wholesale Market, Competition Has Required The
Management Of Significant Commodity Exposure…
Equivalent gas production1 Equivalent fixed price short2 Net gas position3
Million MMBtu Million MMBtu Million MMBtu
Company A 700 255 449
Company B 650 345 305
0
Company C 290
290
240
Company D 15 225
TXU Long-
490 300 190
Term1
0
Company E 85 85
75
Company F 75
0
1 Estimated long term exposure (2010+)
2 Includes adders to account for shaping, line losses and congestion; Assumes residential, small, medium, and large business are short positions
11
3 Native risk position; excludes gas contracts and hedges
13. …In Retail, Competition Brought Significant Switching,
Making Texas The Only Competitive Retail Market
Significant competition: Net incumbent switch rates
Feb 05; Percent of load
69
67
26 14
4
Large Small and Residential Local Long distance
Business Medium telephone 3 3 years after
Business years after restructuring
restructuring
ERCOT retail switching
The only true market: Net residential incumbent switch rates
Feb 05; Percent of load
26
8 7
3 3
2 2 2 1 1
TX DC NY PA MD OH MA CT ME CA 12
14. ERCOT Accounts For Nearly 80% Of US Residential
Switching
Residential switching by state2
US Residential retail sales1
2004; 100% ~ 38 TWh
2004; 100% = 1,293 TWh
All other
markets3
ERCOT
ERCOT
8% New York 9%
9%
Pennsylvania
4%
78%
92%
Rest of US
While ERCOT is only 8% of total electric sales in the US, it comprises 78% of
While ERCOT is only 8% of total electric sales in the US, it comprises 78% of
residential switching across the United States
residential switching across the United States
1 Based on data from EIA; ERCOT website
2 Based on data from KEMA – 2004 Restructuring Review; state PUC websites; excludes load in Ohio attributed to municipal aggregation
3 Includes AZ, CA, CT, DC, DE, IL, MA, MD, ME, MI, MT, NH, NJ, NV, OH, OR, RI, VA
13
15. Similar To Other Restructured Markets, We Expect This
Market To Continue To Drive Efficiency And Innovation…
Crashing prices: Airline prices Cheap calls: US long distance Trucking prices (truckload)
79-05; Index of real prices 80-05; Index of real 67-05; Index of real $/ton
(1979=100) revenue/minute (1980=100) (1967=100)
100
100 100
45% 86% 37%
45% 86% 37%
63
55
14
67
79 80 Today
Today Today
A competitive market forces the efficiency gains through to the customer in
A competitive market forces the efficiency gains through to the customer in
the form of lower prices and value added services
the form of lower prices and value added services
14
16. …Making The Transition For The Former Monopolies
Extremely Difficult: Declining Financial Flexibility…
AAA AA A BBB BB B CCC D
Bankruptcies
04
90
American 04
90
04
90 04
90
Delta
96 Airlines
United 90 04
90 04
AT&T 90 04
90 04
69 Telecom Qwest 90 04
90 04
MCI 90 02
90 02
Yellow 90 04
90 04
37 Trucking
Ryder 90 04
90 04
15
17. …And Poor Returns
Poor returns: Annual total return to shareholders (CAGR)
83-03; Percent
90%
13.0
6.9 5.7
5.8
3.5 3.1
Average
-2.0
-5.1
-6.3
S&P 500 American Delta United AT&T Qwest MCI Ryder Yellow
Airlines Telecom Trucking
There is not a single industrial deregulated incumbent that has outperformed
There is not a single industrial deregulated incumbent that has outperformed
the broader market over the last 20 years
the broader market over the last 20 years
Source: Compustat
16
18. How Will TXU Avoid The Pitfalls That Have Trapped Other
Former Monopolies?
“The brief booms that airlines occasionally enjoyed in the
“The brief booms that airlines occasionally enjoyed in the
1980s and 1990s encouraged them to believe that radical
1980s and 1990s encouraged them to believe that radical
change wasn’t necessary. Change didn’t happen fast enough
change wasn’t necessary. Change didn’t happen fast enough
because it was always a moving target,”
because it was always a moving target,”
Alfred Kahn, Chairman of Civil Aeronautics Board
Alfred Kahn, Chairman of Civil Aeronautics Board
17
19. Today’s Agenda
From To
Overview An exciting and
100 years of history
Overview
challenging future
Competitive
Competitive A monopoly’s paradise No more free lunch
Landscape
Landscape
Transformation
Transformation A regulated monopoly An industrial
energy company
2005+
2005+ A year of turnaround Defining industry
Objectives
Objectives performance
18
20. TXU Business Environment – Jan 04
Too much debt: Debt/total enterprise value
Poor returns: Annual TRS
Jan 04; Percent
Jan 94- Jan 04; Percent
91% 43%
91% 43%
65
11.9
37
1.1
Top quartile Top quartile
TXU
TXU
(S&P Electric) (S&P Electric)
Costly operations: Nuclear operating costs Poor service: Average speed to answer
03; $/MWh 03; Seconds
18% 96%
18% 96%
280
12.0
9.8
12
TXU Best in class TXU Best in class 19
21. To Turn This Company Around We Had To Start From
Scratch
20
22. To Turn This Company Around We Had To Start From
Scratch
21
23. To Compete In This New Market, TXU Implemented A Three
Phase Transformation Process
Phase 3:
Sustained
Performance and
Growth
Phase 2:
Strengthen the Core &
Drive Performance
Improvement
Phase 1:
Rationalize,
Restructure & Restore
Financial Strength
• Sold disadvantaged businesses
• Repaired balance sheet
• Strengthened contribution margins
22
24. Step One: Focused Portfolio On Core Businesses…
“Improve Or Sell” “Grow Core Business”
Fossil
Business Markets
Delivery
High
Market Attractiveness
Nuclear
Consumer Markets
Almost $14
Almost $14
billion was
Wholesale Markets billion was
deployed to
deployed to
reduce debt and
reduce debt and
“Rationalize” “Restructure Or Sell” return capital to
return capital to
shareholders
shareholders
TXU Gas CGE JV
Low Gas
Australia
generation
Fuel Co.
Low High
TXU’s Competitive Position 23
25. …Redeploying Cash To Fix The Balance Sheet And Reduce
Risks
Phase 1: Uses of cash Phase 1: Reduction in risk
Phase 1: Sources of cash
04; $ billions 04; $ billions
04; $ billions
Uneconomic
14.2 14.2 9.7
leases 0.4
Investments
1.0
Cash balances 0.5
1.2
0.3 0.8
Dividend Pension/
OPEB
5.5
Borrowings 5.1
Equity
Underwater
repurchase
hedge
1.2
Cash from ops 8.0
Litigation
Debt 7.6
Divested 6.5 repurchase
businesses
Risk/Return restructuring generated over $6 billion in value and reduced
Risk/Return restructuring generated over $6 billion in value and reduced
entity value risk by almost $10 billion
entity value risk by almost $10 billion
24
26. Phase 2 Is All About High Performance…
Phase 3:
Sustained
Performance and
Growth
Phase 2:
Strengthen the Core &
Drive Performance
Improvement
Phase 1:
Rationalize, • Identified $1.6-1.7 billion
Restructure & Restore in EBIT improvement
Financial Strength
25
27. …Through Development Of An Industrial Skill Set
Market Leadership
Operational Excellence Risk/Return Mindset
• Superior customer service/
• Top decile throughput • Strict capital allocation
brand management discipline
• World class industrial
• Customer segmentation
production costs • Risk/return restructuring
and pricing
• Industry leading reliability • Commodity risk
• Distinctive commodity management
• Lean corporate SG&A
sourcing
Performance Management
• High performance culture
• Balanced cascading scorecards
• Employee development
• Incentives linked to key value drivers
26
33. Market Leadership Will Result In A World Class Customer Experience,
And An Optimized Supply Function…
Better customer service:
Customer retention through
Average speed of answer
innovative loyalty programs
03-05; Seconds
280
115
52
30
12 16
03 Avg Q1 05 ERCOT ERCOT Baby Leading
Bell fin. svc. co.
A B
Better power sourcing:
Reducing retail bad debt expense
Uneconomic generation of gas fleet
99-05; $ millions
118 121 03-04; GWh
95 54%
54%
Start of 3,450
75-80
deregulation
50-60
49
1,580
24
16
99 00 01 02 03 04 05E Target 32
Summer 03 Summer 04
34. …And An Improved Profile Of Our Customer Mix
Losing lower profitability customers in …Gaining higher profitability customers
North Texas… out of territory
In-territory residential switching Out of territory customer counts
03-04; Thousands of customers 03-04; Thousands of customers
230
194
Better 164
48%
profit- 148
ability Better
38%
69%
profit-
57%
ability
Lower Lower
52% 62%
43% 31%
profit- profit-
ability ability
03 04 03 04
TXU is focused on retaining the most profitable in territory
TXU is focused on retaining the most profitable in territory
customers and building a profitable out of territory business
customers and building a profitable out of territory business
33
35. TXU Follows A Systematic Capital Allocation Process…
Retained for
Investment
TXU Business Units
Cash
Flow
Excess Excess Excess
Excess
from
“Customer” Reinvest Financial Dividend
Oper-
Capital -ment Flexibility Payout
ations
and
Asset
Yes Yes, if Yes, until Yes
Sales
Quality service 50% of cash Coverage ratio Payout of Repurchases
Production returned within Debt/EBITDA 30-40% or Distributions
reliability 3 years Debt/EV
Minimum ROI
Total Payout
of 15%
Cap - 75% of
Operational
Earnings
Equity
Debt
Holders Holders
34
36. …And A Capital Structure That Is Closer To Optimal
Weighted average cost of capital (WACC)
03-05; Percent
9.0%
8.5%
8.0%
7.5%
03
7.0%
05E
6.5% 04
6.0%
5.5% Acceptable range
5.0%
0 10 20 30 40 50 60 70 80
Debt/Enterprise Value
Percent
The current capital allocation process maintains an
The current capital allocation process maintains an
extremely strong capital structure even in downside scenarios
extremely strong capital structure even in downside scenarios
35
39. The Industrial Skill Set Is Underpinned By A Strong
Performance Management Culture
Reduced number of management layers… …Implementing best in class performance
03-05; Number of layers management
38%
8 38%
6-7 6 5
• Stretch targets based on best in class
performance
• Monthly “performance dashboards” to
Long-term
03 04 05E
target review financial and operational
performance
…With new managers having the right
• Balanced scorecards that cascade from
skills to compete
top-level financials to front-line
03-05; Percent of management team
operations
0 19 New
26 40 • Differentiated incentive systems that
100 reward performance against key value
81 74 Old
60 drivers
• Succession plans aimed at developing a
03 04 05E Long-term
bench two-deep at every key position
target
38
40. The Market Has Responded Positively To The
Transformation
Total annual return to shareholders
Percent
Jan 04 – Jun 05 June 95 – Jun 05 June 85 – Jun 05
1,075
333
240
205
180 180
40 11
11
TXU S&P S&P
TXU S&P S&P
TXU S&P S&P
Electric 500
Electric 500
Electric 500
Change in market cap
$ billions
13
7
-2
TXU TXU TXU
TXU’s turnaround created more value than in the 20 years proceeding it
TXU’s turnaround created more value than in the 20 years proceeding it 39
41. To Compete In This New Market, TXU Implemented A Three
Phase Transformation Process
Phase 3:
Sustained
Performance and
Growth
Phase 2:
Strengthen the Core & • Continued operational
Drive Performance improvement
Improvement • Exploring value creating
Phase 1:
growth opportunities
Rationalize,
Restructure & Restore
Financial Strength
40
42. We Are Now Turning Our Attention To Profitable Growth
As deregulation unfolds, retail opportunities …Organic options exist such as re-
outside of TX may become attractive… powering gas facilities or leveraging unused
coal assets
Morgan Creek Twin Oak
G
HP IP LP G
No substantive activity
`
Retail access suspended
Retail access framework in place for all customers
G Tb S
i t
…Leveraging technology to improve …Current state of industry indicates
reliability and productivity potential opportunity for consolidation
Equity share of top ten players
04; Percent
68
37
Global Electric
Oil & Gas Power 41
43. Today’s Agenda
From To
Overview An exciting and
100 years of history
Overview
challenging future
Competitive
Competitive A monopoly’s paradise No more free lunch
Landscape
Landscape
Transformation
Transformation A regulated monopoly An industrial
energy company
2005+
2005+ A year of turnaround Defining industry
Objectives
Objectives performance
42
44. TXU Faces Significant Challenges And Opportunities Going
Forward
Success in our dynamic, challenging industry depends on:
“Achieving industry leadership” – Driving toward top decile operations and
service in our core businesses
“Cultivating innovation and initiative” – Building a high performance culture
focused on continuous improvement
“Earning the right to grow” – Maintaining financial discipline and enhancing
core capabilities to capitalize on future value creating opportunities
Key opportunities going forward
– Implementing lean manufacturing principles in solid fuel plants
– Developing world class marketing capabilities
– Managing large and complex commodity risk positions
– Developing a profitable growth strategy outside of the core business
43
48. Financial Definitions
Measure Definition
EBIT (non-GAAP) Income from continuing operations before interest income, interest expense and related charges, and
income tax and special items. EBIT is a measure used by TXU to assess performance.
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.
Enterprise Value (non-GAAP) Total debt plus preference stock plus market capitalization less cash and restricted cash.
Market Capitalization Shares of common stock outstanding multiplied by closing share price as of the balance sheet date.
(non-GAAP)
Free Cash Flow (non-GAAP) Cash from operating activities, less capital expenditures and nuclear fuel.
Special Items Unusual charges related to the implementation of the performance improvement program and other
charges, credits or gains, that are unusual or nonrecurring. The performance improvement program is being
implemented in phases, and the charges are expected to occur largely within a one-year period. Special
items are included in reported GAAP earnings, but are excluded from operational earnings. Special items
associated with the performance improvement program include debt extinguishment losses and costs
related to severance programs, asset impairments and facility closures.
Total Debt (GAAP) Long-term debt (including current portion), plus bank loans and commercial paper, plus long-term debt held
by subsidiary trusts, plus preferred securities of subsidiaries, including exchangeable preferred
membership interests (EPMIs). 2003 total debt includes debt related to Telecom and discontinued
operations.
TotalDebt/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.
Total debt/EBITDA is a measure used by TXU to access credit quality.
TotalDebt/Enterprise Value Total debt less transition bonds divided by enterprise value is used by TXU to assess credit quality.
(non-GAAP)
47
