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energy future holindings _070605

  1. 1. Transforming a 120 Year-Old Regulated Utility C. John Wilder Chief Executive Officer Southern Methodist University June 24, 2005
  2. 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. 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. 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. 5. TXU: A Dynamic History And A Bright Future Yesterday… Today… 4
  6. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 21. To Turn This Company Around We Had To Start From Scratch 20
  22. 22. To Turn This Company Around We Had To Start From Scratch 21
  23. 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. 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. 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. 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. 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
  28. 28. Operational Excellence Is About The Extra Inch 27
  29. 29. Operational Excellence Is About The Extra Inch 28
  30. 30. Operational Excellence: “Lean Principles” To Generation Nuclear capacity factors1 Lignite capacity factors 03-LT; Percent 03-LT; Percent 90 6% 89 9% 6% 9% 96 96 Top decile 94 Top decile 86 85 88 Long-term Long-term 03 04 05E 03 04 05E target target 1% improvement ~ $10MM EBIT 1% improvement ~ $20MM EBIT Nuclear operating expense1 Lignite fuel & operating expense 03-LT; $/MWh generated 03-LT; $/MWh generated 17% 14% $16.9 $16.8 $15.8 $12.4 $12.0 Top decile $11.6 $14.5 $10.0 Top decile Long-term Long-term 03 04 05E 03 04 05E target target $1 per MWh improvement ~ $18MM EBIT $1 per MWh improvement ~ $45MM EBIT 29 1 Normalized for one outage per year.
  31. 31. TXU’s Customer Service Needed To Be Improved 30
  32. 32. TXU’s Customer Service Needed To Be Improved 31
  33. 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. 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. 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. 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
  37. 37. Performance Management Starts With Ownership Of Performance 36
  38. 38. Performance Management Starts With Ownership Of Performance 37
  39. 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. 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. 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. 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. 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. 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
  45. 45. Ultimate Success Is About “Going For The Green” 44
  46. 46. Ultimate Success Is About “Going For The Green” 45
  47. 47. Appendix – Financial Definitions
  48. 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

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