energy future holindings _070605

Transforming a 120 Year-Old Regulated Utility

C. John WilderChief Executive Officer

Southern Methodist UniversityJune 24, 2005

1

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 DefinitionsThis 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.

2

SMU Has Had A Distinctive Impact On TXU

Lead by example: Employees with SMU degrees04; Percent

100%=

Total TXU employees

Management/ leadership

team

Senior leadership

team

145 78,000

SMU grads

Others

3

97 94

615

85

3

Today’s Agenda

Competitive Landscape

Competitive Landscape A monopoly’s paradise No more free lunch

TransformationTransformation A regulated monopoly An industrial energy company

2005+Objectives

2005+Objectives

A year of turnaround Defining industry performance

OverviewOverview 100 years of history An exciting and challenging future

From To

4

TXU: A Dynamic History And A Bright Future

Yesterday… Today…

5

TXU Is Focused On Three Businesses With Structural Advantages Across The Entire Value Chain…

Business

Structural advantages

Assets

TXU Power

Generation

2nd largest U.S. deregulated output

Access to low cost lignite reserves

60 TWh of baseloadproduction in a gas on the margin market

$10.8 billion

TXU Electric Delivery

Transmission and

Distribution

6th largest U.S. T&D company

Top quartile costs and reliability

Highest growth NERC region (2.5%)

Efficient capital recovery

$9.9 billion

TXU Energy

Retail

Large scale competitive retailer

Loyal customer base

Strong brand recognition

Superior service

$3.5 billion

6

…With Advantaged Scope And ScaleFinancial Metrics for S&P Electric Utilities Index05E; Mixed measures

4th Quartile 3rd Quartile Median 1st Quartile Top

Market Cap$ billions 8.2 11.2 15.5 32.53.9

20.1#3

Enterprise value$ billions

28.5#3

6.9 14.4 18.8 23.4 42.5

Free cash flow$ billions

-1.2 -0.1 0.1 0.5 2.1

1.7#2

TXU ranks #177 on the Fortune 500TXU ranks #177 on the Fortune 500

7

Today’s Agenda

OverviewOverview



TransformationTransformation

2005+Objectives

2005+Objectives

100 years of history

A monopoly’s paradise

A regulated monopoly

A year of turnaround

From To

No more free lunch

An industrial energy company

Defining industry performance

An exciting and challenging future

8

Upstream Downstream

DistributionTransmissionGeneration

Produce power Transmit power over long distances

Fuel

Generatingstation

Transmission wires

Transmission substation

Distribution wires

Customers

Utilities Historically Have Been Integrated Monopolies Across Upstream And Downstream Functions In Electric Power

Deliver power locally to customers

9

Generation

Utility Restructuring Has “Unbundled” The Electric Power Value Chain Creating New Competitive Businesses

Generation Transmission Distribution

Large regional markets

Wholesale trading and marketing

Super-regional to national markets

Transmission DistributionRetail Energy Services

Regionally franchised

Franchises with longstanding local service territories

Mass market, chain, niche, and large commercial/ industrial customer markets

Restructuring

Competitive

Restructuring has created extremely competitive wholesale and retail markets• Almost 70 competitive companies producing power in Texas• Almost 60 competitive retailers selling power to consumers in Texas

Restructuring has created extremely competitive wholesale and retail markets• Almost 70 competitive companies producing power in Texas• Almost 60 competitive retailers selling power to consumers in Texas

10

0

50

100

150

200

0 10 20 30 40 50 60 70 80 90

ERCOT generation portfolio: Average variable cost04; $/MWh

In The Generation Market, Competition Has Spurred Investment And Improved Efficiency…

Wholesale prices are 40% lower than they would have been under regulationWholesale prices are 40% lower than they would have been under regulation

Cumulative CapacityGW

NuclearCoal

Gas/oil

Internal combustion

CCGT

22 GW of new efficient capacity

($15 billion investment)Wind

TXU owns 8,100 MW of solid fuel generation:• 5,800 MW of lignite• 2,300 MW of nuclear

TXU owns 10,300 MW of gas/oil generation• 9,400 MW of gas• 900 MW of CT’s

11

75

85

490

240

290

650

700

Company B

Company C

Company D

449

305

290

225

190

85

75

… In The Wholesale Market, Competition Has Required The Management Of Significant Commodity Exposure…

Net gas position3

Million MMBtuEquivalent gas production1

Million MMBtuEquivalent fixed price short2

Million MMBtu

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 positions3 Native risk position; excludes gas contracts and hedges

Company A

TXU Long-Term1

Company F

Company E

255

345

0

15

300

0

0

12

…In Retail, Competition Brought Significant Switching, Making Texas The Only Competitive Retail Market

14426

6967

LargeBusiness

Small andMedium

Business

Residential Localtelephone 3years after

restructuring

Long distance3 years afterrestructuring

Significant competition: Net incumbent switch ratesFeb 05; Percent of load

ERCOT retail switching

1122233

78

26

TX DC NY PA MD OH MA CT ME CA

The only true market: Net residential incumbent switch ratesFeb 05; Percent of load

13

ERCOT Accounts For Nearly 80% Of US Residential Switching

US Residential retail sales1

2004; 100% = 1,293 TWh

8%

92%

ERCOT

Rest of US

While ERCOT is only 8% of total electric sales in the US, it comprises 78% of residential switching across the United States

While ERCOT is only 8% of total electric sales in the US, it comprises 78% of residential switching across the United States

4%

9%

9%

78%

Residential switching by state2

2004; 100% ~ 38 TWh

All othermarkets3

ERCOT

Pennsylvania

New York

1 Based on data from EIA; ERCOT website2 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

14

Similar To Other Restructured Markets, We Expect This Market To Continue To Drive Efficiency And Innovation…

Crashing prices: Airline prices79-05; Index of real prices (1979=100)

55

100

79 Today

45%45%

14

100

Cheap calls: US long distance80-05; Index of real revenue/minute (1980=100)

86%86%

80 Today

A competitive market forces the efficiency gains through to the customer in the form of lower prices and value added services

A competitive market forces the efficiency gains through to the customer in the form of lower prices and value added services

63

100

Trucking prices (truckload)67-05; Index of real $/ton (1967=100)

37%37%

67 Today

15

…Making The Transition For The Former Monopolies Extremely Difficult: Declining Financial Flexibility…

AT&T

Yellow

MCI

Qwest

Ryder

United

Delta

American

AAA BBBAA A B CCCBB

Trucking

Telecom

Airlines

D

9090 0404

9090 0404

9090 0404

9090 0404

Bankruptcies

96

69

37

9090 0404

9090 0202

9090 0404

9090 0404

16

5.76.9

-5.1

3.15.8

-6.3

-2.0

3.5

13.0

…And Poor Returns

Poor returns: Annual total return to shareholders (CAGR)83-03; Percent

S&P 500 American

Airlines

AT&T MCI

Source: Compustat

United Delta Qwest Ryder Yellow

TruckingTelecom

There is not a single industrial deregulated incumbent that has outperformed the broader market over the last 20 years

There is not a single industrial deregulated incumbent that has outperformed the broader market over the last 20 years

Average

90%

17

How Will TXU Avoid The Pitfalls That Have Trapped Other Former Monopolies?

“The brief booms that airlines occasionally enjoyed in the 1980s and 1990s encouraged them to believe that radical

change wasn’t necessary. Change didn’t happen fast enough because it was always a moving target,”

Alfred Kahn, Chairman of Civil Aeronautics Board

“The brief booms that airlines occasionally enjoyed in the 1980s and 1990s encouraged them to believe that radical

change wasn’t necessary. Change didn’t happen fast enough because it was always a moving target,”

Alfred Kahn, Chairman of Civil Aeronautics Board

18

Today’s Agenda

OverviewOverview




2005+Objectives

2005+Objectives





No more free lunch




From To

19

TXU Business Environment – Jan 04

12.09.8

TXU Best in class

Costly operations: Nuclear operating costs03; $/MWh

18%18% 280

12

TXU Best in class

Poor service: Average speed to answer03; Seconds

96%96%

65

37

TXU

Too much debt: Debt/total enterprise valueJan 04; Percent

Top quartile (S&P Electric)

43%43%

1.1

11.9

TXU

Poor returns: Annual TRSJan 94- Jan 04; Percent

Top quartile (S&P Electric)

91%91%

20

To Turn This Company Around We Had To Start From Scratch

21

To Turn This Company Around We Had To Start From Scratch

22

To Compete In This New Market, TXU Implemented A Three Phase Transformation Process

Phase 2: Strengthen the Core &

Drive Performance Improvement

Phase 3: Sustained

Performance and Growth

Phase 1:Rationalize,

Restructure & Restore Financial Strength

• Sold disadvantaged businesses

• Repaired balance sheet

• Strengthened contribution margins

23

Step One: Focused Portfolio On Core Businesses…

Low

High

Low High

Mar

ket A

ttrac

tiven

ess

TXU’s Competitive Position

“Improve Or Sell” “Grow Core Business”

“Rationalize” “Restructure Or Sell”

Fuel Co.

Consumer Markets

Fossil

DeliveryBusiness Markets

Australia

CGE JVTXU Gas

Nuclear

Wholesale Markets

Gasgeneration

Almost $14 billion was deployed to

reduce debt and return capital to

shareholders

Almost $14 billion was deployed to

reduce debt and return capital to

shareholders

24

…Redeploying Cash To Fix The Balance Sheet And Reduce Risks

Phase 1: Uses of cash04; $ billions

Debt repurchase

Equity repurchase

Investments

7.6

5.1

1.2

14.2

Dividend 0.3

Phase 1: Sources of cash04; $ billions

Cash from ops

Cash balances

6.5

1.2

1.014.2

5.5

Divested businesses

Borrowings

Risk/Return restructuring generated over $6 billion in value and reduced entity value risk by almost $10 billion

Risk/Return restructuring generated over $6 billion in value and reduced entity value risk by almost $10 billion

Phase 1: Reduction in risk04; $ billions

Litigation

Underwater hedge

Pension/ OPEB

8.0

0.8

0.49.7Uneconomic

leases0.5

25

Phase 2 Is All About High Performance…





Phase 3: Sustained


• Identified $1.6-1.7 billion in EBIT improvement

26

…Through Development Of An Industrial Skill Set

Operational Excellence

• Top decile throughput • World class industrial

production costs• Industry leading reliability• Lean corporate SG&A

Market Leadership

• Superior customer service/ brand management

• Customer segmentation and pricing

• Distinctive commodity sourcing

Risk/Return Mindset

• Strict capital allocation discipline

• Risk/return restructuring• Commodity risk

management

Performance Management• High performance culture• Balanced cascading scorecards• Employee development• Incentives linked to key value drivers

27

Operational Excellence Is About The Extra Inch

28

Operational Excellence Is About The Extra Inch

29

Operational Excellence: “Lean Principles” To GenerationNuclear capacity factors1

03-LT; Percent

88

94 9696

03 04 05E

9%9%

1% improvement ~ $10MM EBIT

Top decile

Long-term target

85 86

89 90

03 04 05E

Lignite capacity factors03-LT; Percent

6%6%

1% improvement ~ $20MM EBIT

Top decile

Long-term target

$1 per MWh improvement ~ $45MM EBIT

Top decile

$16.9 $16.8

$14.5

$15.8

03 04 05E

Lignite fuel & operating expense03-LT; $/MWh generated

14%

Long-term target

Nuclear operating expense1

03-LT; $/MWh generated

$12.0 $12.4$11.6

$10.0

03 04 05E$1 per MWh improvement ~ $18MM EBIT

Top decile

17%

Long-term target

1 Normalized for one outage per year.

30

TXU’s Customer Service Needed To Be Improved

31

TXU’s Customer Service Needed To Be Improved

32

Market Leadership Will Result In A World Class Customer Experience, And An Optimized Supply Function…

Customer retention through innovative loyalty programs

Better customer service: Average speed of answer03-05; Seconds

03 Avg ERCOT A

Q1 05

1652

115

3012

280

ERCOT B

Baby Bell

Leading fin. svc. co.

Better power sourcing: Uneconomic generation of gas fleet03-04; GWh

3,450

1,580

Summer 03 Summer 04

54%54%

16 24

49

118 121

9575-80

50-60

Reducing retail bad debt expense99-05; $ millions

99 00 01 02 03 04 05E Target

Start of deregulation

33

…And An Improved Profile Of Our Customer Mix

03 04

Losing lower profitability customers in North Texas…In-territory residential switching03-04; Thousands of customers

Betterprofit-ability

Lower profit-ability

52%

48%

230

62%

38%

164

03 04

…Gaining higher profitability customers out of territoryOut of territory customer counts03-04; Thousands of customers

43%

57%

148

31%

69%

194

TXU is focused on retaining the most profitable in territory customers and building a profitable out of territory business

TXU is focused on retaining the most profitable in territory customers and building a profitable out of territory business

Betterprofit-ability

Lower profit-ability

34

DebtHolders

FinancialFlexibility

Yes, until

Coverage ratio Debt/EBITDADebt/EV

Excess

Yes

Payout of 30-40%

ExcessDividendPayout

EquityHolders

Cash FlowfromOper-ations

andAssetSalesTX

U B

usin

ess

Uni

ts

Reinvest-ment

Yes, if

50% of cash returned within 3 yearsMinimum ROI of 15%

Excess“Customer”

Capital

Yes

Quality serviceProduction reliability

Repurchasesor Distributions

Retained forInvestment

Excess

Total Payout Cap - 75% ofOperational

Earnings

TXU Follows A Systematic Capital Allocation Process…

35

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

0 10 20 30 40 50 60 70 80

…And A Capital Structure That Is Closer To OptimalWeighted average cost of capital (WACC)03-05; Percent

Debt/Enterprise ValuePercent

03

05E

The current capital allocation process maintains an extremely strong capital structure even in downside scenarios

The current capital allocation process maintains an extremely strong capital structure even in downside scenarios

Acceptable range

04

36

Performance Management Starts With Ownership Of Performance

37

Performance Management Starts With Ownership Of Performance

38

The Industrial Skill Set Is Underpinned By A Strong Performance Management Culture

Reduced number of management layers…03-05; Number of layers

8 6 56-7

03 04 05E

100 81 74 60

0 19 26 40

03 04 05E

Long-term target

Long-term target

…With new managers having the right skills to compete03-05; Percent of management team

38%38%

New

Old

…Implementing best in class performance management

• Stretch targets based on best in class performance

• Monthly “performance dashboards” to review financial and operational performance

• Balanced scorecards that cascade from top-level financials to front-line operations

• Differentiated incentive systems that reward performance against key value drivers

• Succession plans aimed at developing a bench two-deep at every key position

39

The Market Has Responded Positively To The Transformation

TXU’s turnaround created more value than in the 20 years proceeding itTXU’s turnaround created more value than in the 20 years proceeding it

June 85 – Jun 05

333

205

TXU S&P Electric

S&P 500

7

TXU

1,075

Total annual return to shareholdersPercent

Change in market cap$ billions

240

40 11

Jan 04 – Jun 05

TXU S&P Electric

S&P 500

TXU

13

June 95 – Jun 05

11

180 180

TXU S&P Electric

S&P 500

TXU-2

40

To Compete In This New Market, TXU Implemented A Three Phase Transformation Process





Phase 3: Sustained


• Continued operational improvement

• Exploring value creating growth opportunities

41

We Are Now Turning Our Attention To Profitable Growth

Retail access framework in place for all customers

No substantive activity`Retail access suspended

As deregulation unfolds, retail opportunities outside of TX may become attractive…

…Organic options exist such as re-powering gas facilities or leveraging unused coal assets

G T bi S t

GG

GGHP IP LP

Morgan Creek Twin Oak

…Leveraging technology to improve reliability and productivity

Equity share of top ten players04; Percent

…Current state of industry indicates potential opportunity for consolidation

37

68

Electric Power

Global Oil & Gas

42

Today’s Agenda

OverviewOverview




2005+Objectives

2005+Objectives





No more free lunch




From To

43

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

44

Ultimate Success Is About “Going For The Green”

45

Ultimate Success Is About “Going For The Green”

Appendix –Financial Definitions

47

Financial Definitions

Total debt less transition bonds divided by enterprise value is used by TXU to assess credit quality.TotalDebt/Enterprise Value (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/EBITDA (non-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.

Total Debt (GAAP)

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.

Special Items

Cash from operating activities, less capital expenditures and nuclear fuel. Free Cash Flow (non-GAAP)

Shares of common stock outstanding multiplied by closing share price as of the balance sheet date.Market Capitalization (non-GAAP)

Total debt plus preference stock plus market capitalization less cash and restricted cash.Enterprise Value (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 (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.

EBIT (non-GAAP)

DefinitionMeasure

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