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 www.txucorp.com 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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
