Risk/Return Mindset

Our application of a risk/return mindset to business decisions has really improved. We've whittled down the risks to those that are inherent in our core business and eliminated billions of dollars of potential future liabilities. The most important way to reduce risks is to improve the business mix and business performance, and that is where we started. We divested telecom and natural gas distribution businesses with negative cash flows, an underperforming intrastate pipeline, and an Australian business that had cash flow we couldn't efficiently use. We restructured two parts of the retail operation that were losing $100 million per division per year, and we substantially improved customer service to do everything we could to keep our valuable customers, who were frustrated that we wouldn't answer the phones. We very analytically benchmarked all our operations and drove our core businesses to high-performance levels.

We have been brutal in our pursuit of risk reduction. We have eliminated or mitigated risks ranging from $1.5 billion of underwater hedges to underfunded vegetation management programs and plant maintenance. We've improved our corporate governance, restructured $500 million of uneconomic leases and purchase power agreements, and provided for the proper regulatory recovery for almost half a billion dollars of underfunded pension and retirement medical liabilities. David Poole and the legal team have settled billions of dollars of potential litigation. We've also reduced retail bad-debt expense from $121 million a year to $53 million per year. A three-year hedging strategy we executed in 2005 now mitigates virtually all our natural gas price exposure, with retail acting as a partial hedge to our generation capacity. We understand the risky nature of our businesses, and we continue to build a top management team that has a track record in managing these types of businesses.

Since we began our turnaround, cumulative total shareholder return, the most comprehensive measure of risk/return performance, dramatically exceeds that of the market indices and TXU's previous performance. Total shareholder return for the two-year period through 2005 was 343 percent, compared to minus 2 percent for the 10 years prior to the beginning of the turnaround. We are ahead of plan for improving our financial flexibility and strength. We aim to continue to improve our metrics and demonstrate that TXU is far stronger today. Grade: A-

¹ Based on actual 2003 financial results including subsequently discontinued operations.