TXU - 2001 Summary Annual Report

We are accelerating our growth in new North American markets. Diversification will allow us to take advantage of other deregulated markets as well as reduce our concentration in Texas. Expansion of our energy trading operations and acquisition of firm power and natural gas storage contracts more than doubled US gross margin outside of Texas in 2001 compared to the previous year. With a strong pipeline of opportunities, we expect 150 percent growth in North American markets outside of Texas in 2002.

As part of our growth plan, the agreement in 2001 to sell 2,334 megawatts of generation plant in Texas was a major achievement. The divestiture will reduce debt, better position the Texas portfolio, and position TXU for further growth in North American markets.

Our distinctive portfolio model is now implemented on three continents, and the TXU brand is launched globally. The merchant energy business is on track to capture value and achieve its goal of 11 to 13 percent annual earnings growth.

In 2001, the European business successfully completed a fundamental restructuring of its operations. The result is a sharper focus on merchant energy operations in the competitive markets of Europe, a United Kingdom business that is repositioned to succeed in an environment with low wholesale energy costs, and a substantially strengthened balance sheet.

Major divestitures repositioned the European portfolio to fit market conditions and reduce debt. The sale of the Eastern Electricity distribution operation, together with our stake in the 24seven joint venture that operated the business, decreases regulatory uncertainty and allows complete focus on the higher-growth merchant energy business in the UK. In addition, the divestiture of 3,705 megawatts of UK generation plant reduces risk and further restructures the energy portfolio.

While most of the proceeds will reduce debt, some will be recycled into opportunities in mainland Europe’s deregulating markets where TXU is building strong bases in Central Europe and the Nordic region in particular. Our German platform includes over 450,000 customers, generation, and natural gas storage. In the Nordic region, we continue to strengthen our energy portfolio with increased levels of generation capacity control. Our skills as one of the leading merchant energy traders in Europe ideally position us to continue to grow the business and optimize the value of the assets.

TXU’s Australian operation also is performing well. With growing revenue and net income from the merchant energy business, TXU is the No. 1 portfolio manager in the national market, which now includes full competition in Victoria’s electricity market and a liberalizing market in South Australia.

After several years of very focused activity, we have completed the structural separation of the merchant energy and energy delivery businesses. The top-performing energy delivery business, which delivers electricity and natural gas over systems of wires and pipes, has operations of significant scale in North America and Australia.

Now operating under the name Oncor, our North American energy delivery business has an exciting new identity and future. Within the traditional Texas service area, Oncor will remain an industry leader in the efficient and reliable transmission and distribution of energy. With reasonable regulation and a strong, diversified Texas economy, Oncor has steady growth prospects from its existing business. The Oncor brand also includes a new competitive venture, Oncor Utility Solutions, which offers the potential for incremental growth from unregulated asset-management and operating services. Besides providing reliable service, Oncor produces stable cash flows and earnings. The energy delivery business is expected to deliver six to eight percent earnings growth annually.

I am very proud of TXU’s two strong businesses. Each has a clear vision, superior staff with exceptional skills, strong near-term goals, and an impressive performance record.