TXU 2004 Annual Report Home
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Restructuring Success
The Top Ten
Ahead of Pace
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Management's Letter - Ahead of Pace

While we still have a lot to do and face challenges ahead, I think the work we accomplished in 2004 puts us on a clear path to make the transformation from the utility TXU was for over a century to a high-performance industrial company that sets the standard for the power industry. After a full year as CEO, I'm more confident than ever that TXU is a compelling value proposition. Few Texas businesses have devoted more time, money and effort to the industrial, commercial and agricultural development of the state than TXU. The importance of what we do, our three strong businesses and their significant improvement potential are what continue to make me so enthusiastic about my role here. I'm excited to work with a team that's providing an essential service to society.

Going into 2005, TXU can build on these advantages:

A strong business profile. TXU has three core businesses that are well positioned and situated in a high-growth regional market.

A rejuvenated financial profile. Compared with 2003, TXU expects to have three times the earning power, double the normalized free cash flow and an approximate 145% improvement in return on invested capital in 2005.

A more resilient business model. Our integrated business model should exhibit adequate to good performance under a wide range of commodity price scenarios.

Individually, TXU Energy and TXU Power are highly exposed to wholesale electricity prices, but the combination of the two businesses reduces price volatility, providing a natural hedge within TXU Energy Holdings. And TXU Electric Delivery, with its industry cost leadership, is in a good position to leverage the high underlying long-term annual growth rate of 2.5% in its service area.

Performance-improvement potential. TXU's businesses have identified initiatives that can and should drive $1.2 billion to $1.3 billion of improvement before taxes over the next three years relative to 2004.


TXU’s Disciplined Capital Allocation Process - TXU generates capital from cash flow from operations and asset sales. The first call on the excess capital is to assure quality service and production reliability for customers. Only after “customer capital” is allocated is further reinvestment in the businesses considered. TXU’s reinvestment criteria stipulates a return in three years of 50% of the cash invested and a minimum return on investment of 15%. If financial flexibility is maintained as measured by three strong credit metrics – debt/enterprise value, coverage ratio and debt/EBITDA –TXU will continue a conservative dividend payout of 30% to 40% of operational earnings and cash distributions to shareholders in the form of share repurchases or distributions up to 75% of operational earnings. The remainder of excess cash is retained for investment back into the businesses.

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Disciplined capital allocation. TXU's capital allocation philosophy focuses on maximizing returns to shareholders while maintaining strong credit metrics. With the increased dividend and potential share repurchases or other distributions to shareholders, TXU should be able to maintain high-performance total payout ratios.

  
 
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