At the end of the year, an employee asked me if I was bored now that we'd reshaped the businesses and regained some financial flexibility. I told him I appreciated his concern about my motivation but went on to say that I'm more inspired today than I was when I arrived in February 2004. I knew when I came to TXU that we had painful decisions to make. We knew the core businesses weren't performing at the levels we needed and that others had to be shut down or sold. We knew we had too little cash, too much debt, too many leaders who didn't fit the new TXU and some financial arrangements that were killing the company. Turnarounds are brutal, so my theory was simple - get it over with as fast as you can. You can probably tell I'm the kind of person who takes the bandage off with one hard pull and swallows the medicine with one big gulp. Although we'll always be challenged by hard choices, we tried to get as many of the tough decisions as possible out of the way last year.

Now we're in a motivational position with exciting challenges. How will we grow? How can we keep improving our businesses to be the undisputed leaders in their markets? How can we create new products or technologies? How can we develop our leaders in a way that inspires employees more? How can we liberate employees to make more decisions on their own? This is the phase of business I truly love. It's the fun part of my job.

Plain and Simple
We have six clear priorities in 2005:

High performance. We must continue to drive high performance in the core businesses as we focus on operational excellence, market leadership and human performance leadership. David Campbell will lead this effort and has already made tremendous progress. And while our business portfolio is in a much better position than when we began 2004, we're still challenged to make our businesses more resilient to the uncertainties of laws and regulations, the volatility of the commodity markets and the natural exposure of a concentrated position in a single regulatory jurisdiction.

Customer excellence. Although TXU made remarkable progress in 2004 in repairing poor customer service, the company has yet to be challenged by the inevitable entry of a competitor with an established consumer brand. That test will come, and TXU must be ready. We must spur ourselves to keep ahead of the competition at our heels. Improving customer service and attracting and retaining customers are the most important priorities of TXU Energy's retail business and will remain constant challenges. 2004 proves that customer service is key: as customer service improved, customer retention in the North Texas residential market also went up and customer churn rates dropped. Building a profitable out-of-territory residential business in regions of the state outside of North Texas is also a priority and one of TXU Energy's growth paths. The small- and medium-business segment continues to be a competitive battleground in which TXU Energy lost a significant share in its home territory in 2004. Stabilizing market share and margins in this segment are important priorities. The large commercial and industrial business, which improved in the second half of 2004, faces a make-or-break year in 2005. We will focus on and win profitable customers or exit the business.

Cost leadership. While we expect to reduce fixed costs by $1.3 billion, or 32%, from 2003 to 2005, they must be cut another $500 million within five years. The next level of reductions will be tougher to achieve than the 2004 and 2005 cuts and will require more ingenuity and fundamental change in work processes and human performance.

Human performance. The success of the restructuring program and TXU's aspiration to become a high-performance industrial company are dependent on the quality of TXU's people. The company made progress last year in improving human performance by restructuring the management team and increasing the number of employees embedded in the businesses, but we have more to do. This year, we must upgrade management talent, develop the right incentive plan that motivates and rewards high performance, inspire a high-performance culture within each business and develop people. And while the workforce was restructured and its capability strengthened in 2004, TXU has areas that require more attention this year.

Continued restructuring for value. The restructuring program, which is about 75% complete, has already unlocked considerable value. In 2005, we'll continue mining the hidden value embedded in TXU by freeing trapped cash. Assets such as lignite reserves and underused real estate, including thousands of acre-feet of water rights and considerable office space, offer potential for creating value. Millions of dollars in poor-performing legacy contracts that continue to burden the income statement could also be restructured. Assets that are not a natural fit for the company, such as the gas fleet, are another way we may be able to monetize selected assets and provide value to shareholders.

Profitable growth. TXU must deliberately examine its growth options. Although the bar is high for deploying growth capital - 50% of cash returned in three years with a 15% return on investment - there are exciting opportunities to explore.