Becoming a high-performance industrial company is not as simple as it sounds, but we made real progress in 2004. Our restructuring program turned TXU around to focus our three businesses on achieving industry leadership across three critical factors. We are using these three factors - operational excellence, market leadership and human performance leadership - to drive to top-quartile financial performance and the ultimate transformation of the company.

Phase 1, now fully implemented, restructured TXU and restored its profitability. We asked the hard questions to kick off the phase. Which businesses weren't creating value? Could some support functions be done more effectively by a third party? Which ones? What services do customers want and deserve? How could management be strengthened? What contracts and business processes required immediate changes? What investments and business improvements could reap quick, value-creating benefits? One answer was the sale of $6.5 billion of assets. This step, combined with borrowings, cash flow from operations and cash on hand, funded an overall liability management program totaling more than $14 billion. Another answer was a commitment to achieving world-class customer service.

Rationalize, Restructure, & Restore Financial Strength		Strengthen the Core & Drive Performance Improvement		Allocate Capital & Grow
Sold disadvantaged businesses Repaired balance sheet Strengthened contribution margins Improved customer service		Identified $1.2 billion to $1.3 billion in improvement opportunities by 2007 Implementing rigorous performance management process		Refining capital allocation philosophy Exploring value-creating growth opportunities

Phase 2 launched an ongoing, broad-based performance-improvement program. Most of the initiatives are underway and yielding benefits. Overall, this program identified the potential for $1.2 billion to $1.3 billion of earnings improvement before taxes by 2007. The vast majority of the improvement is expected in the first two years. It falls into two broad categories: operational excellence, which accounts for about $500 million of the improvement, and market leadership, which accounts for approximately $750 million. The third element - human performance leadership - is a critical enabler of the success of the other two categories and the overall restructuring program. Phase 2 initiatives continue to reshape the financial profile for the company, reflecting a commitment to high performance within each of the three core businesses.

Phase 3, our growth and capital-deployment initiatives, focused in 2004 on refining the capital allocation philosophy, rebasing the dividend and establishing a framework for future growth investments. Our revamped plan stipulates that the first call on our capital is to keep customer service, delivery reliability and power production at high levels. Only after capital is allocated to assure high performance is further reinvestment in the businesses considered, and then the transactions have to be right. Refining growth strategies and pursuing attractive opportunities are important priorities in 2005, as is returning capital to investors. If financial flexibility is maintained at target levels for the key credit metrics discussed earlier, TXU will return up to 75% of operational earnings to shareholders.