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Sustainable Retail Margins In ERCOT TXU’s Incumbent Market Has Developed Similarly To Other Successful Deregulated Markets Although Residential Retail Headroom Is Expected To Rise Over The Next Two Years… Margin history and outlook 02-06; Mixed measures Incumbent market share1 Years since deregulation; Percent Retail headroom1 Percent 100% 7x24 power price2 $/MWh 40% Wireline 35% 90% North Texas residential 80% 70 Forward wholesale power price 60 30% South Texas residential 50 25% 40 70% 20% UK residential2 60% 30 15% 50% Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 5% 10 0% 00 02 1 Market share estimates based on customer count 2 Estimates for 2003 and 2004 Source: PUC; OFGEM 03 04E 05E 06E Headroom = (PTB – power cost – wires charges) / PTB; based on average of forward looking 12 months; forward curve as of October 18, 2004; assumes a strike up to $6.92/MMBtu approved in February 2005 2 Rolling average of 12 month forward curve 1 1 …Market Volatility Challenges Attacker’s Economics… Attacker gross margins 07E; $/MWh ERCOT North zone power price volatility 02-04; $/MWh Gross margin 99-04 (except TXU=02-04); Percent 55 38 10.5 28 29 26 Gross margin per volatility 99-04; No units 12 4.5 8.1 14 14 5 TXU gross margin – 07 estimate Competitor discount Acquisition cost1 Attacker gross margin Specialty Departapparel ment stores 2.6 Net margin3 Standard deviation of ERCOT power prices2 Drug stores North Texas attacker TXU retail 6.1 Assumes $150 customer acquisition cost with 24 month customer lifetime 2 Assumes no hedging; 20% adders for shaping, ancillary services, and line losses 3 After SG&A, customer acquisition costs, bad debt expenses, and taxes 4 Assumes TXU retail demand is 85% self supplied; TXU retail only exposed to 15% of volatility 0.3 Specialty Departapparel ment stores 3 1 20 day rolling average of 12 month forward curve1 7.50 Current strike threshold(+5%) = $6.85 6.50 Current strike = 6.52 3.0 Grocery Superstores center stores Drug stores 6.00 Jul-04 Oct-04 North TXU Texas retail attacker North TXU Texas retail attacker 4 Defined as standard deviation of quarterly gross margin normalized by initial gross margin North Texas residential gross margin 05; $/MMbtu TXU North Texas residential net margin2 05; $/MMBtu TXU Attacker1 Attacker 10 (5) Jan-05 Cal 05 gas, $/MMBtu PTB Strike, $/MMBtu 13 19 (2) 2 (7) Daily NYMEX gas prices Apr-04 Drug stores 6.8 3.7 3.5 Grocery Superstores center stores …Has Made Retail Economics Unsustainable Without ESTIMATES Further Price Adjustments Historical Gas Prices vs. Forward Curve 8.50 $/MMBtu 04-05; 7.00 6.0 Specialty Departapparel ment stores The Dramatic Increase In Gas Prices Over The Last Month... 5.50 7.0 6.3 4.3 TXU volatility4 1 8.00 Grocery Superstores center stores Volatility1 of gross margin 99-04 (except TXU=02-04); Percent 45.5 8.9 5.00 Jan-04 9.9 17.2 Net margin3 2 …And Margins Are Below Other Industries When Normalized For Volatility 30 29 20 TXU retail headroom 10% 3 4 (5) 7 (2) No strike Modeled strike in current plan Potential strike 7.63 6.52 7.63 6.92 7.63 7.63 1 1 2 Assumes all future prices are equal to forward curve as of October 22, 2004 Assumes strike would not take effect for 45 days 5 Includes acquisition costs of $150/MWh amortized over 24 months 2 Includes impact of SG&A, bad debt, income taxes and revenue taxes; Attacker economics based on 10% discount from PTB, SG&A of $2.5/MWh, bad debt equals 1.3% of revenues, income taxes at 35% rate, revenue taxes equals 1.8% of revenues; forward curve as of October 21, 2004 6