Dallas-based TXU Corp. unveiled some major initiatives last week — streamlined business operations, a $3.5 billion outsourcing agreement with Capgemini to improve customer service and a joint venture with Credit Suisse First Boston (CSFB) to form a new energy marketing and trading unit.

Following a 90-day review, TXU management showcased the changes during an investor and analyst conference last Tuesday. The streamlined business will be composed of three units: regulated electric delivery and two unregulated segments, TXU Power and TXU Energy. The conference provided initiatives to improve customer service, reliability and operational performance; transactions to unlock value and reduce risk; an initial 2005 detailed outlook and “high level” 2006 outlook; and the organizational realignment.

The extensive changes extend into management offices, where Tom Baker, now TXU Energy’s president, will take over as chairman and CEO of the regulated electric-delivery business. Mike Green, previously president of Oncor, will become chairman and CEO of TXU Power, and Paul O’Malley takes over TXU Energy. Kirk Oliver, senior vice president and treasurer, also was named CFO; current CFO Dan Farell will oversee the agreement with Capgemini.

Because of its realignment, TXU estimates operational earnings for full-year 2005 will increase 60% in 2004, ranging between $3.75-4.25/share. Income from continuing operations for 2005 is expected to fall between $3.82-4.32/share.

In its new energy marketing and trading entity, TXU signed a memorandum of understanding for a 50/50 investment with CSFB. The new business would become the exclusive energy marketing and trading vehicle for both parties in North America, effectively creating an “Aa3/A+” rated entity through a guarantee from a CSFB company. The energy marketing entity will market and trade power, natural gas and other energy-related commodities in North America.

“Our proposed new investment with TXU fulfills one of the top priorities for CSFB, which is to enter the energy commodities trading markets with a top flight physical energy producer,” said James Healy, CSFB’s global co-head of fixed income. “We are very excited about building this business with TXU, with our mutual goal for this new entity to become a leader in the industry.”

While establishing a potential growth platform, the new entity also would allow TXU to achieve one of its strategic priorities — reducing risk — by limiting TXU’s aggregate exposure to the marketing and trading business. TXU will be working with CSFB to finalize definitive documentation for the new entity over the coming months, with a goal of beginning operations early this fall.

In another announcement cheered by investors, TXU signed a $3.5 billion, 10-year agreement with Capgemini to form Capgemini Energy LP, which eventually will provide information technology, customer support, billing and other technology-enabled services for TXU customers. The agreement also will offer information technology and business process services to third parties.

Under the agreement, about 2,700 employees will move from TXU to Capgemini Energy, effective July 1, 2004. TXU will own less than 3% of Capgemini Energy and will have the right to sell all its interest in the joint venture to Capgemini when the contract ends.

There are other organizational changes within TXU’s streamlined units. In TXU’s electric-delivery business, the company will invest $45 million over the next three years to improve vegetation management across the electric distribution network, a 70% increase over the last three years to return to an optimum maintenance cycle by 2007. TXU’s electric-delivery business also will invest on average an extra $80 million annually over the next three years on key transmission projects, a 35% increase over 2003 investment levels.

In addition, the electric-delivery business will invest in capital projects to reduce duration and frequency of outages by 20% by 2006. To support these programs and build the financial strength of the utility, TXU plans to suspend distributions from the electric-delivery business to TXU Corp. through 2006. Overall, the investment program is geared toward an objective of achieving top quartile performance in all key utility reliability metrics by 2006.

For the realigned generation business, TXU Power, the company will invest an additional $275 million, increasing annual spending 45% over 2003, to improve the reliability of coal and nuclear production. The company also will replace the four steam generators in one of the two units of the Comanche Peak nuclear plant to maintain the operating efficiency, which is estimated at $175-225 million.

TXU plans to review its nuclear assets, which are comprised of two electricity generation units at Comanche Peak, each with a capacity of 1,150 MW. TXU has retained JP Morgan Securities Inc. as an adviser, and the review will evaluate ways to improve the long-term availability and certainty of electricity supply for TXU’s customers. TXU also is exploring ways to maintain access to firm power supply from a creditworthy counterparty, regardless of the operational status of Comanche Peak.

Finally, as part of its review, the company also is considering selling some of its real estate — currently, TXU owns or leases more than 1.7 million square feet in various corporate and headquarters locations, which is about 80% more than it needs.

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