TXU electric delivery is significantly restructuring its traditional business model. The company has been working tirelessly to find ways to create value, including taking unprecedented steps to outsource business service functions. Our new approach is achieving the expected results, but we have encountered unexpected challenges and, even today, continue to learn lessons that we will apply to future deals.

Electric Delivery (Dallas, Texas, U.S.) intends to be among the best in the nation at delivering electricity. The heart of the company's strategy is to achieve industry leadership in reliability, cost management and technology. We are taking innovative actions to achieve this goal through initiatives that create operational scale, efficiency and deep technical expertise.

Electric Delivery currently is in the top quartile in a number of key performance metrics, and we believe our future performance can be in the top decile. To reach these goals, we are focused on our primary role: delivering electricity reliably, safely and efficiently. That means owning and operating 100,000 miles (160,000 km) of distribution lines and 14,000 miles (22,500 km) of transmission lines with laser-like intensity to create the most value possible for the business, the consumers who rely on us every day, our shareholders, the retail electric providers we serve, the power generators that provide the electricity we deliver and our employees.

We believe achieving these goals also requires taking bold actions to manage some significant portions of the business. Our core competencies will never include information technology or back-office human resources functions. Outsourcing is increasingly a key part of the structure of many successful businesses, from financial institutions and airlines to telecommunications, paper companies and electric utilities.

Our industry hasn't changed much since it was created during the industrial revolution over a century ago. We find ourselves in the midst of a digital age. Technical advances that have revolutionized most industries, and created many others, have yet to make an impact on our industry. Electric Delivery plans to take full advantage of the opportunities technology offers. We are building the power grid for the next generation, and our intent is to partner with service providers that can enable our transformation.

Since mid-2004, TXU Corp. and its subsidiaries, including Electric Delivery, have created relationships to manage critical, but noncore operations. We have been aggressive and are among the utility industry leaders in this area. Our partners are some of the best in the fields they serve. Electric Delivery has also proposed a key joint-venture agreement to better manage some of the businesses that are truly core operations.

TXU and Capgemini in 2004 formed Capgemini Energy (CGE; Dallas), a company dedicated to providing business and technology services to the U.S. energy industry. CGE also performs business process and support functions throughout TXU. About 2700 TXU employees and 300 contractors were offered jobs there. CGE now provides call center, billing, supply chain, finance and accounting, and information technology services to TXU and its subsidiaries. Back-office human resources, payroll services and telecommunications services are provided to TXU through Hewitt Associates (Lincolnshire, Illinois, U.S.) and Lucent Technologies (Murray Hill, New Jersey, U.S.) as alliance partners of CGE.

The CGE joint venture helped TXU reduce certain operating costs by 30% in the first year of the alliance, but not without some challenges to overcome. For example:

• Recognizing that many CGE employees possessed specialized knowledge regarding TXU's proprietary applications, and that retention of such knowledge was crucial to our continuing operations, we reached agreement with CGE that movement of jobs to areas outside of Texas would be done with adequate advance communications and with an approved knowledge-transfer plan to address operational risks.

• One of the projects not included in our agreement with CGE was installation of equipment for our automated meter-reading initiative. We purchased the system from a third-party vendor and found ourselves unexpectedly mediating disagreements between CGE and the vendor about which company was responsible for installation. We have been able to successfully establish accountabilities for such situations as this, where TXU purchased equipment from third-party vendors, and both CGE and the third-party shared responsibility for installation and operation. This has served as an important test of both the contractual model and the working level TXU-CGE relationship. TXU recognized and CGE responded to the fact that, for complex and large projects, there was a need in some cases to recruit project and program managers with technical and managerial skills that go beyond those of some of the staff initially hired by CGE from TXU.

In each of these cases, as well as others, we worked together closely to solve the problems, and as a result have strengthened the effectiveness of our partnership. These were internal issues, and resolving them quickly kept them from becoming problems for our customers. Each step down the outsourcing road and each lesson we learn along the way will help us craft better deals in the future. That's important because Electric Delivery now is finalizing several agreements that will enhance our ability to manage the state's largest electric delivery system and achieve industry-leading reliability, efficiency and innovation.

In June 2006, Electric Delivery signed a US$8.7 billion service agreement with InfrastruX Energy Services (IES; Bellevue, Washington, U.S.) to provide system design, construction, maintenance and operations for 10 years. This is a significantly different type of agreement that will keep Electric Delivery as a key part of the customer service equation and will be more inclusive than any other of its kind in the utility industry.

IES is a new joint-venture company created by TXU Corp. and InfrastruX Group Inc. It is a utility services business and initially will employ 5500 people, including about 2100 former Electric Delivery employees and about 3400 InfrastruX employees who are moving to the joint venture. This venture is expected to create a business with the scale to provide distinctive services in utility design, operations, maintenance and construction to Electric Delivery and other utilities across North America. Under this type of arrangement, Electric Delivery can be smaller, nimbler and focused on ownership and management of assets. Electric Delivery will continue to be the certificated utility and remains responsible for developing the design, standards, construction and maintenance to be implemented by IES and will have full oversight and control of the key utility operations.

Electric Delivery will remain one of the nation's largest transmission and delivery companies, focused on achieving top-level reliability and safety performance. The company will continue to be regulated by the state of Texas, through its Public Utility Commission (PUC), and remains committed to managing the transmission and distribution grid in the west, east, central and north central areas of the state.

The support of sister utilities in the aftermath of 2005 hurricanes is indicative of the kind of ingenuity, resourcefulness and work ethic that has made Electric Delivery employees such a vital part of the communities the company serves, and it is one of the key ingredients that will make IES equally successful. This is just one of the many reasons Electric Delivery is confident that the pending agreement with IES will bring benefits to customers and shareholders.

The company also knows that it will have a world-class partner that is singularly focused on the business of maintaining and repairing power lines. We will continue to have some of the best utility workers in the field, and customers and end users will continue to receive the best possible service from dedicated specialists. To ensure that Electric Delivery customers' needs receive the same priority they received prior to the IES transaction, Electric Delivery has the ability to assure that any decisions that temporarily reallocate resources that typically serve Electric Delivery customers don't jeopardize service reliability.