**UNITED
STATES SECURITIES AND EXCHANGE COMMISSION**


Washington,
D.C. 20549


__________________________________________











**FORM
10-K**











[ Ö ] ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934











**For
the fiscal year ended December 31, 2004**








— OR **—**








[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934








Commission
File Number 1-11668





**TXU
US Holdings Company**
 (Exact
Name of Registrant as Specified in its Charter)













Texas
    75-1837355(State
      of Incorporation)
    (I.R.S.
      Employer Identification No.)1601
      Bryan Street, Dallas TX 75201-3411
    (214)
      812-4600(Address
      of Principal Executive Offices)(Zip Code)
    (Registrant’s
      Telephone Number)








__________________________________________




**Securities
registered pursuant to Section 12(b) of the Act:** None





**Securities
registered pursuant to Section 12(g) of the Act:** Preferred Stock, without par value





__________________________________________







Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes Ö No
__





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ Ö ]





Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes __ No Ö





Aggregate
market value of TXU US Holdings Company Common Stock held by non-affiliates:
None





Common
Stock outstanding at March 29, 2005: 2,062,768 Class A shares, without par value
and 39,192,594 Class B shares, without par value.





__________________________________________








**DOCUMENTS
INCORPORATED BY REFERENCE** -
None








****
















****


**TABLE
OF CONTENTS**
  **Page****Glossary**
    ii**PART
      I****Items
      1. and 2. BUSINESS and PROPERTIES**
    1TXU
      US HOLDINGS COMPANY AND SUBSIDIARIES
    1TEXAS
      ELECTRIC INDUSTRY RESTRUCTURING
    1OPERATING
      SEGMENTS
    3TXU
      Energy Holdings
    4TXU
      Electric Delivery
    8ENVIRONMENTAL
      MATTERS
    10**Item
      3.****LEGAL
      PROCEEDINGS**
    12**Item
      4.****SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**
    14**PART
      II****Item
      5.****MARKET
      FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER****MATTERS**
    15**Item
      6.****SELECTED
      FINANCIAL DATA**
    15**Item
      7.****MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND****RESULTS
      OF OPERATIONS**
    15**Item
      7A.****QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
    15**Item
      8.****FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA**
    15**Item
      9.****CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND****FINANCIAL
      DISCLOSURE**
    15**Item
      9A.****CONTROLS
      AND PROCEDURES**
    15**Item
      9B.****OTHER
      INFORMATION**
    15**PART
      III****Item
      10.****DIRECTORS
      AND EXECUTIVE OFFICERS OF REGISTRANT**
    16**Item
      11.****EXECUTIVE
      COMPENSATION**
    18**Item
      12.****SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT**
    34**Item
      13.****CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**
    35**Item
      14.****PRINCIPAL
      ACCOUNTING FEES AND SERVICES**
    35**PART
      IV****Item
      15.****EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES**
    37**APPENDIX
      A - Financial Information of TXU US Holdings Company**
    A-1**APPENDIX
      B - Exhibits for 2004 Form 10-K**
    B-1





**Periodic
reports on Form 10-K and Form 10-Q and current reports on Form 8-K that contain
financial information of TXU US Holdings Company as well as TXU Corp.’s code of
conduct for employees, officers and directors (which is applicable to TXU US
Holdings Company) are made available to the public, free of charge, on the TXU
Corp. website at http://www.txucorp.com, in the case of Securities and Exchange
Commission filings, shortly after they have been filed with the Securities and
Exchange Commission. TXU US Holdings Company will provide copies of current
reports not posted on the website upon request. The information on TXU Corp.’s
website shall not be deemed a part of, or incorporated by reference into, this
report on Form 10-K.**










i





**GLOSSARY**





When the
following terms and abbreviations appear in the text of this report, they have
the meanings indicated below.





**1999
      Restructuring Legislation**
    legislation
      that restructured the electric utility industry in Texas to provide for
      retail competition**2002
      Form 8-K**
    US
      Holdings’ Current Report on Form 8-K filed on February 26, 2003 for TXU
      Energy Holdings with respect to its financial information for the year
      ended December 31, 2002, and Form 8-K filed September 16, 2003 to reflect
      the impact of adopting SFAS 145 on the financial information reported in
      the Form 8-K filed on February 26, 2003**2002
      Form 10-K**
    US
      Holdings’ Annual Report on Form 10-K for the year ended December 31,
      2002**2003
      Form 10-K**
    US
      Holdings’ Annual Report on Form 10-K for the year ended December 31,
      2003**APB
      25**
    Accounting
      Principles Board Opinion No. 25, “Accounting for Stock Issued to
      Employees”**APB
      30**
    Accounting
      Principles Board Opinion No. 30, “Reporting the Results of Operations -
      Reporting the Effects of Disposal of a Segment of a Business, and
      Extraordinary, Unusual and Infrequently Occurring Events and Transactions”**Bcf**
    billion
      cubic feet**Capgemini**
    Capgemini
      Energy LP, a new company providing business process support services to
      TXU Corp. and a subsidiary of Cap Gemini North America Inc.**Commission**
    Public
      Utility Commission of Texas**EITF**
    Emerging
      Issues Task Force**EITF
      98-10**
    EITF
      Issue No. 98-10, “Accounting for Contracts Involved in Energy Trading and
      Risk Management Activities”**EITF
      02-3**
    EITF
      Issue No. 02-3, “Issues Involved in Accounting for Derivative Contracts
      Held for Trading Purposes and Contracts Involved in Energy Trading and
      Risk Management Activities”**EPA**
    Environmental
      Protection Agency**ERCOT**
    Electric
      Reliability Council of Texas, the Independent System Operator and the
      regional reliability coordinator of various electricity systems within
      Texas**ERISA**
    Employee
      Retirement Income Security Act**FASB**
    Financial
      Accounting Standards Board, the designated organization in the private
      sector for establishing standards for financial accounting and
      reporting.**FERC**
    Federal
      Energy Regulatory Commission**FIN**
    Financial
      Accounting Standards Board Interpretation**FIN
      46**
    FIN
      No. 46, “Consolidation of Variable Interest Entities”**FIN
      46R**
    FIN
      No. 46 (Revised 2003), “Consolidation of Variable Interest
      Entities”**Fitch**
    Fitch
      Ratings, Ltd.**FSP**
    FASB
      Staff Position (interpretations of standards issued by the staff of the
      FASB)
   ii
  **FSP
      106-1**
    FSP
      106-1, “Accounting and Disclosure Requirements Related to the Medicare
      Prescription Drug, Improvement and Modernization Act of 2003”**FSP
      106-2**
    FSP
      106-2, “Accounting and Disclosure Requirements Related to the Medicare
      Prescription Drug, Improvement and Modernization Act of 2003”**GW**
    gigawatts**GWh**
    gigawatt-hours**historical
      service territory**
    the
      territory, largely in North Texas, being served by US Holdings as a
      regulated utility at the time of entering retail competition on January 1,
      2002**IRS**
    Internal
      Revenue Service**kV**
    kilovolts**kWh**
    kilowatt-hours**Moody’s**
    Moody’s
      Investors Services, Inc.**MW**
    megawatts**MWh**
    megawatt-hours**NRC**
    United
      States Nuclear Regulatory Commission**POLR**
    provider
      of last resort of electricity to certain customers under the Commission
      rules interpreting the 1999 Restructuring Legislation**price-to-beat
      rate**
    residential
      and small business customer electricity rates established by the
      Commission that (i) were required to be charged in a REP’s historical
      service territories until the earlier of January 1, 2005 or the date when
      40% of the electricity consumed by such customer classes is supplied by
      competing REPs, adjusted periodically for changes in fuel costs, and (ii)
      are required to be made available to those customers until January 1,
      2007**REP**
    retail
      electric provider**S&P**
    Standard
      & Poor’s, a division of the McGraw Hill Companies**Sarbanes-Oxley**
    Sarbanes
      -Oxley Act of 2002**SEC**
    United
      States Securities and Exchange Commission**Settlement
      Plan**
    regulatory
      settlement plan that received final approval by the Commission in January
      2003**SFAS**
    Statement
      of Financial Accounting Standards issued by the FASB**SFAS
      4**
    SFAS
      No. 4, “Reporting Gains and Losses from Extinguishment of
      Debt”**SFAS
      34**
    SFAS
      No. 34, “Capitalization of Interest Cost”**SFAS
      71**
    SFAS
      No. 71, “Accounting for the Effect of Certain Types of
      Regulation”**SFAS
      87**
    SFAS
      No. 87, “Employers’ Accounting for Pensions”**SFAS
      106**
    SFAS
      No. 106, “Employers'
      Accounting for Postretirement Benefits Other Than Pensions”**SFAS
      109**
    SFAS
      No. 109, “Accounting for Income Taxes”**SFAS
      123**
    SFAS
      No. 123, “Accounting for Stock-Based Compensation”**SFAS
      123R**
    SFAS
      No. 123 (revised 2004), “Share-Based Payment”**SFAS
      133**
    SFAS
      No. 133, “Accounting for Derivative Instruments and Hedging
      Activities”
   iii
  **SFAS
      140**
    SFAS
      No. 140, “Accounting for Transfers and Servicing of Financial Assets and
      Extinguishments of Liabilities a replacement of FASB Statement
      125”**SFAS
      142**
    SFAS
      No. 142, “Goodwill and Other Intangible Assets”**SFAS
      143**
    SFAS
      No. 143, “Accounting for Asset Retirement Obligations”**SFAS
      144**
    SFAS
      No. 144, “Accounting for the Impairment or Disposal of Long-Lived
      Assets”**SFAS
      145**
    SFAS
      No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of
      FASB Statement 13, and Technical Corrections”**SG&A**
    selling,
      general and administrative**TCEQ**
    Texas
      Commission on Environmental Quality**TXU
      Corp.**
    refers
      to TXU Corp., a holding company, and/or its consolidated subsidiaries,
      depending on context**TXU
      Electric Delivery**
    refers
      to TXU Electric Delivery Company (formerly Oncor Electric Delivery
      Company), a subsidiary of US Holdings, and/or its consolidated bankruptcy
      remote financing subsidiary, TXU Electric Delivery Transition Bond Company
      LLC (formerly Oncor Electric Delivery Transition Bond Company LLC),
      depending on context**TXU
      Energy Holdings**
    refers
      to TXU Energy Company LLC, a subsidiary of US Holdings, and/or its
      consolidated subsidiaries, depending on context**TXU
      Fuel**
    TXU
      Fuel Company, a former subsidiary of TXU Energy Holdings**TXU
      Gas**
    TXU
      Gas Company, a former subsidiary of TXU Corp.**TXU
      Mining**
    TXU
      Mining Company LP, a subsidiary of TXU Energy Holdings**TXU
      Portfolio Management**
    TXU
      Portfolio Management Company LP, a subsidiary of TXU Energy
      Holdings**US**
    United
      States of America**US
      GAAP**
    accounting
      principles generally accepted in the US**US
      Holdings**
    TXU
      US Holdings Company, a subsidiary of TXU Corp. and parent of the TXU
      Energy Holdings and TXU Electric Delivery businesses







iv








**PART
I**





**Items
1. and 2.**  **BUSINESS
and PROPERTIES**





**TXU
US HOLDINGS COMPANY AND SUBSIDIARIES**





TXU US
Holdings Company (US Holdings) is a subsidiary of TXU Corp. and is a holding
company conducting its operations principally through its TXU Energy Company LLC
(TXU Energy Holdings) and TXU Electric Delivery Company (TXU Electric Delivery)
subsidiaries. TXU Energy Holdings is engaged in electricity generation and
retail and wholesale energy sales. TXU Electric Delivery engages in regulated
electricity transmission and distribution operations.





TXU
Energy Holdings provides electricity and related services to more than 2.5
million retail electricity customers in Texas, more customers than any other
retail electric provider (REP) in the state. TXU Energy Holdings owns or leases
over 18,300 MW of generation in Texas including 2,300 MW of nuclear and 5,837 MW
of lignite/coal-fired generation capacity. TXU Electric Delivery complements the
competitive operations, using asset management skills developed over more than
one hundred years, to provide reliable electricity delivery to consumers. TXU
Electric Delivery operates the largest distribution and transmission system in
Texas, providing power to approximately 3 million electric delivery points over
99,638 miles of distribution lines and 14,191 miles of transmission lines. At
December 31, 2004, US Holdings had 7,605 full-time employees, including 1,926 in
a collective bargaining unit.





US
Holdings operates primarily within the ERCOT system. ERCOT is an intrastate
network of investor-owned entities, cooperatives, public entities, nonutility
generators and power marketers. ERCOT is the regional reliability coordinating
organization for member electricity systems in Texas, the Independent System
Operator of the interconnected transmission system of those systems, and is
responsible for ensuring equal access to transmission service by all wholesale
market participants in the ERCOT region.





**BUSINESS
RESTRUCTURING**





During
2004, management reviewed US Holdings’ operations to identify and implement
strategic initiatives to improve operational and financial performance. Among a
number of actions, management completed the following:





***Divestitures*** ─ In
April 2004, TXU Energy Holdings distributed the assets of TXU Fuel, its gas
transportation subsidiary, to US Holdings at book value, including $16 million
of allocated goodwill. In June 2004, US Holdings completed the sale of the
assets of TXU Fuel to Energy Transfer Partners, L.P. for $500 million in cash.
TXU Fuel had 2003 revenues of approximately $65 million, the majority of which
represented gas transportation fees from TXU Energy Holdings. As part of the
transaction, TXU Energy Holdings entered into a transportation agreement,
intended to be market-price based, with the new owner to transport gas to TXU
Energy Holdings’ generation plants. Because of the continuing involvement in the
business through the transportation agreement, the sale of TXU Fuel assets has
not been accounted for as a discontinued operation.





***Other
Business Changes*** — In May
2004, TXU Corp. initiated an arrangement under which TXU Energy Holdings and TXU
Electric Delivery entered into services agreements with a subsidiary of Cap
Gemini North America Inc., Capgemini Energy LP (Capgemini), a new company
initially providing business process support services to TXU Corp., but
immediately implementing a plan to offer similar services to other utility
companies. Under the ten-year agreement, over 2,500 TXU Corp. employees
(including approximately 1,300 from US Holdings) transferred from subsidiaries
of TXU Corp. to Capgemini effective July 1, 2004. Outsourced base support
services performed by Capgemini for a fixed fee, subject to adjustment for
volumes or other factors, include information technology, customer call center,
billing, human resources, supply chain and certain accounting activities.





**1**








**TEXAS
ELECTRIC INDUSTRY RESTRUCTURING**





***RESTRUCTURING
LEGISLATION***





As a
result of the 1999 Restructuring Legislation, on January 1, 2002, TXU Corp.
disaggregated (unbundled) its Texas electric utility business into a power
generation company, a retail electric provider and an electricity transmission
and distribution (delivery) utility. Unbundled electricity delivery utilities
within ERCOT, such as TXU Electric Delivery, remain regulated by the Public
Utility Commission of Texas (the Commission).





Effective
January 1, 2002, REPs affiliated with electricity delivery utilities were
required to charge price-to-beat rates, established by the Commission, to
residential and small business customers located in their historical service
territories. TXU Energy Holdings, whose REP is affiliated with an electricity
delivery utility, was required to charge the price-to-beat rate, adjusted for
fuel factor changes, to such classes of customers until the earlier of January
1, 2005 or the date on which 40% of the electricity consumed by customers in
that class is supplied by competing REPs. Currently, TXU Energy Holdings may
offer rates different from the price-to-beat rate to customers in that class,
but it must also continue to make the price-to-beat rate available for
residential and small business customers until January 1, 2007. In December
2003, the Commission found that TXU Energy Holdings had met the 40% requirement
to be allowed to offer alternatives to the price-to-beat rate for small business
customers in its historical service territory.





Under
amended Commission rules, effective in April 2003, affiliated REPs of utilities
are allowed to petition the Commission twice a year for a change in the fuel
factor component of their price-to-beat rates if the average price of natural
gas futures increases or decreases more than 5% (10% if the petition is filed
after November 15 of any year) from the level used to set the existing
price-to-beat fuel factor rate. The fuel factor adjustment mechanism is intended
to encourage full and fair competition among providers of electricity. With fuel
factor adjustments, the price-to-beat is not expected to be below the market
rate, and this mechanism allows for new competitors to enter the marketplace and
effectively compete for retail customers.





—
    TXU
      Energy Holdings implemented two price-to-beat increases in 2003. The
      first, requested in January and approved by the Commission and implemented
      in March, raised the average monthly residential bill of a customer using
      1,000 kilowatt hours by 12%. The second increase, requested in July and
      approved and implemented in August, raised the average monthly residential
      bill by 4%.





—
    TXU
      Energy Holdings also implemented two price-to-beat increases in 2004. The
      first, requested in March and approved and implemented in May, raised the
      average monthly residential bill by 3%. The second increase, requested in
      June, approved in July and implemented in August, raised the average
      monthly residential bill by 6%.





Also,
effective January 1, 2002, power generation companies affiliated with
electricity delivery utilities may charge unregulated prices in connection with
ERCOT wholesale power transactions. Estimated costs associated with TXU Energy
Holdings’ nuclear power plant decommissioning obligations continue to be
recovered by TXU Electric Delivery as an electricity distribution fee surcharge
over the life of the plant.





***REGULATORY
SETTLEMENT PLAN*** ****





On
December 31, 2001, US Holdings filed a Settlement Plan with the Commission. It
resolved all major pending issues related to US Holdings’ transition to
competition pursuant to the 1999 Restructuring Legislation. The Settlement Plan,
which became final and nonappealable in January 2003, does not remove regulatory
oversight of TXU Electric Delivery’s business nor does it eliminate TXU Energy
Holdings’ price-to-beat rates and related fuel adjustments.





The major
elements of the Settlement Plan are:





***Excess
Mitigation Credit*** ** — Over
the two-year period ended December 31, 2003, TXU Electric Delivery implemented a
stranded cost excess mitigation credit in the amount of $389 million (originally
estimated to be $350 million), plus $26 million in interest, applied as a
reduction to distribution fees charged to all REPs, including TXU Energy
Holdings. The credit was funded through payments on a note receivable from TXU
Energy Holdings.





**2**


******


***Regulatory
Asset Securitization*** — US
Holdings received a financing order authorizing the issuance of securitization
(transition) bonds in the aggregate principal amount of up to $1.3 billion to
recover regulatory asset stranded costs and other qualified costs. Accordingly,
TXU Electric Delivery Transition Bond Company LLC, a bankruptcy remote financing
subsidiary of TXU Electric Delivery, issued an initial $500 million of
securitization bonds in 2003 and the remaining $790 million in the first half of
2004. The principal and interest on the bonds are recoverable through revenues
as a transition charge to all REPs, including TXU Energy Holdings. There is no
remaining issuance authorization under the financing order.





***Retail
Clawback***  ***Credit*** —A
retail clawback credit related to residential customers was implemented in
January 2004. In 2004, the Commission determined that the clawback would be
applied at a rate of $2.73 per customer each month, ending in December 2005.
This credit is being applied to distribution fees charged by TXU Electric
Delivery to all REPs, including TXU Energy Holdings, over the period. TXU Energy
Holdings funds the credit provided by TXU Electric Delivery.





***Stranded
Costs and Fuel Cost Recovery*** — TXU
Energy Holdings’ stranded costs, not including regulatory assets, are fixed at
zero. US Holdings will not seek to recover its unrecovered fuel costs, which
existed at December 31, 2001. Also, it will not conduct a final fuel cost
reconciliation, which would have covered the period from July 1998 until the
beginning of competition in January 2002.





***PROVIDER
OF LAST RESORT***





The POLR
provides electric service only to customers who request POLR service, whose
selected REP goes out of business, or who are transferred to the POLR by other
REPs for reasons other than nonpayment. Through a competitive bid process, the
Commission selected a POLR to serve for a two-year term beginning January 1,
2003, for several areas within Texas. In areas for which no bids were submitted,
the Commission selected the POLR by lottery. TXU Energy Holdings did not bid to
be the POLR, but was designated POLR through lottery for residential and small
business customers in certain West Texas service areas and for small business
customers in the Houston service area. TXU Energy Holdings’ obligation to serve
as POLR in those areas ceased on December 31, 2004. However, the REPs selected
by the Commission to assume the POLR obligation in those areas on January 1,
2005 initially objected to that selection. To ensure continuity of POLR service,
TXU Energy Holdings voluntarily agreed to continue providing POLR service in
those areas until March 31, 2005, at which time TXU Energy Holdings’ POLR
obligations will cease. Under the current rule, the Commission will use a
competitive bid process in late 2006 to determine POLR providers for 2007 and
2008.





**OPERATING
SEGMENTS**








US
Holdings has two reportable segments: TXU Energy Holdings and TXU Electric
Delivery. (See Note 18 to Financial Statements for further information
concerning reportable business segments.)





**TXU
Energy Holdings** -
consists of operations, principally in the competitive Texas market, involving
power production (electricity generation), and retail and wholesale energy
sales.





**TXU
Electric Delivery** -
consists of regulated operations involving the transmission and distribution of
electricity in Texas.





**Other** - Remaining
nonsegment operations consisting primarily of servicing approximately $150 million of debt.





**3**





**TXU
ENERGY HOLDINGS SEGMENT**





The TXU
Energy Holdings segment’s operations are conducted principally through TXU
Energy Holdings and its following subsidiaries: TXU Generation Company LP; TXU
Portfolio Management Company LP; TXU Energy Retail Company LP; and two coal
mining subsidiaries.





TXU
Energy Holdings serves more than 2.5 million retail electric customers, of which
2.3 million are in its historical service territory. This territory, which is
located in the north-central, eastern and western parts of Texas, has an
estimated population in excess of 7 million, about one-third of the population
of Texas, and comprises 92 counties and 370 incorporated municipalities,
including Dallas/Fort Worth and surrounding suburbs, as well as Waco, Wichita
Falls, Odessa, Midland, Tyler and Killeen. The Dallas/Fort Worth area is a
diversified commercial and industrial center with substantial banking,
insurance, telecommunications, electronics, aerospace, petrochemical and
specialized steel manufacturing, and automotive and aircraft assembly
operations. TXU Energy Holdings also provides retail electric service in other
areas of ERCOT now open to competition, including the Houston, Corpus Christi,
and lower Rio Grande Valley areas of Texas.





Texas is
one of the fastest growing states in the nation and has attracted a number of
competitors into a deregulated energy market. As a result, competition is
expected to continue to be robust.





The power
fleet in Texas consists of 19 owned or leased plants with generating capacity
fueled as follows: 2,300 MW nuclear
(1 plant); 5,837  MW
coal/lignite (4 plants); and 10,228 MW gas/oil (14 plants). Of the total gas/oil
plant capacity, 1,028 MW represent units mothballed or no longer run for TXU
Energy Holdings’ benefit, 375 MW represent units under a reliability contract
with ERCOT and 2,516 MW represent units pending mothballing. TXU Energy Holdings
supplies its retail customer base from its power fleet as well as through
long-term power supply agreements and purchases in the wholesale markets. The
power generating plants and other important properties of TXU Energy Holdings
are located primarily on land owned in fee simple. TXU Energy Holdings has sold
and may from time to time sell generation assets to reduce its position in the
Texas market and provide funds for other investments or to reduce debt.





TXU
Energy Holdings is one of the largest purchasers of wind-generated energy in
Texas and the US. TXU Energy Holdings currently purchases energy from wind
projects with approximately 579 MW of capacity located in West Texas. TXU Energy
Holdings expects to continue to add additional wind generation to its portfolio
as commercial opportunities become available.





***Business
Organization —*** Although
the TXU Energy Holdings segment is managed as an integrated business, for
purposes of operational accountability and performance management, the segment
has been divided into the TXU Power business and the TXU Energy business.





TXU Power
consists of the nuclear-powered and lignite/coal-fired production operations
(referred to in the aggregate as baseload production). TXU Energy consists of
the consumer, business and wholesale sales operations. The wholesale markets
operation is responsible for hedging and risk management activities designed to
mitigate commodity price risk for the segment as a whole.





***TXU
Power***





***Nuclear-Powered
Production Assets*** — TXU
Power operates two baseload nuclear-fueled electricity generation units at the
Comanche Peak plant, each of which is designed for a capacity of 1,150 MW.





TXU
Power has on
hand, or has contracted for, enrichment services through mid-2006 and
fabrication services through 2011 for its nuclear units. TXU Power is finalizing
supply contracts for the purchase of uranium and conversion to meet its needs
through mid-2008 and does not anticipate any problems in completing the
contracts. TXU Power does not anticipate any difficulties procuring raw
materials and services beyond these dates.





TXU
Power’s onsite spent nuclear fuel storage capability is sufficient to
accommodate the operation of Comanche Peak through the year 2017, while
maintaining the capability to off-load the core of one of the nuclear-fueled
generating units.





**4**


Under
current regulatory licenses, nuclear decommissioning activities are projected to
begin in 2030 for Comanche Peak Unit 1 and 2033 for Unit 2 and common
facilities. Since January 1, 2002, projected decommissioning costs are being
recovered from TXU Electric Delivery’s customers through a delivery charge based
upon a 1997 site-specific study, adjusted for changes in the value of trust fund
assets, through rates placed into effect under the 2001 Unbundled Cost of
Service filing.





The
Comanche Peak nuclear-powered generation units were originally estimated to have
a useful life of 40 years, based on the life of the operating licenses granted
by the NRC. Over the last several years, the NRC has granted 20-year extensions
to the initial 40-year terms for several commercial power reactors. Based on
these extensions and current expectations of industry practice, the useful life
of the Comanche Peak nuclear-powered generation units is now estimated to be 60
years. TXU Power expects to file a license extension request in accordance with
timing and other provisions established by the NRC. (See Note 2 to Financial
Statements under *Property,
Plant and Equipment* , for a
discussion of the change in depreciable lives for accounting purposes).





***Lignite/Coal-Fired
Production Assets*** —
Approximately 70% of the fuel used at TXU Power’s baseload lignite/coal-fired
generation plants in 2004 was supplied from owned in fee simple or leased proven
surface-minable lignite reserves dedicated to the Big Brown, Monticello and
Martin Lake generating plants, which were constructed adjacent to the reserves.
TXU Power utilizes owned and/or leased equipment to remove the overburden and
recover the lignite.





TXU Power
supplements its lignite fuel at Big Brown, Monticello and Martin Lake with
western coal from the Powder River Basin in Wyoming. The coal is purchased from
multiple suppliers under contracts of various lengths and is transported from
the Powder River Basin to TXU Power’s generating plants by railcar. Based on its
current usage, TXU Power believes that it has sufficient lignite reserves and
access to western coal resources for its generating needs in the foreseeable
future. During 2004, TXU Power secured a supply of western coal to satisfy the
majority of its purchased coal needs for the next five years.





One of
TXU Power’s key competitive strengths is its ability to produce electricity at
low variable costs in a market in which power prices are set by gas-fired
generation. New gas-fired capacity, while generally more efficient to operate
than existing gas/oil-fired capacity due to technological advances,
is  subject
to the volatile and increasing cost of natural gas fuel. On the other hand,
baseload nuclear and lignite/coal-fired plants have lower variable production
costs than new gas-fired plants at current average market gas prices.





***TXU
Energy***





***Competitive
Markets -*** Regulatory
restructuring in Texas has resulted in competitive markets within the state,
thus presenting additional opportunities for growth accompanied by the
introduction of competitive pressures. Texas is one of the fastest growing
states in the nation with a diverse and resilient economy and, as a result, has
attracted a number of competitors into the retail electricity market. TXU
Energy, as an active participant in this competitive market, is marketing its
services in Texas to add new customers and to retain its existing customers.





Based on
the latest data provided by ERCOT (November 2004), approximately 20% of all
customers in ERCOT areas open to customer choice had elected to switch
providers. At the present time, 67 REPs are certified to compete within the
state of Texas.





TXU
Energy believes that the scale derived from a large retail portfolio provides
the platform for a profitable operation by, among other things, reducing the
costs of service and billing per customer. TXU Energy emphasizes its
identification with the TXU brand and reputation and focuses on excellent
customer service as a way to continue to strengthen its reputation. TXU Energy
uses a value pricing approach by customizing its products to each customer
segment with service enhancements that are known to be valued by customers in
those segments. With its approach, TXU Energy intends to achieve substantially
higher customer loyalty and enhanced profit margins, while reducing the costs
associated with customers frequently switching suppliers.





TXU
Energy has invested in customer-related infrastructure and capabilities.
Together with its business support services vendor, Capgemini, TXU Energy uses
its customer relationships, customer service operations, technology operating
platforms, commercial operations, marketing, and customer loyalty to actively
compete to retain its customer base and to add customers.





**5**


***Wholesale
Markets Operations -*** TXU
Energy optimizes the value of the TXU Energy Holdings portfolio by balancing
customer demand for energy with the supply of energy in an economically
efficient and effective manner.    This effort includes hedging
and risk management as well as other value creation activities.  Retail and
wholesale demand  has generally been greater than volumes that can be
supplied by the baseload (nuclear and lignite/coal-fired) production; however,
the supply demand relationship will evolve over time as market fundamentals and
the retail competitive landscape change.   The wholesale markets
operations act to provide additional supply balancing through the gas/oil-fired
generation assets or purchases of power.  These operations manage the
commodity volume and price risks inherent in TXU Energy Holdings’ generation and
sales operations through supply structuring, pricing and hedging activities,
including hedging both future power sales and purchases of fuel supplies for the
generation plants.  These operations are also responsible for the efficient
dispatch of power from the generation plants.





TXU
Energy manages fifteen gas/oil-fired plants owned by TXU Power, including a 122
MW plant located in Pedricktown, New Jersey that is held for sale. Significant
portions of the gas/oil generating plants have the ability to switch between gas
and fuel oil. Gas/oil fuel requirements for 2004 were provided through a mix of
contracts with producers at the wellhead and contracts with commercial
suppliers. Fuel oil can be stored at 13 of the principally gas-fueled generating
plants. At December 31, 2004, TXU Energy had fuel oil storage capacity
sufficient to accommodate approximately 5.5 million barrels of oil and had
approximately 830,000 barrels of oil in inventory. TXU Energy may sell, lease,
toll or mothball additional capacity as economic conditions warrant. Mothballed
plants can be restored to operation if economic conditions warrant it. TXU
Energy ceased use of nine leased combustion turbines (585 MW) in December 2004
and has no intention to use the units for its own benefit for the remaining
terms of the leases.





In its
risk management activities, TXU Energy enters into physical delivery contracts,
exchange traded and “over-the-counter” financial contracts as well as bilateral
contracts with customers. Physical delivery contracts relate to the purchase and
sale of electricity and gas primarily in the wholesale markets in Texas. TXU
Energy’s risk management activities also incorporate some speculative trading
activity.





TXU
Energy manages exposure to price risk within established transactional policies
and limits. TXU Energy targets best practices in risk management and risk
control by employing proven principles used by financial institutions. These
controls have been structured so that they are practical in application and
consistent with stated business objectives. These operations revalue exposures
daily using integrated energy systems to capture value and mitigate risks. A
risk management forum meets regularly to ensure that transactional practices
comply with its prior approval of commodities, instruments, exchanges and
markets. Transactional risks are monitored and limits are enforced to comply
with the established risk policy. TXU Energy has a strict disciplinary program
to address any violations of its risk management policy requirements and
periodically reviews these policies to ensure they are responsive to changing
market and business conditions. These policies are designed to protect earnings,
cash flows and credit ratings.





TXU
Energy’s natural gas operations in Texas include wellhead production contracts,
transportation agreements and storage leases. Natural gas is purchased for
internal use in the generation of power, as well as for sale in wholesale
markets and to large business customers. Because of the correlation of natural
gas and power prices, TXU Energy’s natural gas operations provide opportunities
to hedge its margins on power sales.





***Competitive
Strategy -*** TXU
Energy’s strategy is to defend and build its customer base in the competitive
Texas market through superior management of its asset portfolio. Achieving
market leadership, operational excellence, and customer satisfaction are all
critical elements for executing on that strategy.





Retail
competition has remained steady in Texas with several large participants broadly
extending their marketing across all customer segments and all geographic areas
of competition. TXU Energy has successfully executed similar marketing programs
while retaining the majority of its incumbent residential customer base. TXU
Energy’s residential customer focus is to control costs and reduce customer
churn through improvements in the customer experience.





In 2004,
TXU Energy believes that it made a significant step toward achieving superior
customer service and operational excellence through the establishment of a
business relationship with Capgemini. Further discussion of TXU Corp.’s services
agreement with Capgemini is included in Note 1 to Financial Statements.





**6**





TXU
Energy will continue to focus on sustaining its leading position in the Texas
market by providing superior customer service, innovative new products and
effective commodity risk management. TXU Energy is in a position to move quickly
toward capturing new opportunities outside of Texas as they arise.


***ERCOT
Market —*** TXU
Energy Holdings believes that the ERCOT region presents an attractive
competitive electric service market due to the following factors:
 
 ·
    ERCOT’s
      market rules support fair and robust competition, while providing
      opportunities for TXU Energy Holdings to optimize its generation fleet
      operations and purchased power
requirements;
 
 ·
    peak
      demand is expected to grow at an average rate of approximately 2.4% per
      year; and
 
 ·
    it
      is a sizeable market with approximately 62 GW of peak demand and
      approximately 33 GW of average demand.


Reserve
margins calculated by ERCOT for the ERCOT market, based upon existing
operational capacity, planned new capacity with interconnection agreements, and
excluding capacity currently in, or planned for a mothballed state, are expected
to be 14.8% in 2005, 11.2% in 2006, 8.6% in 2007, 6.0% in 2008 and 3.4% in 2009.
ERCOT desires to maintain a reserve margin of 12.5% or higher. Accordingly,
these projected reserve margins may subsequently be adjusted by ERCOT to reflect
its pending decisions regarding whether to enter into Reliability Must Run
agreements (an agreement to run a unit that would not otherwise be operated
except as necessary to provide voltage support, stability or management of
transmission constraints) with units currently planned for mothballing.





To
encourage competition in the ERCOT region, each incumbent power generation
company owning 400 MW or more of installed generating capacity must annually
offer to sell at auction entitlements to 15% of the output of its installed
generating capacity. Such auction sales cannot be to an affiliated REP. The
obligation of TXU Energy Holdings to sell capacity entitlements at auction
continues until the earlier of January 1, 2007 or the date the Commission
determines that 40% or more of the electric power consumed by residential and
small business customers within the affiliated delivery utility certificated
service area before the onset of customer choice is provided by nonaffiliated
REPs. In 2004, TXU Energy Holdings held capacity auctions in March and July for
2004 capacity, and in September and November for 2005 capacity. TXU Energy
Holdings met its capacity auction obligations for 2004. In March 2005, TXU
Energy Holdings held a capacity auction for 2005 capacity. The next auction for
the remaining 2005 capacity obligations is scheduled for July 2005.





***Outside
Texas*** — ** Energy
industry restructuring, although proceeding well in Texas, has not had similar
success in most other parts of the US. As early as 2000, optimism for national
legislation and increased opening of competitive markets began to alter the
strategy of many industry participants. The establishment of Regional
Transmission Organizations and open access for both wholesale and retail
customers was on the horizon. Together with increasing customer demand for lower
priced electricity and other energy services, these measures were expected to
have accelerated the industry’s movement toward a more competitive pricing and
cost structure.





Many
states, faced with this increasing pressure from legislative bodies (federal and
state) to become more competitive while adhering to certain continued regulatory
requirements, along with changing economic conditions and rapid technological
changes, put forth deregulation plans that have since been deferred or changed.
The result is delayed restructuring. New entry by retailers as well as by
merchant generators in states other than Texas has been slowed. The continued
uncertainty regarding many state and federal regulatory policies has delayed the
opening of new retail markets.





***Customers*** — There
are no individually significant customers upon which TXU Energy Holdings’
business or results of operations are highly dependent.





**7**








***REGULATION
AND RATES***





See *Texas*  *Electric
Industry Restructuring* above
for a description of the significant regulatory provisions relating to the
deregulation of the Texas electric industry.





US
Holdings is a holding company as defined in the Public Utility Holding Company
Act of 1935. However, US Holdings and all of its subsidiary companies are exempt
from the provisions of such Act, except Section 9(a)(2) which relates to the
acquisition of securities of public utility companies and Section 33 which
relates to the acquisition of foreign (non-US) utility companies.





TXU
Energy Holdings is an exempt wholesale generator under the Federal Power Act and
is subject to the jurisdiction of the NRC with respect to its nuclear power
plant. NRC regulations govern the granting of licenses for the construction and
operation of nuclear power plants and subject such plants to continuing review
and regulation. TXU Energy Holdings also holds a power marketer license from
FERC.





See *Environmental
Matters* discussion below for environmental regulations and related matters.





**TXU
ELECTRIC DELIVERY SEGMENT**





The TXU
Electric Delivery segment consists of regulated electricity transmission and
distribution operations within Texas. TXU Electric Delivery provides the
essential service of delivering electricity safely, reliably and economically to
end-use consumers through its distribution systems. Operating assets of the
segment are located principally in the north-central, eastern and western parts
of Texas.





***ELECTRICITY
TRANSMISSION***





TXU
Electric Delivery’s electricity transmission business is responsible for the
safe and reliable operations of its transmission network and substations. These
responsibilities consist of the construction and maintenance of transmission
facilities and substations and the monitoring, controlling and dispatching of
high-voltage electricity over TXU Electric Delivery’s transmission facilities in
coordination with ERCOT.





TXU
Electric Delivery is a member of ERCOT, and the transmission business actively
supports the operations of ERCOT and market participants. The transmission
business participates with ERCOT and other member utilities to plan, design,
construct and operate new transmission lines, with regulatory approval,
necessary to maintain reliability, increase bulk power transfer capability and
to minimize limitations and constraints on the ERCOT transmission grid.





Transmission
revenues are provided under tariffs approved by either the Commission and, to a
small degree, the FERC. Network transmission revenues compensate TXU Electric
Delivery for delivery of power over transmission facilities operating at 60 kV
and above. Transformation service revenues compensate TXU Electric Delivery for
substation facilities that transform power from high-voltage transmission to
distribution voltages below 60 kV. Other services offered by the transmission
business include, but are not limited to: system impact studies, facilities
studies and maintenance of transformer equipment, substations and transmission
lines owned by other nonretail parties.





TXU
Electric Delivery’s transmission facilities include 4,511 circuit miles of
345-kV transmission lines and 9,680 circuit miles of 138- and 69-kV transmission
lines. Forty generating plants totaling 32,699 megawatts are directly connected
to TXU Electric Delivery’s transmission system, and 697 distribution substations
are served from TXU Electric Delivery’s transmission system.





TXU
Electric Delivery is connected by eight 345-kV lines to CenterPoint Energy Inc.;
by four 345-kV lines (one of which is an asynchronous high voltage direct
current interconnection) with the Southwest Power Pool; by eight 138-kV and
twelve 69-kV lines to American Electric Power Company Inc.; by six 345-kV,
eighteen 138-kV and three 69-kV lines to the Lower Colorado River Authority; by
seven 345-kV and nine 138-kV lines to the Texas Municipal Power Agency; by nine
138 kV and eleven 69 kV lines with Texas New Mexico Power; by four 345-kV,
eighty-five 138-kV and twenty 69 kV lines with Brazos Electric Power
Cooperative; by twenty-five 138 kV and six 69 kV lines with Rayburn Country
Electric Cooperative; and at thirteen points with smaller systems operating
wholly within Texas.





**8**


***ELECTRICITY
DISTRIBUTION***





TXU
Electric Delivery’s electricity distribution business is responsible for the
overall safe and efficient operation of distribution facilities, including power
delivery, power quality and system reliability. The TXU Electric Delivery
distribution system supplies electricity to approximately 3 million points of
delivery. The electricity distribution business consists of the ownership,
management, construction, maintenance and operation of the distribution system
within TXU Electric Delivery’s certificated service area. Over the past five
years, the number of TXU Electric Delivery’s distribution system points of
delivery served has been growing an average of 2% per year.





TXU
Electric Delivery’s distribution system receives electricity from the
transmission system through substations and distributes electricity to end-users
and wholesale customers through 2,943 distribution feeders.





The TXU
Electric Delivery distribution system consists of 55,718 miles of overhead
primary conductors, 22,114 miles of overhead secondary and street light
conductors, 13,527 miles of underground primary conductors and 8,279 miles of
underground secondary and street light conductors. The majority of the
distribution system operates at 25-kV and 12.5-kV.





Most of
TXU Electric Delivery’s power lines have been constructed over lands of others
pursuant to easements or along public highways, streets and rights-of-way as
permitted by law.





***CUSTOMERS***





TXU
Electric Delivery’s transmission customers consist of municipalities, electric
cooperatives and other distribution companies. TXU Electric Delivery’s
distribution customers consist of 47 REPs in TXU Electric Delivery’s certified
service area, including affiliated REPs. For the year ended December 31, 2004,
distribution revenues from TXU Energy Holdings represented approximately 71% of
TXU Electric Delivery’s total distribution revenues and 64% of TXU Electric
Delivery’s total revenues. There are no individually significant unaffiliated
consumers upon which TXU Electric Delivery’s business or results are highly
dependent.





Since
January 1, 2002, the retail customers who purchase and consume electricity and
are connected to TXU Electric Delivery’s system have been free to choose their
electricity supplier from REPs who compete for their business. The changed
character of electric service, however, does not mean that the safe and reliable
delivery of dependable power is any less critical to TXU Electric Delivery’s
success. Service quality, safety and reliability are of paramount importance to
REPs, electricity consumers and TXU Electric Delivery. TXU Electric Delivery
intends to continue to build on its inherited tradition of low cost and high
performance.





***STRATEGY***





TXU
Electric Delivery’s primary mission is to deliver electricity safely, reliably
and economically to end-use consumers with a focus on operational excellence and
performance management that is critical for success.





TXU
Electric Delivery will continue to focus on providing top decile reliability,
world-class strategic sourcing and a lean administrative cost structure to
achieve operational excellence. TXU Electric Delivery has developed and
implemented a multiyear Comprehensive Maintenance Program in order to improve
reliability of its poorer performing facilities. This program is a proactive
strategy that includes both heavy maintenance activities and selective
replacement of aging infrastructure to avoid or minimize outages. This program
is expected to continue through 2006. TXU Electric Delivery has also implemented
a Transmission Grid Enhancement Program to invest in major electricity
transmission projects to further improve reliability and reduce congestion.





In 2004,
TXU Electric Delivery achieved top quartile performance levels of SAIDI and
CAIDI, two of the three key reliability indicators. This top quartile measure is
based on performance averages of a broad group of electric transmission and
distribution companies in North America. SAIDI performance, the average number
of total electric service outage minutes per customer in the past year, was
75.54 minutes and CAIDI performance, the average number of electric service
outage minutes per interruption in the past year, was 68.67 minutes. In
addition, the year-end 2004 SAIFI performance level, the average number of
electric service interruptions per customer per year, improved to 1.10
interruptions and is moving towards first-quartile levels.





**9**


TXU
Electric Delivery intends to focus on performance management in the future by
creating a high performance culture that aligns individual performance with
business objectives.





***REGULATION
AND RATES*** ******





See *Texas
Electric Industry Restructuring* above
for a description of the significant regulatory provisions relating to the
deregulation of the Texas electric industry.





As its
operations are wholly within Texas, TXU Electric Delivery believes that it is
not a public utility as defined in the Federal Power Act and has been advised by
its counsel that it is not subject to general regulation under such act.





The
Commission has original jurisdiction over transmission rates and services and
over distribution rates and services in unincorporated areas and in those
municipalities that have ceded original jurisdiction to the Commission and has
exclusive appellate jurisdiction to review the rate and service orders and
ordinances of municipalities. Generally, the Texas Public Utility Regulatory Act
(PURA) prohibits the collection of any rates or charges by a public utility (as
defined by PURA) that does not have the prior approval of the Commission.





At the
state level, PURA, as amended, requires owners or operators of transmission
facilities to provide open access wholesale transmission services to third
parties at rates and terms that are nondiscriminatory and comparable to the
rates and terms of the utility's own use of its system. The Commission has
adopted rules implementing the state open access requirements for utilities that
are subject to the Commission's jurisdiction over transmission services, such as
TXU Electric Delivery.





Provisions
of the 1999 Restructuring Legislation allow TXU Electric Delivery to annually
update its transmission rates to reflect changes in invested capital. These
provisions encourage investment in the transmission system to help ensure
reliability and efficiency by allowing for timely recovery of and return on new
transmission investments.





**ENVIRONMENTAL
MATTERS**





***Air
—*** The
federal Clean Air Act includes provisions which, among other things, place
limits on the sulfur dioxide (SO 2 ) and
nitrogen oxides (NOx) emissions produced by certain generation plants. In
addition to the new source performance standards applicable to SO 2 and NOx,
the Clean Air Act requires that fossil-fueled plants have sufficient
SO 2 emission
allowances and meet certain NOx emission standards. TXU Energy Holdings’
generation plants meet the SO 2 allowance requirements and NOx  emission
rates.





Recently,
the EPA issued a final rule to further reduce NOx and SO 2 **** emissions
from power plants. The SO 2 and NOx
reductions required under the Clean Air Implementation Rule (CAIR) are based on
a cap and trade approach (market-based) in which a cap is put on the total
quantity of emissions allowed in 28 eastern states (including Texas), emitters
are required to have allowances for each ton emitted, and emitters are allowed
to trade emissions under the cap. The CAIR reductions are proposed to be phased
in between 2010 and 2015.





On March
16, 2005, the EPA published a final rule requiring reductions of mercury from
coal-fired power plants. Based on a preliminary announcement from the EPA, the
rule will use a cap and trade approach on a nationwide basis. The mercury
reductions are proposed to be phased in between 2010 and 2018. US Holdings is in
the process of reviewing the final rules and is unable to determine what impact,
if any, the implementation of these rules will have on US Holdings’ results of
operations or financial position.





SO 2 reductions required under the proposed regional haze/visibility rule (or
so-called BART rule) only apply to units built between 1962 and 1977. The
reductions would be required on a unit-by-unit basis. EPA has suggested that
CAIR may satisfy the BART reductions.





Compliance
plans for all of these rules (CAIR, BART and mercury) will be coordinated. The
least cost approach to compliance will be developed. To comply with the eventual
final requirements of these rules, it is likely that some costs, which could be
material, will be incurred for installation of additional control equipment and
for facility operations and maintenance.





**10**


The
f ederal
Clean Air Act requires each state to monitor air quality for compliance with
federal health standards. The standards for ozone (both the one-hour and
eight-hour) are not being achieved in several areas of Texas. The TCEQ has
adopted revisions to its State Implementation Plan (SIP) rules that require an
88% reduction in NOx emissions from electricity generation plants in the
Dallas-Fort Worth ozone non-attainment area and a 51% reduction in
NOx  emissions
from electricity generation plants in East and Central Texas. Full compliance is
required by May 1, 2005. TXU Energy Holdings has installed all the pollution
control technology necessary to achieve the reductions in NOx required in 2005.
Additionally, the TCEQ is expected to propose new SIP rules by 2007 to deal with
8-hour ozone standards. These NOx reductions are expected to be less significant
in Texas than elsewhere because the most current data (for 2003) show that the
Texas NOx rate is 0.14 lb./mmBtu, which is approximately 50% below the national
average. These rules could require further NOx emission reductions from certain
TXU Energy Holdings facilities.





Major air
pollution control provisions of the 1999 Texas Restructuring Legislation
required a 50% reduction in NOx emissions and a 25% reduction in SO 2 emissions from “grandfathered” electric utility generation plants. The first
compliance period was for the year beginning May 1, 2003 through April 30, 2004.
TXU Energy Holdings has obtained all permits required for the “grandfathered”
plants by the 1999 Restructuring Legislation and has completed all construction
programs to install control equipment to achieve the required reductions. TXU
Energy Holdings is in compliance with the requirements at the end of the first
compliance period.





The Bush
Administration is addressing greenhouse gas emissions through its greenhouse gas
emissions intensity reduction Climate VISION program. The Bush Administration
and EPA have proposed the Clear Skies legislative initiative calling for
reductions of SO 2 , NOx,
and mercury emissions from electricity generation facilities over a 15-year
period. Some legislative proposals for additional regulation of SO 2 , NOx,
mercury and carbon dioxide have been considered at the federal level and it is
expected that additional similar proposals will be made in the future. US
Holdings continues to participate in a voluntary greenhouse gas emission
reduction program and since 1995 has reported the results of its program
annually to the U.S. Department of Energy. US Holdings is also participating in
a new voluntary electric utility industry sector climate change initiative in
partnership with the Department of Energy. In October
2004, US Holdings released an independent study by NERA Economic Consulting in
collaboration with Marc Goldsmith & Associates. The study evaluated TXU
Corp.’s processes for following and evaluating air emissions and climate
policies and reviewed US Holdings’ actions regarding previous major air
emissions policies and compliance. Additionally, the study considered the
financial consequences and related risks to US Holdings of prospective air
emissions and climate change policies, including an assessment of the financial
effects of reducing emissions now in anticipation of future requirements. The
study concluded that US Holdings has the appropriate processes and procedures in
place and uses appropriate economic methodologies to evaluate financial
consequences of environmental regulatory policy changes and scenarios. The study
also concluded that absent certain specific circumstances, US Holdings’
shareholders would not benefit if the company devoted major financial resources
now to reduce its carbon dioxide emissions in advance of uncertain future
emission regulations. In addition, the study concluded that US Holdings’ efforts
have consistently resulted in compliance with air emission limits. The study is
available on TXU Corp.'s website at http://www.txucorp.com/responsibility/environment/reports/Env_Study100104.pdf .





US
Holdings continues to assess the financial and operational risks posed by future
legislative changes pertaining to greenhouse gas emissions and multi-pollutant
emissions, but because these proposals are in the formative stages, US Holdings
is unable to predict their future impacts on the financial condition and
operations of US Holdings.





***Water
—*** The TCEQ
and/or the EPA have jurisdiction over water discharges (including storm water)
from all domestic facilities. Facilities of TXU Energy Holdings and TXU Electric
Delivery are presently in compliance with applicable state and federal
requirements relating to discharge of pollutants into the water. TXU Energy
Holdings and TXU Electric Delivery hold all required waste water discharge
permits from the TCEQ for facilities in operation and have applied for or
obtained necessary permits for facilities under construction. TXU Energy
Holdings and TXU Electric Delivery believe they can satisfy the requirements
necessary to obtain any required permits or renewals. Recent changes to federal
rules pertaining to Spill Prevention, Control and Countermeasure Plans for
oil-filled electrical equipment and bulk storage facilities for oil will require
updating of certain plans and facilities. TXU Electric Delivery is unable to
predict at this time the impact of these changes. Clean Water Act Section 316(b)
regulations pertaining to existing water intake structures were published by the
EPA in July 2004. As prescribed in the new regulations, TXU Energy Holdings is
implementing a monitoring program to determine the future actions that might
need to be taken to comply with these regulations. The results of this program
will determine the impact on TXU Energy Holdings.





**11**


******


***Other
—*** Diversion,
impoundment and withdrawal of water for cooling and other purposes are subject
to the jurisdiction of the TCEQ *.* TXU
Energy Holdings possesses all necessary permits for these activities from the
TCEQ for its present operations.





Treatment,
storage and disposal of solid and hazardous waste are regulated at the state
level under the Texas Solid Waste Disposal Act and at the federal level under
the Resource Conservation and Recovery Act of 1976, as amended, and the Toxic
Substances Control Act. The EPA has issued regulations under the Resource
Conservation and Recovery Act of 1976 and the Toxic Substances Control Act, and
the TCEQ has issued regulations under the Texas Solid Waste Disposal Act
applicable to facilities of TXU Energy Holdings and TXU Electric Delivery. TXU
Energy Holdings has registered solid waste disposal sites and has obtained or
applied for such permits as are required by such regulations.





Under the
federal Low-Level Radioactive Waste Policy Act of 1980, as amended, the State of
Texas is required to provide, either on its own or jointly with other states in
a compact, for the disposal of all low-level radioactive waste generated within
the state. The State of Texas has agreed to a compact for a disposal facility
that would be located in Texas. That compact was ratified by Congress and signed
by the President in 1998. In 2003, the State of Texas enacted legislation
allowing a private entity to be licensed to accept low-level radioactive waste
for disposal. In August 2004, the State received a license application from
Waste Control Specialists LLC for review. TXU Energy Holdings intends to
continue to ship low-level waste material off-site for as long as an alternative
disposal site is available. Should existing off-site disposal become
unavailable, the low-level waste material will be stored on-site. TXU Energy
Holdings’ on-site storage capacity is expected to be adequate until other
off-site facilities become available. (See Power Production - Nuclear-Powered
Production Assets above.)





***Environmental
Capital Expenditures*** - Capital
expenditures for TXU Energy Holdings’ environmental projects were $12.7 million
in 2004 and are expected to be about $15.8 million in 2005. TXU Electric
Delivery’s capital expenditures for environmental matters were $4 million in
2004 and are expected to be approximately $4 million in 2005.





**Item
3.**  **LEGAL
PROCEEDINGS**





On March
18, 2005, TXU Corp. received a subpoena from the SEC. The subpoena requires TXU
Corp. to produce documents and other information for the period from January 1,
2001 to March 31, 2003 relating to, among other things, the financial distress
at TXU Europe during 2002 and the resulting financial condition of TXU Corp.,
TXU Corp.’s reduction of its quarterly dividend in October 2002, and the
following two previously disclosed claims against TXU Corp. and certain other
persons named in such claims: (i) a lawsuit brought in April 2003 by a former
employee of TXU Portfolio Management, William J. Murray (Murray Litigation) and
(ii) various consolidated lawsuits brought by various shareholders of TXU Corp.
during late 2002 and January 2003 (Shareholders’ Litigation). The documents
accompanying the subpoena state that (i) the SEC is conducting a fact-finding
inquiry for purposes of allowing it to determine whether there have been any
violations of the federal securities laws and (ii) the request does not mean the
SEC has concluded that TXU Corp. or any other person has violated the law.





Although
TXU Corp. cannot predict the outcome of the SEC inquiry, as previously
disclosed, TXU Corp. does not believe that there is any merit to the claims made
in the Murray Litigation and it intends to vigorously defend such litigation. In
addition, TXU Corp. has executed a memorandum of understanding regarding the
settlement of the Shareholders’ Litigation. TXU Corp. expects to execute a final
agreement containing the terms of such settlement during the second quarter of
2005.





TXU Corp.
intends to cooperate with the SEC and is in the process of responding to the
subpoena.







On
February 18, 2005, a lawsuit was filed by Utility Choice, L.P. and Cirro Group,
Inc. in the United States District Court for the Southern District of Texas,
Houston Division, against TXU Corp. and certain of its subsidiaries, as well as
various other wholesale market participants doing business in ERCOT, claiming
generally that defendants engaged in a variety of anticompetitive conduct,
including market manipulation in violation of antitrust and other laws. TXU
Corp. believes that claims against it and its subsidiary companies are without
merit, and TXU Corp. and its subsidiaries intend to vigorously defend the
lawsuit. TXU Corp. is, however, unable to estimate any possible loss or predict
the outcome of this action.





**12**





Between
October 19 and December 30, 2004, ten lawsuits were filed by purported customers
in various California superior courts against TXU Corp., TXU Energy Trading Co.
and TXU Energy Services and other marketers, traders, transporters and sellers
of natural gas. Plaintiffs allege that beginning at least by the summer of 2000,
defendants manipulated and fixed at artificially high levels natural gas prices
in California in violation of the Cartwright Act and other California state
laws. These lawsuits have been coordinated in the San Diego Superior Court with
numerous other natural gas actions as "In re Natural Gas Anti-Trust Cases I, II,
III, IV and V." TXU Corp. believes the claims against TXU Corp. and its
subsidiaries are without merit, and intends to vigorously defend the lawsuits.
TXU Corp. is, however, unable to estimate any possible loss or predict the
outcome of these actions.





On July
7, 2003, a lawsuit was filed by Texas Commercial Energy (TCE) in the United
States District Court for the Southern District of Texas, Corpus Christi
Division, against TXU Energy Holdings and certain of its subsidiaries, as well
as various other wholesale market participants doing business in ERCOT, claiming
generally that defendants engaged in market manipulation, in violation of
antitrust and other laws, primarily during the period of extreme weather
conditions in late February 2003. An amended complaint was filed in February
2004 that joined additional, unaffiliated defendants. Three retail electric
providers filed motions for leave to intervene in the action alleging claims
substantially identical to TCE’s. In addition, approximately 25 purported former
customers of TCE filed a motion to intervene in the action alleging claims
substantially identical to TCE’s, both on their own behalf and on behalf of a
putative class of all former customers of TCE. An order granting TXU Energy
Holdings’ Motion to Dismiss based on the filed rate doctrine was entered on June
24, 2004. TCE has appealed the dismissal; however, US Holdings believes the
dismissal of the antitrust claims was proper and that it has not committed any
violation of the antitrust laws. The appeal remains pending before the Fifth
Circuit Court of Appeals. Further, the Commission’s investigation of the market
conditions in late February 2003 has not resulted in any finding adverse to US
Holdings. Accordingly, US Holdings believes that TCE’s and the intervenors’
claims are without merit, and intends to vigorously defend the lawsuit on
appeal. US Holdings is, however, unable to estimate any possible loss or predict
the outcome of this action.





On April
28, 2003, a lawsuit was filed by a former employee of TXU Portfolio Management
in the United States District Court for the Northern District of Texas, Dallas
Division, against TXU Corp., TXU Energy Holdings and TXU Portfolio Management.
The case is set for trial on June 6, 2005 and discovery in the case is
substantially complete. In the case, the plaintiff asserts claims under Section
806 of Sarbanes-Oxley arising from the termination of plaintiff’s employment and
claims for breach of contract relating to payment of certain bonuses. Plaintiff
seeks back pay, payment of bonuses and alternatively, reinstatement or future
compensation, including bonuses. US Holdings believes the plaintiff’s claims are
without merit. The plaintiff was terminated as the result of a reduction in
force, not as a reaction to any concerns the plaintiff had expressed, and
plaintiff was not in a position to evaluate TXU Corp.’s financial statements or
assess the adequacy of TXU Corp.’s financial disclosures. Thus, US Holdings does
not believe that there is any merit to the plaintiff’s claims under
Sarbanes-Oxley. US Holdings disputes the plaintiff’s claims and intends to
vigorously defend the litigation. US Holdings is, however, unable to estimate
any possible loss or predict the outcome of this action.





On March
10, 2003, a lawsuit was filed by Kimberly P. Killebrew in the United States
District Court for the Eastern District of Texas, Lufkin Division, against TXU
Corp. and TXU Portfolio Management, asserting generally that defendants engaged
in manipulation of the wholesale electric market, in violation of antitrust and
other laws. This case was transferred to the Beaumont Division of the Eastern
District of Texas and on March 24, 2004 was transferred to the Northern District
of Texas, Dallas Division. This action is brought by an individual, alleging to
be a retail consumer of electricity, on behalf of herself and as a proposed
representative of a putative class of retail purchasers of electricity that are
similarly situated. Defendants have filed a motion to dismiss the lawsuit which
is pending before the court; however, as a result of the dismissal of the
antitrust claims in the litigation described above brought by TCE, the parties
have agreed to stay this litigation until the appeal in the TCE case has been
decided. US Holdings believes that the plaintiff lacks standing to assert any
antitrust claims and that defendants have not violated antitrust laws or other
laws as claimed by plaintiff. Therefore, US Holdings believes that plaintiff’s
claims are without merit and plans to vigorously defend the lawsuit. US Holdings
is however, unable to estimate any possible loss or predict the outcome of this
action.





**13**


******


***General*** — In
addition to the above, US Holdings is involved in various other legal and
administrative proceedings in the normal course of business the ultimate
resolution of which, in the opinion of management, should not have a material
effect upon its financial position, results of operations or cash flows.





**Item
4.**  **SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS**





None.








**14**





**PART
II**





**Item
5.**  **MARKET
FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**





Not
applicable. All of US Holdings’ common stock is owned by TXU Corp. Reference is
made to Note 10 to Financial Statements regarding limitations upon payment of
dividends on common stock of US Holdings.





**Item
6.**  **SELECTED
FINANCIAL DATA**





The
information required hereunder is set forth under Selected Financial Data
included in Appendix A to this report.





**Item
7.**  **MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS**





The
information required hereunder is set forth in Management’s Discussion and
Analysis of Financial Condition and Results of Operations included in Appendix A
to this report.





**Item
7A.**  **QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





The
information required hereunder is set forth under Quantitative and Qualitative
Disclosures about Market Risk under Management’s Discussion and Analysis of
Financial Condition and Results of Operations included in Appendix A to this
report.





**Item
8.**  **FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA**





The
information required hereunder is set forth under Statement of Responsibility,
Report of Independent Registered Public Accounting Firm, Statements of
Consolidated Income, Statements of Consolidated Comprehensive Income, Statements
of Consolidated Cash Flows, Consolidated Balance Sheets, Statements of
Consolidated Shareholders’ Equity and Notes to Financial Statements included in
Appendix A to this report.





**Item
9.**  **CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE**





None.





**Item
9A.**  **CONTROLS
AND PROCEDURES**





An
evaluation was performed under the supervision and with the participation of US
Holdings’ management, including the principal executive officer and principal
financial officer, of the effectiveness of the design and operation of the
disclosure controls and procedures in effect as of December 31, 2004. This
evaluation took into consideration the strategic initiatives described in Note 1
to Financial Statements. Based on the evaluation performed, US Holdings’
management, including the principal executive officer and principal financial
officer, concluded that the disclosure controls and procedures were effective.





There
have been no changes in US Holdings’ internal controls over financial reporting
for its operations that have occurred during the most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, US
Holdings' internal controls over financial reporting.





**Item
9B.**  **OTHER
INFORMATION**





None.








**15**





**PART
III**





**Item
10.**  **DIRECTORS
AND EXECUTIVE OFFICERS OF REGISTRANT**





Identification
of Directors, business experience and other directorships:





**Name
      of Director**
    
    **Age**
    
    **Other
      Positions and Offices Presently Held With US Holdings (Current Term
      Expires**
      **in
      May 2005)**
    
    **Date
      First Elected as Director**
      **(Current
      Term Expires in May 2005)**
    
    **Present
      Principal Occupation or**
      **Employment
      and Principal**
      **Business
      (Preceding Five Years),**
      **Other
      Directorships**T.
      L. Baker
    
    59
    
    Chairman
      of the Board, President and Chief Executive Officer
    
    July
      26, 2004
    
    Chairman
      of the Board and Chief Executive of TXU Electric Delivery Company and
      Chairman of the Board and Chief Executive of TXU Electric Delivery
      Transition Bond Company; prior thereto Executive Vice President of TXU
      Corp. and President and Chief Executive of TXU Energy; prior thereto,
      Executive Vice President of TXU Energy; prior thereto, vice Chairman of
      Electric Delivery; prior thereto, President of Electric Delivery; prior
      thereto, President of TXU Electric Company; prior thereto, President,
      Electric Service Division of TXU Electric Company; other directorships:
      TXU Electric Delivery Company and TXU Electric Delivery Transition Bond
      Company LLC.David
      A. Campbell
    
    36
    
    None
    
    July
      26, 2004
    
    Executive
      Vice President of TXU Corp.; prior thereto, Principal of McKinsey &
      Company, Inc.; prior thereto, associate of McKinsey & Company, Inc.;
      other directorships: TXU Electric Delivery Company, TXU Electric Delivery
      Transition Bond Company LLC, and TXU Energy Company
LLC.Kirk
      R. Oliver
    
    47
    
    Executive
      Vice President and Chief Financial Officer
    
    July
      26, 2004
    
    Executive
      Vice President and Chief Financial Officer of TXU Corp., TXU Electric
      Delivery Company, TXU Electric Delivery Transition Bond Company, TXU
      Energy Company LLC and TXU US Holdings Company; prior thereto, Executive
      Vice President, Chief Financial Officer and Treasurer of TXU Corp. and
      Treasurer and Assistant Secretary of TXU Electric Delivery Company, TXU
      Energy Company LLC and TXU US Holdings Company; prior thereto, Treasurer
      and Assistant Secretary of TXU Corp., TXU Electric Delivery Company, TXU
      Energy Company LLC and TXU US Holdings Company; other directorships: TXU
      Electric Delivery Company, TXU Electric Delivery Transition Bond Company
      LLC, and TXU Energy Company LLC.Eric
      H. Peterson
    
    44
    
    None
    
    November
      1, 2002
    
    Executive
      Vice President and General Counsel of TXU Corp.; prior thereto, Senior
      Vice-President and General Counsel for DTE Energy; prior thereto, partner
      in the law firm of Worsham, Forsythe & Wooldridge; other
      directorships: TXU Electric Delivery Company, TXU Electric Delivery
      Transition Bond Company LLC, and TXU Energy Company
LLC.C.
      John Wilder
    
    46
    
    None
    
    March
      15, 2004
    
    President
      and Chief Executive of TXU Corp.; prior thereto, Executive Vice President
      and Chief Financial Officer of Entergy Corporation.; other directorships:
      TXU Corp., TXU Electric Delivery CompanyandTXU
      Energy Company LLC.





Directors
of US Holdings receive no compensation in their capacity as
Directors.





**16**








Identification
of Executive Officers and business experience:





**Name
      of Officer**
    
    **Age**
    
    **Positions
      and Offices Presently Held (Current Term Expires**
      **in
      May 2005)**
    
    **Date
      First Elected to Present Offices**
      **(Current
      Term Expires in May 2005)**
    
    **Business
      Experience**
      **(Preceding
      Five Years)**T.
      L. Baker
    
    59
    
    Chairman
      of the Board, President and Chief Executive Officer
    
    July
      26, 2004
    
    Chairman
      of the Board and Chief Executive of TXU Electric Delivery Company and
      Chairman of the Board and Chief Executive of TXU Electric Delivery
      Transition Bond Company; prior thereto Executive Vice President of TXU
      Corp. and President and Chief Executive of TXU Energy; prior thereto,
      Executive Vice President of TXU Energy; prior thereto, vice Chairman of
      Electric Delivery; prior thereto, President of Electric Delivery; prior
      thereto, President of TXU Electric Company; prior thereto, President,
      Electric Service Division of TXU Electric Company.M.
      S. Greene
    
    59
    
    Chairman
      of the Board, President and Chief Executive of TXU Generation Management
      Company LLC
    
    July
      26, 2004
    
    Chairman
      of the Board, President and Chief Executive of TXU Generation Management
      Company LLC and Executive Vice President of TXU Energy Company LLC; prior
      thereto, Vice Chairman and Chief Executive of TXU Electric Delivery
      Company; prior thereto, Vice Chairman of TXU Electric Delivery Company;
      prior thereto, President of TXU Electric Delivery Company; prior thereto,
      President of Transmission Division of TXU Electric; prior thereto,
      Executive Vice President of TXU Fuel.Paul
      O’Malley
    
    40
    
    Chairman
      of the Board, President and Chief Executive of TXU Energy Company
      LLC
    
    July
      26, 2004
    
    Chairman
      of the Board, President and Chief Executive of TXU Energy Company LLC;
      prior thereto, Senior Vice President and Principal Financial Officer of
      TXU Energy Company LLC; prior thereto, Chief Financial Officer of TXU
      Australia; prior thereto, Director - Corporate Finance of Deloitte Touche
      Tohmatsu.Kirk
      R. Oliver
    
    47
    
    Executive
      Vice President and Chief Financial Officer
    
    July
      26, 2004
    
    Executive
      Vice President and Chief Financial Officer of TXU Corp., TXU Electric
      Delivery Company, TXU Electric Delivery Transition Bond Company, TXU
      Energy Company LLC and TXU US Holdings Company; prior thereto, Executive
      Vice President, Chief Financial Officer and Treasurer of TXU Corp. and
      Treasurer and Assistant Secretary of TXU Electric Delivery Company, TXU
      Energy Company LLC and TXU US Holdings Company; prior thereto, Treasurer
      and Assistant Secretary of TXU Corp., TXU Electric Delivery Company, TXU
      Energy Company LLC and TXU US Holdings
Company.








There is
no family relationship between any of the above-named Directors and Executive
Officers.








**17**





**Item
11.**  **EXECUTIVE
COMPENSATION**





**EXECUTIVE
COMPENSATION**





US
Holdings (the Company) and its affiliates have provided compensation during the
last three calendar years to the executive officers named in the Summary
Compensation Table for services in all capacities. Certain information presented
for 2003 and 2002 has been reclassified to be consistent with the presentation
for 2004.




**SUMMARY
      COMPENSATION TABLE**
      ******Annual
      Compensation**
    
    **Long-Term
      Compensation****Awards**
    
    **Payouts****Other**
    
    
    
    
    
    
    
    **All****Annual**
    
    **Restricted**
    
    **Securities**
    
    
    
    **Other****Compen-**
    
    **Stock**
    
    **Underlying**
    
    **LTIP**
    
    **Compen-****Name
      and**
    
    
    
    **Salary**
    
    **Bonus**
    
    **sation**
    
    **Awards**
    
    **Options/**
    
    **Payouts**
    
    **sation****Principal
      Position**
    
    **Year**
    
    **($)**
    
    **($)(2)**
    
    **($)(3)**
    
    **($)(4)**
    
    **SARs
      (#)**
    
    **($)(5)**
    
    **($)(6)**T.
      L. Baker (1) (7)
      Chairman
      of the Board, President and Chief Executive Officer of the
      Company
    
    2004
      2003
      2002
    
    613,667
      516,667
      495,000
    
    379,200
      400,000
      0
    
    ---
      ---
      ---
    
    140,625
      112,500
      112,500
    
    ---
      ---
      ---
    
    12,767
      17,047
      1,109,770
    
    429,850
      114,620
      119,960M.
      S. Greene (1) (7)
      Chairman
      of the Board, President and Chief Executive of TXU Generation Management
      Company LLC
    
    2004
      2003
      2002
    
    459,500
      341,708
      326,667
    
    304,200
      225,000
      98,400
    
    ---
      ---
      ---
    
    101,250
      73,800
      73,800
    
    ---
      ---
      ---
    
    8,971
      12,683
      351,516
    
    286,851
      77,110
      82,420Paul
      O’Malley (1)
      Chairman
      of the Board, President and Chief Executive of TXU Energy Company
      LLC
    
    2004
      2003
      2002
    
    315,841
      246,402
      136,590
    
    274,200
      137,451
      57,177
    
    669,704
      933,583
      358,862
    
    ---
      ---
      ---
    
    ---
      ---
      ---
    
    ---
      ---
      ---
    
    16,686
      24,689
      15,631Kirk
      R. Oliver (1) (7).........
      Executive
      Vice President and Chief Financial Officer of the Company
    
    2004
      2003
      2002
    
    370,750
      267,500
      250,500
    
    304,200
      137,000
      76,500
    
    ---
      ---
      ---
    
    0
      0
      57,375
    
    ---
      ---
      ---
    
    6,901
      ---
      ---
    
    148,145
      38,255
      34,321C.
      John Wilder (1) (7)
      Former
      Chairman of the Board and Chief Executive of the Company (from March 15,
      2004 until July 26, 2004)
    
    2004
      2003
      2002
    
    1,055,871
      ---
      ---
    
    15,915,000
      ---
      ---
    
    788,883
      ---
      ---
    
    281,250
      ---
      ---
    
    ---
      ---
      ---
    
    36,907,589
      ---
      ---
    
    12,300
      ---
      ---Erle
      Nye (1) (7)
      Former
      Chairman of the Board and Chief Executive of the Company (until March 15,
      2004)
    
    2004
      2003
      2002
    
    1,033,333
      966,667
      1,037,500
    
    600,000
      1,000,000
      1,000,000
    
    ---
      ---
      71,236
    
    236,250
      213,750
      236,250
    
    ---
      ---
      ---
    
    0
      1,531
      4,286,400
    
    775,234
      282,911
      299,985H.
      Dan Farell (1) (7)
      Former
      Executive Vice President and Chief Financial Officer (from March 15, 2004
      until July 26, 2004)
    
    2004
      2003
      2002
    
    438,669
      366,667
      323,333
    
    228,500
      200,000
      0
    
    ---
      ---
      ---
    
    101,250
      84,375
      73,125
    
    ---
      ---
      ---
    
    9,144
      12,683
      349,638
    
    173,824
      62,236
      64,258







(1)
    As
      shown in Item 10, Messrs. Baker, Greene, O’Malley and Oliver have been
      employed by several TXU Corp. companies. Likewise, Mr. Farell has also
      been employed by several TXU Corp. companies. Because it would be
      impractical to allocate such officers’ salaries among the various
      companies, the table above includes the aggregate compensation paid by all
      TXU Corp. companies. Messrs. Wilder and Nye were solely compensated by TXU
      Corp.







**18**




(2)
    Amounts
      reported as Bonus in the Summary Compensation Table are attributable for
      the year earned principally to the named executive officers’ participation
      in the TXU Annual Incentive Plan (AIP). Under the terms of the AIP
      effective in 2004, target incentive awards ranging from 75% to 100% of
      base salary, with a maximum award of 100% of base salary, are established
      except that Mr. Wilder is entitled to a target bonus of 200% of base
      salary pursuant to his employment agreement (see footnote (7)). The
      percentage of the target or maximum actually awarded, if any, is dependent
      upon the attainment of per share net income goals established in advance
      by the TXU Corp. Organization and Compensation Committee (Committee), as
      well as the Committee’s evaluation of the participant’s and TXU Corp.’s
      performance. The amount reported as bonus for Mr. Wilder includes a
      signing bonus of $1,000,000, an AIP bonus payment of $2,500,000 for 2004
      and the market value at grant of 500,000 shares to a rabbi trust provided
      for under the terms of his employment agreement with TXU Corp. These
      shares will be distributed to Mr. Wilder in equal portions on the third
      and sixth anniversaries of his agreement. See the TXU Corp. Organization
      and Compensation Committee Report on Executive Compensation for more
      detail.




(3)
    The
      amounts for Mr. O’Malley reported as Other Annual Compensation consist of
      benefits provided by TXU Corp. under the standard expatriate policy in
      connection with his extended assignment in the United States. The amounts
      reported represent housing and taxes associated with these benefits paid
      on Mr. O’Malley’s behalf and certain other benefits. The amounts also
      include final compensation from TXU Australia upon Mr. O’Malley’s
      permanent move to the United States.




The
amount reported for Mr. Wilder as Other Annual Compensation primarily consists
of $560,982 for use of the TXU Corp. aircraft and $161,532 for temporary housing
and other related expenses associated with Mr. Wilder’s relocation to Dallas,
Texas pursuant to his employment agreement as discussed in footnote
(7).




For Mr.
Nye, the amount reported as Other Annual Compensation during 2002 primarily
consists of $39,468 for use of the TXU Corp. aircraft and $20,843 for club
dues.




(4)
    Amounts
      reported as Restricted Stock Awards in the Summary Compensation Table are
      attributable to the named officer’s participation in the Deferred and
      Incentive Compensation Plan (DICP). In November 2004, the Board of
      Directors of TXU Corp. approved an amendment to the DICP which will freeze
      any future participation as of March 31, 2005 (i.e., the end of the
      current DICP plan year). This amendment prohibits additional deferrals by
      existing participants and closes the DICP to new participants. As amended,
      existing DICP accounts will mature and be distributed in accordance with
      their normal schedule under the terms of the DICP. For DICP plan years
      beginning on or prior to April 1, 2004, participants in the DICP were
      permitted to defer a percentage of their base salary not to exceed a
      maximum percentage determined by the Committee for each plan year and in
      any event not to exceed 15% of the participant’s base salary. Salary
      deferred under the DICP is included in amounts reported as Salary in the
      Summary Compensation Table. TXU Corp. made a matching award (Matching
      Award) equal to 150% of the participant’s deferred salary. Prior to 2002,
      one-half of any AIP award (Incentive Award) was deferred and invested
      under the DICP. Matching Awards are subject to forfeiture under certain
      circumstances. Under the DICP, a trustee purchased TXU Corp. common stock
      with an amount of cash equal to each participant’s deferred salary and
      Matching Award, and accounts were established for each participant
      containing performance units (Units) equal to such number of common
      shares. DICP investments, including reinvested dividends, are restricted
      to TXU Corp. common stock, and the value of each Unit credited to
      participants’ accounts equals the value of a share of TXU Corp. common
      stock and is at risk based on the performance of the stock. On the
      expiration of a five year maturity period, the value of the participant’s
      maturing accounts are paid in cash based upon the then-current value of
      the Units; provided, however, that in no event will a participant’s
      account be deemed to have a cash value which is less than the sum of such
      participant’s deferrals together with 6% per annum interest compounded
      annually. Participants may elect to defer amounts that would otherwise
      mature under the DICP, under and subject to the provisions of the Salary
      Deferral Program (SDP) as discussed in footnote (6). The maturity period
      is waived if the participant dies or becomes totally and permanently
      disabled and may be extended under certain circumstances. Deferrals and
      matching awards under the DICP made after December 31, 2004, are subject
      to the provisions of Section 409A. Section 409A was enacted as part of the
      American Jobs Creation Act of 2004 (2004 Deferred Compensation
      Legislation) and substantially impacts the federal income tax rules
      associated with the deferral of income under nonqualified deferred
      arrangements. A transitional relief period will apply to the 2004 Deferred
      Compensation Legislation during which the Internal Revenue Service and the
      Treasury Department are expected to issue guidance and plans will be
      permitted to be amended for compliance with the 2004 Deferred Compensation
      Legislation. Accordingly, certain provisions of the DICP may be modified
      in order to comply with the requirements of Section 409A and related
      guidance.






**19**


Matching
Awards that have been made under the DICP are included under Restricted Stock
Awards in the Summary Compensation Table. As a result of these awards,
undistributed Matching and Incentive Awards made in prior years and dividends
reinvested thereon, the number and market value at December 31, 2004 of such
Units (each of which is equal to one share of common stock) held in the DICP
accounts for Messrs. Baker, Greene, O’Malley, Oliver, Wilder, Nye and Farell
were 19,358 ($1,249,752), 13,275 ($857,034), 0 ($0), 4,105 ($265,019), 9,787
($631,849), 59,816 ($3,861,721) and 13,754 ($887,958),
respectively.





(5)
    The
      amounts reported as LTIP Payouts in the Summary Compensation Table for
      2003 and 2004 reflect earnings distributed during the year on salaries
      previously deferred under the DICP. Amounts reported for 2002 also include
      the vesting and distribution of performance-based restricted stock awards
      under the Long-Term Incentive Compensation Plan (LTICP). For the LTICP
      cycles ending in 2003 and 2004, no awards were earned as a result of TXU
      Corp.’s performance against the applicable performance criteria and
      accordingly all such awards were forfeited.





The
amount of LTIP Payout for Mr. Wilder reflects the vesting of 1,000,000
performance units (each equivalent to one share of TXU Corp.’s stock) issued
pursuant to Mr. Wilder’s employment agreement as discussed in footnote (7) and
the TXU Corp. Organization and Compensation Committee Report on Executive
Compensation. Mr. Wilder’s employment agreement provided for the issuance of
1,000,000 performance units, divided into three roughly equal accounts, which
vested when the market price of TXU Corp.’s stock equaled or exceeded $29.00,
$31.00 and $33.00, respectively, for 30 consecutive trading days. Such share
price vesting performance targets reflected appreciation in the market price of
TXU Corp.’s stock of 16.8%, 24.8% and 32.9%, respectively, over the closing
share price of $24.83 per share on the last trading day prior to the date Mr.
Wilder entered into his employment agreement. All such performance units vested
during the period June 3-7, 2004.





The LTICP
is a comprehensive, stock-based incentive compensation plan providing for common
stock-based awards, including performance-based restricted stock and performance
units. Prior to awards granted in 2004, awards granted under the LTICP to the
named executive officers were comprised primarily of performance-based
restricted stock represented by Restricted Stock Award Agreements
(Performance-Based Agreements). During 2004, TXU Corp. also granted awards under
the LTICP to certain of its named executive officers pursuant to the terms and
conditions of Performance Unit Award Agreements (Unit Agreements). The material
terms of awards made under the LTICP to the Company’s named executive officers
are described below.





*Performance-Based
Agreements.* Performance-Based Agreements entered into to date under the LTICP provide for
the issuance of restricted shares of TXU Corp.’s common stock, which vest at the
end of a two or three year performance period as set forth in the applicable
Performance-Based Agreement. During the performance period, dividends on
restricted shares are reinvested in TXU Corp. common stock and are paid in cash
upon release of the restricted shares. Upon vesting, the restricted shares
become unrestricted shares of TXU Corp.’s common stock. The number of shares
actually awarded pursuant to each Performance-Based Agreement is determined
using a formula based on TXU Corp.’s total return to shareholders over the
applicable performance period compared to the total return of the companies
comprising the Standard & Poor’s 500 Electric Utilities Index. Depending on
such total return, the number of shares originally awarded in such
Performance-Based Agreement is adjusted to become from 0% to 200% of the
original award. Generally, unvested restricted shares are forfeited upon
termination of employment for reasons other than death or disability, provided
that Performance-Based Agreements with named executive officers with whom TXU
Corp. has entered into employment agreements contain provisions intended to
conform the forfeiture provisions of the Performance-Based Agreement with the
termination provisions of the employment agreement.





**20**


*Unit
Agreements.* The Unit
Agreements entered into to date under the LTICP provide for the issuance of
performance units, each having a value equal to one share of TXU Corp.’s common
stock. The performance units vest at the end of a two or three year performance
period as set forth in the applicable Unit Agreement. During the performance
period, the value of the dividends which would have been paid had the
performance units been shares of TXU Corp. common stock are credited to the
award and increase the number of performance units subject to the award by the
number of shares which could have been purchased with such dividends. The number
of performance units actually awarded pursuant to each Unit Agreement is
determined using a formula based on TXU Corp.’s total return to shareholders
over the applicable performance period compared to the total return of the
companies comprising the Standard & Poor’s 500 Electric Utilities Index.
Depending on such total return, the number of performance units originally
awarded under the Unit Agreement (increased by the value of deemed dividends as
described above) is adjusted to become 0% to 200% of such original amount. Upon
vesting, each Unit Agreement, as amended pursuant to amendments entered into
effective December 31, 2004, requires TXU Corp. to distribute the number of
shares of TXU Corp.’s common stock equal to the number of performance units
subject to the Unit Agreement. Generally, unvested performance units are
forfeited upon termination of employment for reasons other than death or
disability, provided that Unit Agreements with named executive officers with
whom TXU Corp. has entered into employment agreements contain provisions
intended to conform the forfeiture provisions of the Unit Agreement with the
termination provisions of the employment agreement.





Under the
current terms of the LTICP, the maximum amount of any award (including awards
under the Performance-Based Agreements and Unit Agreements) that may be paid in
any one year to any of the named executive officers is the fair market value of
100,000 shares of TXU Corp.’s common stock determined as of the first day of
such calendar year. The portion of any award that, based on such limitation,
cannot be fully paid in any year is automatically deferred until a subsequent
year when it can be paid in accordance with applicable legal requirements
without violating such LTICP limitation.





As a
result of Performance-Based Awards and Performance Unit Awards under the LTICP,
and reinvested dividends thereon, the number of shares of restricted stock
and/or performance units, as granted, and the notional face value of such shares
and/or units at December 31, 2004 held for Messrs. Baker, Greene, O’Malley,
Oliver, Wilder, Nye and Farell were 200,772 ($12,961,840), 101,245 ($6,536,377),
79,824 ($5,153,437), 100,193 ($6,468,460), 301,727 ($19,479,495), 426,863
($27,558,275) and 76,697 ($4,951,558), respectively. The ultimate payouts of
these awards depends on meeting the vesting and performance criteria associated
with the various individual awards. If and when paid out, the awards will be
subject to the retention requirements described in the TXU Corp. Organization
and Compensation Committee Report.





As noted,
salaries deferred under the DICP are included in amounts reported as Salary in
the Summary Compensation Table. Amounts shown in the table below represent the
number of shares purchased under the DICP with such deferred salaries for 2004
and the number of shares awarded under the LTICP.


**LONG-TERM
      INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR****Deferred
      and Incentive****Compensation
      Plan****(DICP)**
    
    **Long-Term
      Incentive Compensation Plan (LTICP)****Number
      of**
    
    **Performance**
    
    **Number
      of**
    
    **Performance
      or****Shares,**
    
    **or
      Other**
    
    **Shares,**
    
    **Other
      Period****Units
      or**
    
    **Period
      Until**
    
    **Units
      or**
    
    **Until****Other**
    
    **Maturation
      or**
    
    **Other**
    
    **Maturation
      or**
    
    **Estimated
      Future Payouts****Name**
    **Rights
      (#)**
    
    **Payout**
    
    **Rights
      (#)**
    
    **Payout**
    
    **Minimum
      (#)**
    
    **Maximum
      (#)**T.
      L. Baker
    3,244
    
    5
      Years
    
    75,000
    
    3
      Years
    
    0
    
    150,000M.
      S. Greene
    2,335
    
    5
      Years
    
    54,250
    
    3
      Years
    
    0
    
    108,500Paul
      O’Malley
    0
    
    ---
    
    56,750
    
    3
      Years
    
    0
    
    113,500Kirk
      R. Oliver
    0
    
    ---
    
    69,750
    
    3
      Years
    
    0
    
    139,500C.
      John Wilder
    6,487
    
    5
      Years
    
    150,000
    
    2
      Years
    
    0
    
    300,000150,000
    
    3
      Years
    
    0
    
    300,000Erle
      Nye
    5,449
    
    5
      Years
    
    100,000
    
    3
      Years
    
    0
    
    200,000H.
      Dan Farell
    2,335
    
    5
      Years
    
    35,000
    
    3
      Years
    
    0
    
    70,000
 
 (6)Amounts
reported as All Other Compensation in the Summary Compensation Table are
attributable to the named executive officers' participation in certain plans and
as otherwise described in this footnote.














**21**


Under the
TXU Thrift Plan (Thrift Plan) all eligible employees of TXU Corp. and any of its
participating subsidiaries may invest a portion of their regular salary or wages
among a variety of investment options, including certain mutual funds and common
stock of TXU Corp. Under the Thrift Plan, TXU Corp. matches a portion of an
employee’s contributions. TXU Corp.’s matching contribution is 75% of the first
6% of the employee’s contribution for employees covered under the traditional
defined benefit component of the TXU Retirement Plan, and 100% of the first 6%
of the employee’s contribution for employees covered under the cash balance
component of the TXU Retirement Plan. All matching contributions are invested in
common stock of TXU Corp., subject to certain diversification and withdrawal
rights provided for in the Thrift Plan. The amounts reported under All Other
Compensation in the Summary Compensation Table include these matching amounts
which, for Messrs. Baker, Greene, O’Malley, Oliver, Wilder, Nye and Farell were
$9,225, $9,225, $0, $9,225, $12,300, $12,300 and $9,225, respectively, during
2004.





Under the
Salary Deferral Program (SDP) each employee of TXU Corp. and its participating
subsidiaries whose annual salary is equal to or greater than an amount
established under the SDP ($107,930 for the program year beginning January 1,
2004) may elect to defer up to 50% of annual base salary, and/or up to 100% of
any bonus or incentive award and certain maturing DICP awards, for a period of
seven years, for a period ending with the retirement of such employee, or for a
combination thereof. TXU Corp. makes a matching award, subject to forfeiture
under certain circumstances, equal to 100% of up to the first 8% of salary
deferred under the SDP; provided that employees who first become eligible to
participate in the SDP on or after January 1, 2002, who are also eligible, or
become eligible, to participate in the DICP, are not eligible to receive any SDP
matching awards during the period prior to the discontinuation of the DICP on
March 31, 2005. Salaries and bonuses deferred under the SDP are included in
amounts reported under Salary and Bonus, respectively, in the Summary
Compensation Table. Deferrals are credited with earnings or losses based on the
performance of investment alternatives under the SDP selected by each
participant. At the end of the applicable maturity period, the trustee for the
SDP distributes the deferrals and the applicable earnings in cash as a lump sum
or in annual installments. TXU Corp. is financing the retirement option portion
of the SDP through the purchase of corporate-owned life insurance on the lives
of participants. The proceeds from such insurance are expected to allow TXU
Corp. to fully recover the cost of the retirement option. Deferrals and matching
awards under the SDP made after December 31, 2004, are subject to the provisions
of Section 409A. Accordingly, certain provisions of the SDP may be modified in
order to comply with the requirements of Section 409A and related guidance.
During 2004, matching awards, which are included under All Other Compensation in
the Summary Compensation Table, were made for Messrs. Baker, Greene, O’Malley,
Oliver, Wilder, Nye and Farell in the amounts of $49,093, $45,950, $0, $29,660,
$0, $82,667 and $35,093, respectively.





Under the
TXU Split-Dollar Life Insurance Program (Insurance Program) split-dollar life
insurance policies are purchased for eligible corporate officers of TXU Corp.
and its participating subsidiaries. The eligibility provisions of the Insurance
Program were modified in 2003 so that no new participants will be added after
December 31, 2003. The death benefit of participants’ insurance policies are
equal to two, three or four times their annual Insurance Program compensation
depending on their officer category. Individuals who first became eligible to
participate in the Insurance Program after October 15, 1996, vest in the
policies issued under the Insurance Program over a six-year period. TXU Corp.
pays the premiums for the policies and has received a collateral assignment of
the policies equal in value to the sum of all of its insurance premium payments;
provided that, with respect to executive officers, premium payments made after
August 1, 2002, are made on a non-split-dollar life insurance basis and TXU
Corp.’s rights under the collateral assignment are limited to premium payments
made prior to August 1, 2002. Although the Insurance Program is terminable at
any time, it is designed so that if it is continued, TXU Corp. will fully
recover all of the insurance premium payments covered by the collateral
assignments either upon the death of the participant or, if the assumptions made
as to policy yield are realized, upon the later of 15 years of participation or
the participant’s attainment of age 65. Because premium payments for the
Company’s executive officers were made on a non-split-dollar life insurance
basis during 2004, such premiums were fully taxable to the officers, and tax
gross-up payments were provided to offset the effect of such taxes. Additional
interest was attributed to such officers in 2004 relative to premium payments
which had been made on their behalf prior to August 1, 2002. The aggregate
amount of premiums and tax gross-up payments and interest attribution
for  Messrs.
Baker, Greene, O’Malley, Oliver, Wilder, Nye and Farell from the term insurance
coverage provided and the interest foregone on the remainder of the insurance
premiums paid by TXU Corp. amounted to $371,532, $231,676, $0, $109,260, $0,
$680,267 and $129,506, respectively.





**22**


Mr.
O’Malley, while an employee of TXU Australia, participated in the TXU Australia
superannuation plan, a tax-favored plan established under Australian law. Under
the terms of the plan, employees are permitted but not required to contribute to
the Plan. TXU Australia contributed each year a percentage of covered employees’
base salary, 10% in the case of Mr. O’Malley, and these contributions for Mr.
O’Malley are included as All Other Compensation.


(7)
    TXU
      Corp. has entered into employment agreements with Messrs. Baker, Greene,
      Oliver, Wilder, Nye and Farell as hereinafter described in this footnote.





TXU Corp.
entered into an employment agreement with Mr. Baker effective July 1, 2000.
The agreement, as amended, provides for the continued service by Mr. Baker
through February 28, 2006 (Term). Under the terms of the agreement, Mr. Baker
will, during the Term, be entitled to a minimum annual base salary of $420,000,
eligibility for an annual bonus under the terms of the AIP, and minimum
restricted stock awards of 12,000 shares under the LTICP. The agreement entitles
Mr. Baker to certain severance benefits in the event he is terminated without
cause during the Term, including a lump sum cash payment equal to the greater of
his annualized base salary and target bonus, or the total amount of base salary
and target bonuses he would have received for the remainder of the Term; a lump
sum cash payment in lieu of foregone and forfeited incentive compensation; and
health care benefits. The agreement also provides for compensation and benefits
under certain circumstances following a change-in-control of TXU Corp. during
the Term, including a lump sum cash payment equal to three times his annualized
base salary and target bonus; a lump sum cash payment in lieu of foregone and
forfeited incentive compensation; health care benefits and a tax gross-up
payment to offset any excise tax which may result from such change-in-control
payments.





TXU Corp.
entered into an employment agreement with Mr. Greene effective July 1, 2000. The
agreement, as amended, provides for the continued service by Mr. Greene through
June 30, 2006 (Term). Under the terms of the agreement, Mr. Greene will,
during the Term, be entitled to a minimum annual base salary of $300,000,
eligibility for an annual bonus under the terms of the AIP, and minimum
restricted stock awards of 5,000 shares under the LTICP. The agreement entitles
Mr. Greene to certain severance benefits in the event he is terminated without
cause during the Term, including a lump sum cash payment equal to the greater of
his annualized base salary and target bonus, or the total amount of base salary
and target bonuses he would have received for the remainder of the Term; a lump
sum cash payment in lieu of foregone and forfeited incentive compensation; and
health care benefits. The agreement also provides for compensation and benefits
under certain circumstances following a change-in-control of TXU Corp.,
including a lump sum cash payment equal to three times his annualized base
salary and target bonus; a lump sum cash payment in lieu of foregone and
forfeited incentive compensation; health care benefits and a tax gross-up
payment to offset any excise tax which may result from such change-in-control
payments.





TXU Corp.
entered into an employment agreement with Mr. Oliver effective September 1,
1998. The agreement was amended effective February 28, 2003. Under the
agreement, as amended, Mr. Oliver is entitled to certain severance benefits in
the event he is terminated without cause on or prior to February 28, 2006
(Term), including a payment equal to the greater of his annualized base salary
and target bonus, or the total amount of base salary and target bonuses he would
have received for the remainder of the Term; a payment in lieu of forfeited
incentive compensation; and health care benefits. The agreement also provides
for compensation and benefits under certain circumstances following a
change-in-control of TXU Corp. during the Term, including a payment equal to
three times his annualized base salary and target bonus; a payment in lieu of
foregone and forfeited incentive compensation; health care benefits and a tax
gross-up payment to offset any excise tax which may result from such
change-in-control payments.





**23**


Mr.
Wilder served as Chairman and Chief Executive of the Company. from March 15,
2004 until July 26, 2004 and remains as President and Chief Executive of TXU
Corp. TXU Corp. entered into an employment agreement with Mr. Wilder effective
February 23, 2004. The agreement provides for Mr. Wilder’s service as TXU
Corp.’s President and Chief Executive during a five-year term, which may be
extended for successive one-year periods subject to the terms of the agreement
(Term). TXU Corp. also agreed to use its best efforts to cause Mr. Wilder to be
elected as Chairman of the Board effective with TXU Corp.’s 2005 annual
shareholder’s meeting. The agreement provides that, during the Term, Mr. Wilder
will be entitled to a minimum annual base salary of $1,250,000; target annual
bonuses under the TXU Annual Incentive Plan of 200% of such base salary (Annual
Bonus) (except that Mr. Wilder is guaranteed receipt of the full 200% bonus in
2004); two initial awards of performance-based restricted stock under the LTICP
of 150,000 shares each, one with a two-year performance period and the other
with a three-year performance period; and annual performance-based restricted
stock awards under the LTICP of 150,000 shares (LTIP Awards) thereafter.
Additionally, as provided for in the agreement, TXU Corp. has established a
trust, which holds 500,000 shares of TXU Corp. common stock (Trust Shares)
purchased by TXU Corp., which Trust Shares are to be distributed to Mr. Wilder
in the form of stock, in equal portions on the third and sixth anniversaries of
the agreement unless otherwise deferred. TXU Corp. also awarded Mr. Wilder
1,000,000 phantom units of TXU Corp. common stock (Performance Units) divided
into three roughly equal accounts, which vested when the market price of TXU
Corp.’s stock equaled or exceeded $29.00, $31.00 and $33.00, respectively, for
30 consecutive trading days. Such share price vesting performance targets
reflected appreciation in the market price of TXU Corp.’s stock of 16.8%, 24.8%
and 32.9%, respectively, over the closing market price of $24.83 per share on
the last trading day prior to the date Mr. Wilder entered into his employment
agreement. Under the agreement, Mr. Wilder received a signing bonus of
$1,000,000, and is entitled to certain fringe benefits, including use of TXU
Corp.’s aircraft for security and safety purposes, reimbursement for temporary
living expenses, and relocation benefits, as well as tax reimbursement payments
related to such fringe benefits. The agreement also provides for certain
payments and benefits upon the expiration or termination of the agreement under
various circumstances, including: (i) in the event of Mr. Wilder’s termination
without cause or resignation for good reason, a lump sum cash payment equal to
the base salary and Annual Bonuses he would have received through the remainder
of the Term, with a minimum payment equal to two times the sum of his annualized
base salary and Annual Bonus; a prorated Annual Bonus for the year of
termination; payment of all outstanding LTIP Awards, as well as LTIP awards that
would have been made during the remainder of the initial five-year Term, at the
times such awards would otherwise have been paid in accordance with their terms;
distribution of the Trust Shares when they mature; and certain continuing health
care and fringe benefits; and (ii) in the event Mr. Wilder terminates his
employment within six months following a change in control of TXU Corp. which
occurs on or before the fourth anniversary of the agreement, a prorated Annual
Bonus for the year of termination; payment of all outstanding LTIP Awards at the
times such awards would otherwise have been paid in accordance with their terms;
distribution of the Trust Shares when they mature; and certain continuing health
care and fringe benefits. See the TXU Corp. Organization and Compensation
Committee Report on Executive Compensation for a description of the factors
considered by TXU Corp.’s Organization and Compensation Committee in determining
the terms of Mr. Wilder’s employment agreement and determining his
compensation.





Mr. Nye
served as Chairman of the Board and Chief Executive of the Company from February
27, 1987 until March 15, 2004. Effective June 1, 2002, TXU Corp. entered into a
new employment agreement with Mr. Nye, which superseded his previous employment
agreement. The new agreement provides for an initial term expiring May 31, 2005,
and a secondary term expiring May 31, 2007. During the initial term, Mr. Nye
served as TXU Corp.’s Chairman of the Board and Chief Executive until the
election of Mr. Wilder as TXU Corp.’s Chief Executive in February 2004, at which
time Mr. Nye continued to serve as TXU Corp.’s Chairman of the Board. During the
secondary term, Mr. Nye will continue as an employee of TXU Corp. or, with TXU
Corp.’s approval, he may retire and serve TXU Corp. in a consulting capacity
through the expiration of the secondary term. Mr. Nye will, during the initial
term, be entitled to a minimum annual base salary of $1,050,000, eligibility for
an annual bonus under the terms of the AIP, and minimum annual restricted stock
awards of 40,000 shares under the LTICP. The agreement also provides for a
special payment of $1,000,000 in consideration for his entering into the new
agreement, which amount is payable in equal annual installments over a five year
period. During the secondary term, Mr. Nye will be entitled to an annual base
salary equal to 75% of his base salary prior to expiration of the initial term
and eligible for a prorated bonus under the terms of the AIP for the 2005 AIP
plan year. The agreement also provides Mr. Nye with certain benefits following
his retirement, including office space and administrative support for a period
of five years, use of TXU Corp.’s aircraft for a period of five years (for
participation in business, civic and community activities with which he was
involved during his tenure as Chairman of the Board and Chief Executive of TXU
Corp.), annual medical examinations and financial planning services. The
agreement also reconfirms TXU Corp.’s prior agreement to fund the retirement
benefit to which Mr. Nye will be entitled under TXU Corp.’s supplemental
retirement plan. Additionally, the agreement entitles Mr. Nye to certain
severance benefits in the event he dies, becomes disabled, is terminated without
cause or resigns or retires with TXU Corp.’s approval during the term of the
agreement, including the base salary and annual incentive awards he would have
received; payment of the remaining special award installments at the terms
provided for in the agreement; a lump sum cash payment in lieu of foregone and
forfeited incentive compensation; and health care benefits. The agreement also
provides for compensation and benefits under certain circumstances following a
change-in-control of TXU Corp. during the initial term, including a payment
equal to the greater of three times his annualized base salary and target bonus
or the total base salary and bonus he would have received for the remainder of
the term of the agreement; any unpaid portion of the special bonus; a payment in
lieu of foregone and forfeited incentive compensation; health care benefits; and
a tax gross-up payment to offset any excise tax which may result from such
change-in-control payments.





**24**


Mr.
Farell served as Executive Vice President and Chief Financial Officer of the
Company from March 15, 2004 until July 26, 2004, and has, thereafter, continued
to serve TXU Corp. and its subsidiaries in other roles. TXU Corp. entered into
an employment agreement with Mr. Farell effective February 28, 2003. The
agreement provides for the continued service by Mr. Farell through February 28,
2006 (Term). Under the terms of the agreement, Mr. Farell will, during the Term,
be entitled to a minimum annual base salary of $375,000 and to participate in
all employee benefit plans to the extent that he is qualified to do so by virtue
of his employment with TXU Corp. The agreement entitles Mr. Farell to certain
severance benefits in the event he is terminated without cause during the Term,
including a lump sum cash payment equal to the greater of his annualized base
salary and target bonus, or the total amount of base salary and target bonuses
he would have received for the remainder of the Term; a lump sum cash payment in
lieu of forfeited incentive compensation; and health care benefits. The
agreement also provides for compensation and benefits under certain
circumstances following a change-in-control of TXU Corp. during the Term,
including a lump sum cash payment equal to three times his annualized base
salary and target bonus; a lump sum cash payment in lieu of foregone and
forfeited incentive compensation; health care benefits and a tax gross-up
payment to offset any excise tax which may result from such change-in-control
payments.





TXU Corp.
and its participating subsidiaries maintain a retirement plan (Retirement Plan),
which is qualified under applicable provisions of the Internal Revenue Code of
1986, as amended (Code). The Retirement Plan contains both a traditional defined
benefit component and a cash balance component. Annual retirement benefits under
the traditional defined benefit component, which applied during 2004 to each of
the named officers other than Messrs. O’Malley, Wilder and Nye, are computed as
follows: for each year of accredited service up to a total of 40 years, 1.3% of
the first $7,800, plus 1.5% of the excess over $7,800, of the participant’s
average annual earnings during his or her three years of highest earnings. The
cash balance component covers all employees who first become eligible to
participate in the Retirement Plan on or after January 1, 2002, and employees
previously covered under the traditional defined benefit component who elected
to convert the actuarial equivalent of their accrued traditional defined benefit
to the cash balance plan component. Mr. Nye elected to convert to the cash
balance component. Mr. Wilder will be eligible to participate in the cash
balance component of the Retirement Plan beginning March 1, 2005, after he has
met the one year eligibility requirement under the Retirement Plan.
Mr. O’Malley was eligible to participate in the Plan on August 1, 2004.
Under the cash balance component, hypothetical accounts are established for
participants and credited with monthly contribution credits equal to a
percentage of the participant’s compensation (3.5%, 4.5%, 5.5% or 6.5% depending
on the participant’s combined age and years of accredited service) and interest
credits based on the average yield of the 30-year Treasury bond for the 12
months ending November 30 of the prior year. Amounts reported under Salary for
the named executive officers in the Summary Compensation Table approximate
earnings as defined under the traditional defined benefit component of the
Retirement Plan without regard to any limitations imposed by the Code. Benefits
paid under the traditional defined benefit component of the Retirement Plan are
not subject to any reduction for Social Security payments but are limited by
provisions of the Code. Based on benefits accrued under the cash balance
component of the Retirement Plan as of December 31, 2004, the estimated annual
benefit payable in the form of a straight-life annuity as of that date for Mr.
Nye is $1,396,135. **** As of
December 31, 2004, years of accredited service under the Retirement Plan for
Messrs. Baker, Greene, O’Malley, Oliver, Wilder, Nye and Farell were 34, 34, 0,
5, 0, 40 and 30, respectively.





**PENSION
      PLAN TABLE****Years
      of Service****Remuneration**
    
    **20**
    
    **25**
    
    **30**
    
    **35**
    
    **40**$
      50,000
    
    $
      14,688
    
    $
      18,360
    
    $
      22,032
    
    $
      25,704
    
    $
      29,376100,000
    
    29,688
    
    37,110
    
    44,532
    
    51,954
    
    59,376200,000
    
    59,688
    
    74,610
    
    89,532
    
    104,454
    
    119,376400,000
    
    119,688
    
    149,610
    
    179,532
    
    209,454
    
    239,376800,000
    
    239,688
    
    299,610
    
    359,532
    
    419,454
    
    479,3761,000,000
    
    299,688
    
    374,610
    
    449,532
    
    524,454
    
    599,3761,400,000
    
    419,688
    
    524,610
    
    629,532
    
    734,454
    
    839,376








**25**


TXU
Corp.’s supplemental retirement plan (Supplemental Plan) provides for the
payment of retirement benefits, which would otherwise be limited by the Code or
the definition of earnings in the Retirement Plan, as well as retirement
compensation not payable under the Retirement Plan which TXU Corp. or its
participating subsidiaries are obligated to pay. Under the Supplemental Plan,
retirement benefits are calculated in accordance with the same formula used
under the qualified plan, except that, with respect to calculating the portion
of the Supplemental Plan benefit attributable to service under the traditional
defined benefit component of the Retirement Plan, earnings also include AIP
awards (100% of the AIP awards are reported under Bonus for the named officers
in the Summary Compensation Table). The table set forth above illustrates the
total annual benefit on a straight-life basis payable at retirement under the
Retirement Plan inclusive of benefits payable under the Supplemental Plan, prior
to any reduction for earlier-than-normal or a contingent beneficiary option
which may be selected by participants. Under current guidance, benefits accrued
and paid under the Supplemental Plan after December 31, 2004, are subject to the
provisions of Section 409A (as previously discussed in footnote (4)). As
additional guidance is issued by the Internal Revenue Service and Treasury
Department regarding Section 409A and related guidance, TXU Corp. may make
conforming changes to the Supplemental Plan.





**26**





**The
following report and performance graph are presented herein for information
purposes only. This information is not required to be included herein and shall
not be deemed to form a part of this report to be “filed” with the Securities
and Exchange Commission. The report set forth hereinafter is the report of the
Organization and Compensation Committee of the Board of Directors of TXU Corp.
as is currently expected to be filed with the SEC in the 2005 proxy statement of
TXU Corp.  and is illustrative of the methodology utilized in
establishing the compensation of executive officers of US Holdings. References
in the report to the “Company” are references to TXU Corp. and references to
“this proxy statement” are references to TXU Corp.’s proxy statement in
connection with TXU Corp.’s 2005 annual meeting of
shareholders.**





**ORGANIZATION
AND COMPENSATION COMMITTEE REPORT**


**ON
EXECUTIVE COMPENSATION**





***Overview***





*The
Organization and Compensation Committee of the Board of Directors: (i) reviews
and approves corporate goals and objectives relevant to the compensation of the
Chief Executive (CEO), evaluates the CEO’s performance in light of those goals
and objectives and determines and approves the CEO’s compensation based on such
evaluation; (ii) oversees the evaluation of senior executive officers other than
the CEO and reviews, determines and approves their compensation levels, (iii)
administers and makes recommendations to the Board with respect to the adoption,
amendment or termination of incentive compensation, equity-based and other
executive compensation and benefits plans, policies and practices; (iv) reviews
and discusses with the Board executive management succession planning; and (v)
makes recommendations to the Board with respect to the compensation of the
Company’s non-employee directors. The role and responsibilities of the Committee
are fully set forth in the Committee’s written charter which was approved by the
Board of Directors and which is posted on the Company’s website. As provided in
its charter, the Committee has the sole authority to retain and terminate any
compensation consultant to be used to assist in the evaluation of compensation
provided to officers and directors. The Committee consists only of directors of
the Company who satisfy the requirements for independence under applicable NYSE
Listing Standards. There were seven meetings of the Organization and
Compensation Committee in 2004. The Committee has directed the preparation of
this report and has approved its content and submission to the
shareholders.*





***Compensation
Philosophy***





*As a
matter of policy, the Committee believes that levels of executive compensation
should be based upon an evaluation of the performance of the Company and its
officers generally, as well as in comparison to persons with comparable
responsibilities in similar business enterprises. Compensation plans should
directly align executive compensation with positive, sustained returns to
shareholders with due consideration accorded to balancing both long-term and
short-term objectives. The overall compensation program emphasizes variable
compensation elements with a direct link to company financial performance and to
individual performance. The Committee has determined that, as a matter of policy
to be implemented over time, the base salaries of the officers will be generally
established around the median, or 50th percentile, of the base salaries provided
by comparable utility or energy companies, or other relevant market. The
Committee has also determined that annual incentive compensation targets will be
generally set around the median, or 50* *th* *percentile, of the targets provided by such comparable market; however, the
Committee also determined that annual incentive targets may reach the
75* *th* *percentile, or above, of such comparable market in circumstances where the
Company’s annual performance goals reach the 75* *th* *percentile or better relative to such market. Long-term incentive compensation
will generally balance absolute and relative stock price performance, and will
be generally targeted at the 50* *th* *percentile of the comparable market. The Committee reserves the right to set
compensation above the median in appropriate circumstances. Such compensation
principles and practices are intended to allow the Company to attract, retain
and motivate its key executives, to reward executives appropriately for their
contribution to the attainment of key strategic objectives, and to align the
interests of executives and shareholders through equity-based plans and
performance measures.*





*In
furtherance of these policies, nationally recognized executive compensation
consultants have been retained to assist the Committee in its periodic reviews
of compensation and benefits provided to officers. The consultants utilize
extensive nationwide survey data that tracks compensation trends of comparable
utilities and* *energy
companies as well as to general industry with respect both to the level and
composition of officers’ compensation.*





**27**


***Description
of 2004 Executive Compensation Program***





*The
compensation of the officers of the Company consists principally of (i) base
salaries, (ii) the opportunity to earn an incentive award under the Annual
Incentive Plan (AIP), (iii) awards of performance-based restricted shares or
performance units under the Long-Term Incentive Compensation Plan (Long-Term
Plan) and, to a lesser extent, (iv) the opportunity to participate in the
Deferred and Incentive Compensation Plan (DICP). The AIP award, if any, is based
on overall company performance, achievement of strategic goals and objectives
and individual performance. The ultimate value, if any, of awards of
performance-based restricted shares under the Long-Term Plan, as well as the
value of future payments under the DICP is directly related to the future
performance of the Company’s common stock, which aligns the officers’ and
shareholders’ interests. The Long-Term Plan is expected to be replaced by the
2005 Omnibus Incentive Plan (Omnibus Plan), if approved by shareholders. The
Company also intends to continue to provide incentive award opportunities under
an annual incentive plan, subject to maximum award levels established for
executive officers under the Omnibus Plan. It is anticipated that
performance-based incentive awards under the Omnibus Plan will, in future years,
continue to constitute a substantial percentage of the officers’ total
compensation.*





***Base
Salary*** *.
Consistent with the Committee’s philosophy, base salaries for the Company’s
executive officers in 2004 were generally set around the median, or 50th
percentile, of the base salaries provided by utility and energy companies
comparable to the Company or of the base salaries provided by the most relevant
comparable company set for a specific executive position. The Committee reviews
base salaries on an annual basis although salaries for senior officers may be
frozen for a period of time once they have achieved market levels. In this
process, along with the aforementioned industry benchmarks the Committee also
takes account of the particular capabilities, performance, and experience of
individual executives.*





***Annual
Incentive Compensation*** *.
Awards under the AIP are directly related to attaining corporate financial
performance goals, such as earnings growth, cash flow growth, or return on
invested capital, as well as strategic goals and objectives, such as business
unit performance, service quality and employee safety, as established and
assessed by the Committee. The AIP, which was first approved by the shareholders
in 1995 and re-approved in 2000, is administered by the Committee and provides
an objective framework for assessing annual individual and corporate
performance. Annual incentive awards for officers were determined under the
terms of the AIP in 2004. The Company expects that, in 2005, annual incentive
awards will be determined under an annual incentive plan subject to maximum
award levels established under the Omnibus Plan. The evaluation of each
individual participant’s performance under the AIP may be based upon the
attainment of a combination of corporate, group, business unit and individual
performance, and competitiveness with comparable external positions as measured
by periodic compensation surveys. Depending on the results of such performance
evaluations, and the attainment of the performance goals established in advance,
the Committee may provide annual incentive compensation awards to eligible
officers. The combination of individual and Company results, together with the
Committee’s evaluation of the competitive level of compensation which is
appropriate for such results, determines the amount of annual incentive, if any,
actually awarded. Awards under the AIP constitute the principal annual incentive
component of officers’ compensation.*





***Long-Term
Incentive Compensation*** *. The
Long-Term Plan, which was first approved by the shareholders in 1997 and
re-approved as amended in 2002, is also administered by the Committee and is a
comprehensive stock-based incentive compensation plan under which all awards are
made in, or based on the value of, the Company’s common stock. Awards under the
Long-Term Plan constitute the principal long-term component of officers’
compensation. The ultimate value, if any, of awards under the Long-Term Plan are
directly related to the future performance of the Company’s common stock. The
Long-Term Plan provides that, in the discretion of the Committee, awards may be
in the form of stock options, stock appreciation rights, performance and/or
restricted stock or stock units or in any other stock-based form. The purpose of
the Long-Term Plan is to provide performance-related incentives linked to
long-term performance goals. Such performance goals may include financial
performance criteria such as absolute or relative levels of total shareholder
return, revenues, sales, net income or net worth of the Company, any of its
subsidiaries, business units or other areas, all as the Committee may determine.
Awards under the Long-Term Plan provided to the officers of the Company have
been almost exclusively in the form of performance-based restricted stock or
performance units settled in shares, as more fully described
hereinafter.*





**28**


*The
basis for awards to executives under the Long-Term Plan is similar to that of
the awards under the AIP - i.e., a combination of attaining corporate
performance goals and accomplishing strategic goals and objectives, as well as
individual performance and competitiveness with the market median. The Committee
utilizes nationally recognized executive compensation consultants and extensive
nationwide market data to determine appropriate award levels.*





***Other
Benefits*** *. The
Company also provides certain benefits and perquisites to its executive
officers, in addition to those provided to other employees. These benefits and
perquisites are not tied to any formal performance criteria and are intended to
serve as part of a competitive total compensation program and to enhance the
executive’s ability to conduct the Company’s business. These benefits include
use of the Company aircraft, financial counseling, and reimbursement for certain
country club membership costs. In addition as described on page 16 in footnote
(3) to the Summary Compensation Table, the Company’s executives had been
permitted to defer up to 15% of their base salary, together with a Company
matching contribution equal to 150% of such deferrals, into an account under the
DICP; however, the Board, on recommendation of the Committee, has taken action
to close the Plan to any additional deferrals after March 31, 2005. Also, as
described on page 20 in footnote (5) to the Summary Compensation Table, the
Company provides split-dollar life insurance to eligible corporate officers;
however, this program was closed to new participants after December 31,
2003.*





***Basis
for 2004 Compensation*** *. In
establishing levels of executive compensation, the Committee has reviewed
periodic nationwide compensation and performance data, including the performance
measures under the AIP and the reports of its executive compensation
consultants. Information was also gathered from industry sources and other
published and private materials which provided a basis for comparing comparable
electric and gas utilities and other survey groups representing a large variety
of business organizations. Included in the data considered were the comparative
returns provided by the companies in the Standard & Poor’s 500 Electric
Utilities Index, which are reflected in the graph on page 32. Compensation
amounts were established by the Committee based upon its consideration of the
above comparative data and its subjective evaluation of Company and individual
performance at levels consistent with the Committee’s policy relating to total
direct compensation.*





*Since
its last report to shareholders which was published in the proxy statement for
the 2004 annual meeting of shareholders, the Committee has considered officers’
compensation matters at several meetings. The results of Committee actions taken
in 2004 are included in the Summary Compensation Table and related materials on
pages 15 through 23 of this proxy statement. Generally speaking, actions taken
at those meetings reflected the Committee’s consideration of the following
aspects of the Company’s performance and results in 2004: The Company achieved
significant improvement in its 2004 financial performance and financial
flexibility measures. The Company also achieved significant improvements in
returns on invested capital, based on results from continuing operations and
excluding special items. The Company’s nuclear plant operations achieved
record-setting production levels in 2004, as did the Company’s coal-fired
electric power generation plants. Customer service also showed significant
improvement, as call wait times dropped to 15 seconds or less in the latter half
of the year and the three-year average system reliability of the electric
transmission and distribution network continued to improve. The Company
completed numerous asset sales, including the sale of TXU Australia, TXU Gas,
and TXU Fuel, yielding total proceeds of nearly $7 billion. These proceeds were
redeployed as part of an overall capital and liability management program that
resulted in significant balance sheet restructuring and the return of value to
shareholders through share repurchases and a substantial dividend increase. The
Committee also considered the increase of more than 170% in the price of the
Company’s common stock during 2004.*





*Although
the Company achieved strong financial results in 2004 in excess of the EPS
thresholds for maximum allowed payout, the Committee, based on management’s
recommendation, determined that funding for officers’ 2004 AIP awards should be
limited to a target payout.*





*Primarily
at its meetings in February 2004 and July 2004, the Committee provided awards of
performance-based restricted shares under the Long-Term Plan to officers and
other key employees. The ultimate value of all of such awards, if any, will be
determined by the Company’s total return to shareholders over future performance
periods compared to the total returns for those periods of the companies
comprising the Standard & Poor’s 500 Electric Utilities Index. Depending
upon the Company’s relative total return for such periods, the officers may earn
from 0% to 200% of the original award, and their compensation is, thereby,
directly related to shareholder value. All of the awards under the Long-Term
Plan contemplate that 200% of the original award will be provided if the
Company’s total return is in the 81st percentile or above of the returns of the
companies comprising the Standard & Poor’s 500 Electric Utilities Index and
that such percentage of the original award will be reduced as the Company’s
return compared to the returns provided by the companies in the Index declines
so that 0% of the original award will be provided if the Company’s total return
is in the 40th percentile or below of returns provided by the companies
comprising the Index. Information relating to awards made to the named executive
officers in 2004 is contained in the table on page 19 of this proxy statement.
These awards, and any awards that may be made in the future, are based upon the
Committee’s evaluation of the appropriate level of long-term compensation
consistent with its policy relating to total direct
compensation.*





**29**


***Proposed
Changes to the Compensation Program for 2005.*** *During 2004, the Committee, with the assistance of nationally recognized
compensation consultants, undertook a review of the Company’s annual and
long-term incentive programs. The goals of this review were to ensure that the
Company’s compensation programs support changes in the Company’s business
strategy, model and structure, as well as reflect the changing external
environment with respect to compensation practices. The Committee believes that
the resulting modifications to the Company’s compensation programs will provide
more emphasis to variable compensation “at risk” elements with a direct link to
Company financial performance and to individual performance, and are aligned
with sustained shareholder returns. The Company will more directly utilize
individual performance as a factor in awarding long-term incentive grants and in
determining award payments under the annual incentive plan. The Omnibus Plan has
been approved by the Board of Directors, subject to shareholder approval at the
2005 annual meeting of shareholders to provide for the grant and payment of
long-term incentive awards to employees and non-employee directors and annual
incentives to executive officers.*





***Chief
Executive 2004 Compensation*** *. In
connection with Mr. Wilder’s employment effective February 23, 2004, the Company
entered into the employment agreement described on pages 20 & 21. The
Committee and the Board unanimously approved the terms and conditions of the
employment agreement after consideration of Mr. Wilder's qualifications and
experience, his previous compensation levels, foregone awards and other
compensation at his prior employer, and the competitive marketplace for
executive talent at comparable energy companies.*


*The
Committee was guided by certain key principles in determining the terms of Mr.
Wilder’s employment agreement. These principles included:*
 
 ·
    *obtaining
      the best possible management talent to lead the
    Company;*
 ·
    *instilling
      strong pay-for-performance metrics based on driving sustained growth in
      the Company’s financial results and shareholder returns;
      and*
 ·
    *linking
      Mr. Wilder’s compensation directly to the interests of
      shareholders.*


*Given
the Company’s performance in 2004, the Committee believes that Mr. Wilder’s
performance has dramatically exceeded expectations. The Company’s market
capitalization increased $7.8 billion or 102% in 2004, which was the largest
increase in the history of the Company. Additionally the total shareholder
return for common stock of the Company for 2004 was 178%, over 6.5 times the 27%
total return for the Standard & Poor’s 500 Electric Utilities index, and
third highest in the Standard & Poor’s 500. Mr. Wilder’s 2004 compensation
was less than 1% of the increase in the Company’s market capitalization from the
time of his hiring through the end of 2004.*





**30**


*Under
his employment agreement, Mr. Wilder is entitled to an annual base salary of
$1,250,000, or such higher amount as determined in the sole discretion of the
Board of Directors. Mr. Wilder’s employment agreement also provides Mr. Wilder
the opportunity to earn an annual cash bonus under the AIP. The Committee
approved a 2004 AIP bonus for Mr. Wilder of $2,500,000, equal to the target
payout level established for Mr. Wilder pursuant to his agreement. In addition,
Mr. Wilder received a one-time sign-on bonus of $1,000,000. Mr. Wilder’s
employment agreement also provides for equity-linked compensation. In connection
with his employment, the Company created a rabbi trust (the sole beneficiary of
which is Mr. Wilder) to which the Company contributed 500,000 shares of its
common stock. The agreement provides that Mr. Wilder’s right to receive
such shares shall be nonforfeitable at all times and that half of such shares
shall be distributed to Mr. Wilder on each of the third and sixth anniversaries
of his employment, unless otherwise deferred by Mr. Wilder. To attract Mr.
Wilder to the Company, the shares held in the rabbi trust were provided to
partially compensate him for forfeited compensation and benefits from his former
employer, which is a customary practice in executive employment. The deferral of
Mr. Wilder’s ability to receive such shares furthers the Company’s goals of
encouraging retention and placing an emphasis on long-term stock price
appreciation. Mr. Wilder’s employment agreement provided for the issuance of
1,000,000 performance units (each representing the equivalent of one share of
the Company’s stock), divided into three roughly equal accounts, which vested
when the Company’s share price equaled or exceeded $29.00, $31.00 and $33.00,
respectively, for 30 consecutive trading days. Such share price vesting
performance targets reflected appreciation in the market price of the Company’s
stock of 16.8%, 24.8% and 32.9%, respectively, over the closing share price of
the Company’s common stock of $24.83 per share on the last trading day prior to
the date Mr. Wilder entered into his employment agreement. These performance
targets were intended to further the emphasis on long-term share appreciation
and the targets substantially exceeded the long-term historical stock
appreciation performance of the Company and the industry in which the Company
competes. For the twenty year period from 1984 to 2003, the Company’s shares
appreciated a total of 2%. For the ten year period from 1994 to the end of 2003,
the Company’s shares depreciated a total of 45%. For the five year period from
1999 to 2003 the Company’s shares depreciated a total of 46%. The targets also
exceeded the total Standard & Poor’s 500 Electric Utilities Index price
appreciation for the ten year period from 1994 to the end of 2003 of 13% and the
Index price depreciation for the five year period from 1999 to 2003 of 9%.
Pursuant to his employment agreement, the Committee also granted Mr. Wilder two
separate “performance-based” restricted stock awards in 2004, each with a target
of 150,000 shares. The first grant has a two-year performance period (April 1,
2004 through March 31, 2006) and the second grant has a three-year performance
period (April 1, 2004 through March 31, 2007). Payouts in respect of such grants
shall be based on the Company’s total shareholder return relative to companies
comprising Standard & Poor’s 500 Electric Utilities Index as described above
and shall range from no payout (in the event that the Company’s total
shareholder return is in the 40th percentile or below of companies in the Index)
to 200% of target (in the event that the Company’s total shareholder return is
in the 81st percentile or above of companies in the Index). The linkage of the
payouts in respect of such shares to the Company’s performance relative to its
peers in the Index, together with the length of the related performance periods,
is intended to encourage retention and further align the interests of the
Company’s senior management with those of its shareholders.*





*The
agreement also entitles Mr. Wilder to certain fringe benefits and tax
reimbursement payments related to certain of those fringe benefits, as well as
benefits upon the expiration or termination of the agreement under various
circumstances. The agreement also allows him to elect to defer the receipt of
certain payments. The Committee determined, based upon its subjective evaluation
of competitive market conditions, that the amount as well as the form of Mr.
Wilder’s compensation was required and appropriate in order to attract, incent
and retain an individual with Mr. Wilder’s capabilities. A very significant
portion of Mr. Wilder’s total expected future compensation (namely his annual
bonus and performance-based restricted stock awards) will only be provided based
on the Company’s future performance, and his compensation is, therefore,
directly linked to shareholders’ long-term interests.*





*Actions
taken by the Committee in 2004 with respect to Mr. Nye’s compensation reflected
the transition of Mr. Nye from the Chief Executive to Chairman of the Board. Mr.
Nye’s annual salary was restored to $1,050,000 pursuant to his employment
agreement with the Company, eliminating the temporary one-year reduction taken
voluntarily by Mr. Nye following business reversals of the Company in late 2002.
Notwithstanding that his employment agreement entitled him to a higher amount,
Mr. Nye voluntarily agreed, with Committee approval, to limit his 2004 AIP bonus
to $600,000. In addition, in February 2004 the Committee made an award to Mr.
Nye of 100,000 performance-based restricted shares under the Long-Term Plan
described above. In making this award, the Committee considered Mr. Nye’s
continuation as Chairman of the Board, as well as his expected role in providing
advice and counsel to Mr. Wilder during the transition period.*





*As
previously reported, the Company has entered into employment agreements, as
approved by the Committee, with certain officers. The terms of employment
agreements with the named executive officers are described in footnote (6) to
the Summary Compensation Table on pages 20 through 23 of this proxy statement.*





*Certain
of the Company’s business units have developed separate annual incentive
compensation plans. Those plans focus on the results achieved by those
individual business units and the compensation opportunities provided by those
plans are considered to be competitive in the markets in which those units
compete. Generally, officers may not participate in both the traditional
incentive compensation plans as discussed herein and the business unit plans.*





**31**


*In
discharging its responsibilities with respect to establishing officers’
compensation, the Committee normally considers such matters at its February and
May meetings. Although Company management may be present during Committee
discussions of officers’ compensation, Committee decisions with respect to the
compensation of the Chief Executive are reached in private session without the
presence of any member of Company management.*





***Executive
Stock Ownership***





*The
Company believes that the financial interests of its executives should be
aligned with those of its shareholders. Accordingly, in 2004 the Company adopted
stock ownership guidelines that apply to the Chief Executive, the Company’s
Senior Leadership Team and approximately 40 members of the Company’s Leadership
Team. The Chief Executive is expected to own common stock of the Company having
a value equal to at least five times his annual salary. Members of the Senior
Leadership Team are expected to own common stock of the Company having a value
equal to at least three times their annual salaries. Other members of the
Leadership Team are expected to own common stock of the Company having a value
equal to at least one times their annual salaries. The Company will monitor
compliance through an annual survey, and executives will have five years in
which to comply with the guidelines. In addition, given that the Company is
entering the second year of a multi-year restructuring program, the Company has
adopted a requirement that these same executives retain a substantial portion of
any shares of common stock of the Company (on an after-tax basis) received in
settlement of awards under the Long-Term Plan, even if the executive’s stock
ownership meets or exceeds the stated ownership guidelines.*





***Deductibility
of Executive Compensation***





*Section 162(m)
of the Internal Revenue Code limits the tax deductibility by a publicly held
corporation of compensation in excess of $1 million paid to the Chief Executive
Officer or any other of its four most highly compensated executive officers,
unless that compensation is “performance-based compensation” as defined by the
Code. The Company believes that awards under the AIP and the Long-Term Plan
qualify as performance-based compensation and are not subject to any
deductibility limitations under Section 162(m). In addition, the DICP and
the Salary Deferral Program require the deferral of distributions of maturing
amounts until a time when such amounts would be deductible.*





*The
Committee considers deductibility under Section 162(m) with respect to
other compensation arrangements with executive officers. However, the Committee
and the Board believe that it is in the best interest of the Company that the
Committee retain its flexibility and discretion to make compensation awards,
whether or not deductible, when such awards are consistent with the strategic
goals and best interests of the Company and its shareholders. This flexibility
is necessary to foster achievement of performance goals established by the
Committee as well as other corporate goals that the Committee deems important to
the Company’s success, such as encouraging employee retention and rewarding
achievement.*





*Shareholder
comments to the Committee are welcomed and should be addressed to the Secretary
of the Company at the Company’s offices.*





*Organization
and Compensation Committee*





*J. E.
Oesterreicher, Chair*   *Kerney
Laday (appointed April 1, 2005)*


*E.
Gail de Planque*   *Jack
E. Little*


*Derek
C. Bonham*   *Herbert
H. Richardson*


*William
M. Griffin*








**32**





PERFORMANCE
GRAPH





The
following graph compares the performance of TXU Corp.’s common stock to the
S&P 500 Index and S&P 500 Electric Utilities Index for the last five
years. The graph assumes the investment of $100 at December 31, 1999 and that
all dividends were reinvested. The amount of the investment at the end of each
year is shown in the graph and in the table which follows.











**33**





**Item
12.**  **SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS**





Security
ownership of certain beneficial owners at February 28, 2005:





**Title
      of Class**
    
    **Name
      and Address**
      **of
      Beneficial Owner**
    
    ****
      **Amount
      and Nature**
      **of
      Beneficial Ownership**
    
    **Percent
      of Class**Class
      A common stock, without par value, of
      US
      Holdings
    
    TXU
      Corp.
      Energy
      Plaza
      1601
      Bryan Street
      Dallas,
      TX 75201
    
    2,062,768
      shares
      voting
      and
      investment
      power
    
    100%Class
      B common stock, without par value, of
      US
      Holdings
    
    TXU
      US Holdings Investment Company LLC (a)
      1403
      Foulk Road
      Wilmington,
      DE 19803
    
    39,192,594
      shares voting and
      investment
      power
    
    100%





(a)  A
wholly-owned subsidiary of TXU Corp.





Security
ownership of management February 28, 2005:





The
following lists the common stock of TXU Corp. owned by the Directors and certain
current and former Executive Officers of US Holdings. The named individuals have
sole voting and investment power for the shares of common stock reported.
Ownership of such common stock by the Directors and Executive Officers,
individually and as a group, constituted less than 1% of the outstanding shares
at February 28, 2005. None of the named individuals own any of the preferred
stock of US Holdings or the preferred securities of any subsidiaries of US
Holdings.





**Number of
      Shares****Name**
    **Beneficially
      Owned**
    
    **Share Units (1)**
    
    ******Total**T.
      L. Baker
    226,361
    
    
    32,545
    
    
    258,906David
      A. Campbell
    0
    
    
    0
    
    
    0M.
      S. Greene
    4,860
    
    
    22,318
    
    
    27,178Paul
      O’Malley
    0
    
    
    0
    
    
    0Kirk
      R. Oliver
    1,468
    
    
    6,902
    
    
    8,370Eric
      H. Peterson
    110,010
    
    
    11,393
    
    
    121,403C.
      John Wilder
    891,968
    
    
    519,332
    (2)
    
    1,411,300Erle
      Nye
    473,179
    
    
    100,561
    
    
    573,740H.
      Dan Farell
    84,622
    
    
    23,124
    
    
    107,746All
      Directors and Executive
      Officers
      as a group (9)
    1,792,468
    
    
    716,175
    
    
    2,508,643


_________________





(1)
    Share
      units held in deferred compensation accounts under the Deferred and
      Incentive Compensation Plan (DICP). This plan allows such units to be paid
      only in the form of cash. Investments in such units create an investment
      stake in the performance of TXU Corp.’s common stock similar to
      investments in actual shares of common stock, although investments in the
      DICP have a minimum guaranteed return of six percent (6%) as described in
      footnote (4) to the Summary Compensation
Table.


(2)
    Share
      units include shares held in a trust account established for Mr. Wilder
      pursuant to his employment agreement. See the TXU Corp. Organization and
      Compensation Committee Report on Executive Compensation for more
      details.





**34**


****


**Item
13.**





**CERTAIN
RELATIONSHIPS AND RELATED TRANSATIONS**





NONE




**Item
14.**  **PRINCIPAL
ACCOUNTING FEES AND SERVICES**





US
Holdings has no Audit Committee of its own, but relies upon the TXU Corp. Audit
Committee (Committee). The Committee has adopted a policy relating to engagement
of TXU Corp.’s independent auditors. The policy provides that in addition to the
audit of the financial statements, related quarterly reviews and other audit
services, Deloitte & Touche LLP may be engaged to provide nonaudit services
as described herein. Prior to engagement, all services to be rendered by the
independent auditors must be authorized by the Committee in accordance with
preapproval procedures which are defined in the policy. The preapproval
procedures require (i) the annual review and preapproval by the Committee of all
anticipated audit and nonaudit services; and (ii) the quarterly preapproval by
the Committee of services, if any, not previously approved and the review of the
status of previously approved services. The Committee may also approve certain
ongoing nonaudit services not previously approved in the limited circumstances
provided for in the SEC rules. All services performed by the independent auditor
were preapproved.





The
policy defines those nonaudit services which Deloitte & Touche LLP may also
be engaged to provide as follows: (i) audit related services (e.g. due diligence
related to mergers, acquisitions and divestitures; employee benefit plan audits;
accounting and financial reporting standards consultation; internal control
reviews; and the like); (ii) tax services (e.g. Federal and state tax returns;
regulatory rulings preparation; general tax, merger, acquisition and divestiture
consultation and planning; and the like); and (iii) other services (e.g. process
improvement, review and assurance; litigation and rate case assistance; general
research; and the like). The policy prohibits the engagement of Deloitte &
Touche LLP to provide (i) bookkeeping or other services related to the
accounting records or financial statements of US Holdings; (ii) financial
information systems design and implementation services; (iii) appraisal or
valuation services, fairness opinions, or contribution in-kind reports; (iv)
actuarial services; (v) internal audit outsourcing services; (vi) management or
human resources functions; (vii) broker-dealer, investment advisor, or
investment banking services; (viii) legal and expert services unrelated to the
audit; (ix) tax or financial planning advice to any officer of TXU Corp. and its
subsidiaries; and (x) any other services that the Public Company Accounting
Oversight Board determines, by regulation, to be impermissible.





Compliance
with the Committee’s policy relating to the engagement of Deloitte & Touche
LLP is monitored on behalf of the Committee by TXU Corp.’s chief internal audit
executive. Reports from Deloitte & Touche LLP and the chief internal audit
executive describing the services provided by the firm and fees for such
services are provided to the Committee no less often than quarterly.





**35**








For the
years ended December 31, 2004 and 2003, fees billed to US Holdings by Deloitte
& Touche LLP, the member firms of Deloitte Touche Tohmatsu and their
respective affiliates were as follows:





**2004**
    
    **2003****Audit
      Fees.**Fees for services necessary to perform the annual audit, review Securities
      and Exchange Commission filings, fulfill statutory and other attest
      service requirements, provide comfort letters and consents.
    
    $1,526,000
    
    $1,839,000**Audit-Related
      Fees.**Fees
      for services including employee benefit plan audits, due diligence related
      to mergers, acquisitions and divestitures, accounting consultations and
      audits in connection with acquisitions, internal control reviews, attest
      services that are not required by statute or regulation, and consultation
      concerning financial accounting and reporting standards
    
    882,000
    
    165,000**Tax
      Fees.**Fees
      for tax compliance, tax planning, and tax advice related to mergers and
      acquisitions, divestitures, and communications with and requests for
      rulings from taxing authorities.
    
    72,000
    
    —**All
      Other Fees.**Fees
      for services including process improvementreviews,
      forensic accounting reviews, litigation and rate case
      assistance
    
    —
    
    102,000**Total**
    
    **$2,480,000**
    
    **$2,106,000**








**36**








**PART
IV**





**Item
15.**  **EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES**


Page


(a)  Documents
filed as part of this Report:




Financial
Statements (included in Appendix A to this report):


Selected
      Financial Data
    A-2Management’s
      Discussion and Analysis of Financial Conditionand
      Results of Operations
    A-3Statement
      of Responsibility
    A-49Report
      of Independent Registered Public Accounting Firm
    A-50Statements
      of Consolidated Income for each of the three years inthe
      period ended December 31, 2004
    A-51Statements
      of Consolidated Comprehensive Income for each ofthe
      three years in the period ended December 31, 2004
    A-51Statements
      of Consolidated Cash Flows for each of the threeyears
      in the period ended December 31, 2004
    A-52Consolidated
      Balance Sheets, December 31, 2004 and 2003
    A-53Statements
      of Consolidated Shareholders’ Equity for each of thethree
      years in the period ended December 31, 2004
    A-54Notes
      to Financial Statements
    A-55





The
consolidated financial statement schedules are omitted because of the absence of
the conditions under which they are required or because the required information
is included in the consolidated financial statements or notes
thereto.





(b)  Exhibits:





Included
in Appendix B to this report.





**37**








**SIGNATURES**





**Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, TXU US Holdings Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.**





**TXU
      US HOLDINGS COMPANY**Date:March
      28, 2005By/s/T.
      L. Baker**(T.
      L. Baker, Chairman of the Board,****President and
      Chief Executive)**








**Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of TXU US Holdings Company and
in the capacities and on the date indicated.**








Signature
    Title
    Date/s/
    T.L.
      BAKER
    Principal
      Executive(T.L.
      Baker, Chairman of the Board,
    Officer
      and Director
    March
      28, 2005President
      and Chief Executive)/s/
    KIRK
      R. OLIVER
    Principal
      Financial Officer
    March
      28, 2005(Kirk
      R. Oliver, Executive Vice President
    and
      Directorand
      Chief Financial Officer)/s/
    STAN
      SZLAUDERBACH
    Principal
      Accounting Officer
    March
      28, 2005(Stan
      Szlauderbach, Senior Vice President andController)/s/
    C.
      JOHN WILDER
    Director
    March
      28, 2005(C.
      John Wilder)/s/
    DAVID
      A. CAMPBELL
    Director
    March
      28, 2005(David
      A. Campbell)/s/
    ERIC
      H. PETERSON
    Director
    March
      28, 2005(Eric
      H. Peterson)









**38**





**Appendix
A**





**TXU
US HOLDINGS COMPANY AND SUBSIDIARIES**





**INDEX
TO FINANCIAL INFORMATION**


**December
31, 2004**





**Page**Selected
      Financial Data
    A-2Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
    A-3Statement
      of Responsibility
    A-49Report
      of Independent Registered Public Accounting Firm
    A-50Financial
      Statements:Statements
      of Consolidated Income and Comprehensive Income
    A-51Statements
      of Consolidated Cash Flows
    A-52Consolidated
      Balance Sheets
    A-53Statements
      of Consolidated Shareholders’ Equity
    A-54Notes
      to Financial Statements
    A-55











**A-1**





**TXU
US HOLDINGS COMPANY AND SUBSIDIARIES**


**SELECTED
FINANCIAL DATA**




**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000**Total
      assets — end of year
    
    $
    23,963
    
    $
    23,070
    
    $
    24,877
    
    $
    22,086
    
    $
    23,277Property,
      plant and equipment - net — end of year
    
    $
    16,529
    
    $
    16,677
    
    $
    16,436
    
    $
    16,332
    
    $
    16,095Capital
      expenditures
    
    $
    881
    
    $
    706
    
    $
    797
    
    $
    962
    
    $
    771Capitalization
      — end of yearExchangeable
      subordinated notes (a)
    
    $
    —
    
    $
    —
    
    $
    486
    
    $
    —
    
    $
    —All
      other long-term debt, less amounts due currently
    
    
    7,571
    
    
    7,217
    
    
    6,127
    
    
    5,819
    
    
    5,264Long-term
      debt held by subsidiary trusts
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    876Exchangeable
      preferred membership interests of TXU Energy
      Holdings
      (a)
    
    
    511
    
    
    497
    
    
    —
    
    
    —
    
    
    —Preferred
      stock:Not
      subject to mandatory redemption
    
    
    38
    
    
    38
    
    
    115
    
    
    115
    
    
    115Subject
      to mandatory redemption
    
    
    —
    
    
    —
    
    
    21
    
    
    21
    
    
    21Common
      stock equity
    
    
    6,373
    
    
    6,282
    
    
    6,587
    
    
    7,349
    
    
    7,336Total
    
    $
    14,493
    
    $
    14,034
    
    $
    13,336
    
    $
    13,304
    
    $
    13,612Capitalization
      ratios — end of yearExchangeable
      subordinated notes (a)
    
    
    —
    %
    
    —
    %
    
    3.6
    %
    
    —
    %
    
    —
    %All
      other long-term debt, less amounts due currently
    
    
    52.2
    
    
    51.4
    
    
    46.0
    
    
    43.8
    
    
    38.7Long-term
      debt held by subsidiary trusts
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    6.4Exchangeable
      preferred membership interests of TXU Energy
      Holdings(a)
    
    
    3.5
    
    
    3.5
    
    
    —
    
    
    —
    
    
    —Preferred
      stock
    
    
    0.3
    
    
    0.3
    
    
    1.0
    
    
    1.0
    
    
    1.0Common
      stock equity
    
    
    44.0
    
    
    44.8
    
    
    49.4
    
    
    55.2
    
    
    53.9Total
    
    
    100.0
    %
    
    100.0
    %
    
    100.0
    %
    
    100.0
    %
    
    100.0
    %Embedded
      interest cost on long-term debt — end of year (b)
    
    
    6.1
    %
    
    6.6
    %
    
    6.9
    %
    
    6.1
    %
    
    7.5
    %Embedded
      distribution cost on long-term debt held by
      subsidiary
      trusts — end of year
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    8.3
    %Embedded
      dividend cost on preferred stock— end of year (c)
    
    
    14.0
    %
    
    14.7
    %
    
    7..5
    %
    
    7.5
    %
    
    8.1
    %Revenues
    
    $
    9,294
    
    $
    8,573
    
    $
    8,080
    
    $
    7,966
    
    $
    7,564Net
      income available for common stock (d)
    
    
    658
    
    
    655
    
    
    352
    
    
    707
    
    
    777Ratio
      of earnings to fixed charges (e)
    
    
    2.47
    
    
    2.63
    
    
    2.55
    
    
    3.15
    
    
    3.09Ratio
      of earnings to fixed charges and preferred dividends (e)
    
    
    2.45
    
    
    2.60
    
    
    2.48
    
    
    3.07
    
    
    3.02
 ________________





(a)  Amount is
presented net of discount.


(b)  Represents
the annual interest using year-end rates for variable rate debt and reflecting
the effects of interest rate swaps and


amortization
of any discounts, premiums, issuance costs and any deferred gains/losses on
reacquisitions divided by the carrying value


of the
debt plus or minus the unamortized balance of any discounts, premiums, issuance
costs and gains/losses on reacquisitions at the


end of
the year.


(c)  Includes
the unamortized balance of the loss on reacquired preferred stock and associated
amortization. The embedded dividend cost,


excluding
the effects of the loss on reacquired preferred stock is 6.7% for 2002, 2001and
2000.


(d)
    Net
      income available for common stock in 2004 includes a loss on discontinued
      operations of $34 million, an extraordinary gain of $16 million and the
      cumulative effect of change in accounting principle of $6 million. Net
      income available for common stock includes a loss on discontinued
      operations of $18 million and the cumulative effect of changes in
      accounting principles of( $58) million in 2003. Net income available for
      common stock in 2002 includes a loss on discontinued operations of $52
      million and an extraordinary charge of $134 million. 2001 includes a loss
      on discontinued operations of $28 million and an extraordinary charge of
      $57 million.


(e)
    Excludes
      a loss on discontinued operations of $34 million, an extraordinary gain of
      $16 million and the cumulative effect of change in accounting principle of
      $6 million in 2004. Excludes a loss on discontinued operations of $18
      million and the cumulative effect of changes in accounting principles of
      $58 million in 2003. Excludes a loss on discontinued operations of $52
      million and an extraordinary charge of $134 million. 2001 includes a loss
      on discontinued operations of $28 million and an extraordinary charge of
      $57 million.





Prior
year periods have been reclassifed to reflect certain operations as discontinued
operations. (See Note 4 to Financial Statements.)







**A-2**













**MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**


**AND
RESULTS OF OPERATIONS**





**BUSINESS**





US
Holdings is a subsidiary of TXU Corp. and is a holding company conducting its
operations principally through its TXU Energy Holdings and TXU Electric Delivery
subsidiaries. TXU Energy Holdings is engaged in electricity generation and
retail and wholesale energy sales largely in Texas. TXU Electric Delivery
engages in regulated electricity transmission and distribution operations in
Texas.





**TXU
Corp. Management Change and Restructuring Plan**





Mr. C.
John Wilder, who was named president and chief executive of TXU Corp. in
February 2004, and senior management reviewed TXU Corp.’s operations during 2004
to identify and implement strategic initiatives designed to improve operational
and financial performance. Areas reviewed included:





·
    Noncore business activities;


·
    Cost effectiveness of generation
operations;


·
    Administrative cost structure, including organizational alignments and
      headcount; and


·
    Opportunities to improve retail customer
service.





Management
believes that its actions in 2004 have resulted in sustainable profitability
improvements, principally through streamlining of the organization, optimization
of energy supply costs and improved customer retention. In addition, increased
focus on contingencies resulted in significant progress in resolving certain
regulatory matters. Certain of the actions have resulted in unusual charges and
credits impacting 2004 net income, summarized as follows and discussed below in
more detail:


**Income
      Statement**
    
    **Charge/(Credit)
      to Earnings****Classification**
    
    **Pretax**
    
    **After-tax**TXU
      Energy Holdings segment:Charges
      related to leased equipment
    
    
    
    
    
    Other
      deductions
    
    $
    180
    
    $
    117Software
      write-off
    
    
    
    
    
    Other
      deductions
    
    
    107
    
    
    70Employee
      severance costs
    
    
    
    
    
    Other
      deductions
    
    
    107
    
    
    69Power
      purchase contract termination
    
    
    
    
    
    Other
      deductions
    
    
    101
    
    
    66Spare
      parts inventory write-down
    
    
    
    
    
    Other
      deductions
    
    
    79
    
    
    51Outsourcing
      transition costs
    
    
    
    
    
    Other
      deductions
    
    
    10
    
    
    6Other
      asset impairments
    
    
    
    
    
    Other
      deductions
    
    
    6
    
    
    4Other
      charges
    
    
    
    
    
    Operating
      costs/SG&A
    
    
    8
    
    
    6Recognition
      of deferred gain on plant sales
    
    
    
    
    
    Other
      income
    
    
    (58
    )
    
    (38
    )Gain
      on sale of undeveloped properties
    
    
    
    
    
    Other
      income
    
    
    (19
    )
    
    (12
    )TXU
      Electric Delivery segment:Employee
      severance costs
    
    
    
    
    
    Other
      deductions
    
    
    20
    
    
    13Rate
      case settlement reserve
    
    
    
    
    
    Other
      deductions
    
    
    21
    
    
    14Outsourcing
      transition costs
    
    
    
    
    
    Other
      deductions
    
    
    4
    
    
    3Software
      write-off and asset impairment
    
    
    
    
    
    Other
      deductions
    
    
    4
    
    
    2Other
      charges
    
    
    
    
    
    Operating
      costs/SG&A
    
    
    2
    
    
    1Total
    
    
    
    
    
    
    
    $
    572
    
    $
    372





The
review of US Holdings’ operations and formulation of strategic initiatives is
ongoing, though the phases of the plan expected to result in restructuring
charges are largely completed. Certain of the strategic initiatives described
below could result in additional charges that US Holdings is currently unable to
predict. In addition, other new strategic initiatives that could also materially
affect US Holdings’ financial results are likely.





Following
is a discussion of the major activities associated with the restructuring plan:





*Sale
of TXU Fuel*





In April
2004, TXU Energy Holdings distributed the assets of TXU Fuel, its gas
transportation subsidiary, to US Holdings at book value, including $16 million
of allocated goodwill. In June 2004, US Holdings’ completed the sale of the
assets of TXU Fuel to Energy Transfer Partners, L.P. for $500 million in cash.
TXU Fuel had 2003 revenues of approximately $65 million, the majority of which
represented gas transportation fees from TXU Energy Holdings. As part of the
transaction, TXU Energy Holdings entered into a transportation agreement,
intended to be market-price based, with the new owner to transport gas to TXU
Energy Holdings’ generation plants. Because of the continuing involvement in the
business through the transportation agreement, the pretax gain related to the
sale of $375 million will be recognized over the eight-year life of the
transportation agreement, and the sale of TXU Fuel assets has not been accounted
for as a discontinued operation. The pretax gain is net of $16 million of TXU
Energy Holdings’ goodwill allocated to TXU Fuel.





**A-3**


*Capgemini
Energy Outsourcing Agreement*





In May
2004, as part of an overall arrangement initiated by TXU Corp., TXU Energy
Holdings and TXU Electric Delivery entered into services agreements with
Capgemini Energy LP (Capgemini), a new company initially providing business
process support services to TXU Corp. only, but immediately implementing a plan
to offer similar services to other utility companies. Under the ten-year
agreement, over 2,500 employees (including approximately 1,300 from US Holdings)
transferred from subsidiaries of TXU Corp. to Capgemini effective July 1, 2004.
Outsourced base support services performed by Capgemini for a fixed fee, subject
to adjustment for volumes or other factors, include information technology,
customer call center, billing, human resources, supply chain and certain
accounting activities.





As part
of the agreement, Capgemini was provided a royalty-free right, under an asset
license arrangement, to use TXU Corp.’s information technology assets,
consisting primarily of capitalized software. A portion of the software was in
development and had not yet been placed in service. As a result of outsourcing
its information technology activities, TXU Corp. no longer intends to develop
the software and from TXU Corp.’s perspective the software is abandoned. The
agreement with Capgemini does not require that any software in development be
completed and placed in service. Consequently, the carrying value of these
software projects was written off, resulting in a charge of $109 million ($71
million after-tax), reported in other deductions. The remaining assets were
transferred to a subsidiary of TXU Corp. at book value in exchange for an
interest in that subsidiary. Such interest is accounted for by US Holdings on
the equity method, and US Holdings recorded equity losses (representing
depreciation expense) of $7 million, reported in other deductions.





TXU Corp.
(through the subsidiary) obtained a 2.9% limited partnership interest in
Capgemini in exchange for the asset license described above. TXU Corp. has the
right to sell (the “put option”) its interest and the licensed software to Cap
Gemini North America Inc. for $200 million, plus its share of Capgemini’s
undistributed earnings, upon expiration of the services agreement or earlier
upon the occurrence of certain unexpected events. Cap Gemini North America Inc.
has the right to purchase these interests under the same terms and conditions.
The partnership interest has been recorded at an initial value of $2.9 million
and is being accounted for on the cost method.





US
Holdings has recorded its share of the fair value of the put option, estimated
at $154 million, as a noncurrent asset. Of this amount, $147 million was
recorded as a reduction to the carrying value of the investment. This accounting
is in accordance with guidance related to sales and licensing of internally
developed software described in AICPA Statement of Position 98-1, “Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use.” The
difference of $7 million, which represented the fair value of the assumed cash
distributions and gains while holding the partnership interest for the period
prior to exercise of the put, was recorded as a noncurrent deferred credit. The
remaining balance of the software is being amortized over the estimated
remaining useful lives.





Also as
part of the agreement, TXU Corp. agreed to indemnify Capgemini for severance
costs incurred by Capgemini for former TXU Corp. employees terminated within 18
months of their transfer to Capgemini. Accordingly, in the second quarter of
2004, US Holdings recorded a $38 million ($25 million after-tax) charge for its
share of severance liabilities. In addition, TXU Corp. committed to pay up to
$25 million for costs associated with transitioning the outsourced activities to
Capgemini. During 2004, US Holdings recorded transition expenses of $14 million
($9 million after-tax), and the remainder are expected to be expensed as
incurred in 2005.





*Generation
Facility Closures and Sales*





In
December 2004, TXU Energy Holdings committed to immediately cease operating for
its own benefit nine leased gas-fired combustion turbines, and recorded a charge
of $157 million ($102 million after-tax). The charge represents the present
value of the future lease payments related to the turbines, net of estimated
sublease proceeds. The leases expire in 2017 and 2018. US Holdings is currently
evaluating opportunities with respect to the turbines, including subleasing the
turbines to third parties or decommissioning the turbines. During this
evaluation period, the turbines will be available to ERCOT only for system
reliability purposes.





**A-4**


In
November 2004, US Holdings announced plans to deactivate, or mothball, eight
gas-fired operating units due to electric industry market conditions in Texas.
The units were more than 30 years old and had operated only sparingly during the
last two years. The facility closures resulted in employee severance costs of $7
million ($5 million after-tax).





In the
second quarter of 2004, US Holdings initiated a plan to sell the Pedricktown,
New Jersey 122 MW power production facility and exit the related power supply
and gas transportation agreements. Accordingly, US Holdings recorded an
impairment charge of $26 million ($17 million after-tax) to write down the
facility to estimated fair market value. The results of the business and the
impairment charge are reported in discontinued operations, as discussed in Note
4 to Financial Statements.





In March
2004, US Holdings announced the planned permanent retirement, completed in the
second quarter of 2004, of eight gas-fired operating units. US Holdings also
temporarily closed four other gas-fired units and placed them under evaluation
for retirement. A majority of the 12 units were designated as “peaking units”
and operated only during the summer for many years and had operated only
sparingly during the last two years. US Holdings also closed its Winfield North
Monticello lignite mine in Texas, as it was no longer economical to operate when
compared to the cost of purchasing coal to fuel the adjacent generation
facility. A total charge of $8 million ($5 million after-tax) was recorded for
employee severance costs and impairments related to the various facility
closures.





As a
result of the various actions in 2004, US Holdings will permanently or
temporarily deactivate over 40% of its gas-fired generating capacity in Texas,
representing 4,572 MW of capacity.





*Other
Actions Related to Generation Operations*





In
December 2004, US Holdings executed an agreement to terminate, for a payment of
$172 million, an existing power purchase and tolling agreement that would have
expired in 2006. The agreement was entered into in connection with the sale of
two generation plants to the counterparty in 2001. As a result of the
transaction, US Holdings recorded a charge of $101 million ($66 million
after-tax). The charge represents the payment amount less the remaining
out-of-the-money liability related to the agreement originally recorded at its
inception. US Holdings also recorded a gain of $58 million ($38 million
after-tax), representing the remaining deferred gains from the sale of the two
plants.





In
October 2004, US Holdings entered into an agreement to terminate the operating
lease for certain mining equipment for approximately $28 million in cash,
effective November 1, 2004. The lease termination resulted in a charge of $21
million ($14 million after-tax). US Holdings entered into a short-term lease
with an unrelated third party for the equipment, which is expected to be taken
out of service at the expiration of the lease.





As part
of a review of its generation asset portfolio in the second quarter of 2004, US
Holdings completed a review of its spare parts and equipment inventory to
determine the appropriate level of such inventory. The review included nuclear,
coal and gas-fired generation-related facilities. As a result of this review, US
Holdings recorded a charge of $79 million ($51 million after-tax), to reflect
excess inventory on hand and to write down carrying values to scrap values.





*Organizational
Realignment and Headcount Reductions*





During
2004, management completed a comprehensive organizational review, including an
analysis of staffing requirements. As a result, US Holdings completed a
self-nomination severance program and other involuntary severance actions, and
recorded severance charges totaling $74 million ($47 million after-tax). This
amount includes $33 million in allocated TXU Corp. severance charges.





*Consolidation
of Real Estate*





Currently,
TXU Corp. owns or leases more than 1.3 million square feet in various management
and support office locations, which exceeds its anticipated needs. TXU Corp. has
evaluated alternatives to reduce current office space and intends to consolidate
into its existing headquarters building in Dallas, Texas, enhancing the facility
to enable better employee communication and collaboration and cost
effectiveness. US Holdings recorded $2 million ($1 million after-tax) in exit
fees related to existing leased facilities in 2004. Implementation of this
initiative is expected to result in additional charges in 2005 affecting US
Holdings, but the amounts are not yet estimable.








**A-5**





*Rate
Case Settlement*





In the
fourth quarter of 2004, TXU Electric Delivery recorded a $21 million ($14
million after-tax) charge for estimated settlement payments. The settlement,
which was finalized February 22, 2005, is the result of a number of
municipalities initiating an inquiry regarding distribution rates. The agreement
avoids any immediate rate actions, but would require TXU Electric Delivery to
file a rate case in 2006, based on a 2005 test year, unless the municipalities
and TXU Electric Delivery mutually agree that such a filing is unnecessary. The
final settlement amounts are being determined; however, TXU Electric Delivery
believes the total will closely approximate the amount accrued.


**KEY
CHALLENGES AND INITIATIVES**





Following
is a discussion of the key challenges facing management and the initiatives
currently underway to manage such challenges:




*Competitive
Markets and Customer Retention*
 
 In the
Texas market, 2004 was the third full year of retail competitive activity, and
that activity has impacted customer counts and sales volumes. The area
representing US Holdings’ historical service territory prior to deregulation,
largely in north Texas, consisted of approximately 3 million electricity
consumers (measured by meter counts) as of year-end 2004. TXU Energy Holdings
currently has approximately 2.3 million customers in that territory and has
acquired approximately 200,000 customers in other competitive areas in Texas.
Total customer counts declined 2.3% in 2004, 4.3% in 2003 and 0.5% in 2002.
Retail sales volumes declined 12% in both 2004 and 2003 and 9% in 2002,
reflecting competitive activity in the business market segment and to a lesser
extent in the residential market, as well as milder summer weather in 2004.
While wholesale sales volumes have increased significantly, gross margins have
been compressed by the loss of higher-margin retail sales volumes. In responding
to the competitive landscape, TXU Energy Holdings is focusing on the following
key initiatives:
 
 ·
    TXU
      Energy Holdings’ customer retention strategy remains focused on delivering
      world-class customer service and improving the overall customer
      experience. In line with this strategy, US Holdings continues to implement
      several call center and other major initiatives to improve customer
      service, including a simplified interactive voice response process, an
      enhanced service level program and an upgraded online presence to interact
      with customers over the internet.
 ·
    TXU
      Energy Holdings has improved out-of-territory margins by reducing both its
      cost to serve and cost to acquire customers. Cost-to-serve improvements
      were achieved through the Capgemini arrangement, while cost-to-acquire
      reductions were achieved by suspending mass-media spending and
      prioritizing remaining marketing expenditures to focus on shorter-term
      return requirements. TXU Energy Holdings is now focusing on rebalancing
      the customer mix towards high-value customers and reducing bad debt
      expenses.
 ·
    Business
      initiatives in the small and medium-business segment are focused largely
      on more targeted programs to protect the existing highest-value customers
      and to recapture customers who have switched. Tactical programs being put
      into place include improved customer service, the development of new
      product offerings and the establishment of a new direct-sales force for
      customers with demand of 200 kilowatts and above.
 ·
    While
      TXU Energy Holdings is evaluating strategic alternatives for the
      large-business segment, it remains focused on driving profitability by
      targeting customers with the highest economic potential and delivering
      with a low-cost model. Initiatives include a more disciplined contracting
      and pricing approach, a comprehensive hedging strategy to better protect
      against pricing volatility, improved economic segmentation of the
      large-business market to provide for more targeted sales and marketing
      efforts and more effective deployment of the direct-sales
      force.


*Natural
Gas Price & Market Heat-Rate Exposure*





Wholesale
electricity prices in the Texas market generally move with the price of natural
gas because marginal demand is generally met with gas-fired generation plants.
Wholesale electricity prices also move with market heat rates, which are a
measure of the efficiency of the marginal supplier (generally gas plants) in
generating electricity. Market heat rates are currently near historical lows
following the substantial increase in more efficient gas-fired generation
capacity in Texas in the early 2000’s. In contrast, natural gas prices increased
significantly in recent years, but historically the price has fluctuated due to
the effects of weather, changes in industrial demand and supply availability,
and other economic factors.





**A-6**


Consequently,
sales price management and hedging activities are critical to the profitability
of the business. US Holdings continues to have price flexibility in the large
business market and in all markets outside of its historical service territory.
With respect to residential and small and medium business customers in the
historical service territory, US Holdings must offer regulated price-to-beat
rates until January 1, 2007, but such rates can be adjusted up or down twice a
year at US Holdings’ option, subject to approval by the Commission, based on
changes in natural gas prices. Effective January 1, 2004 for the small and
medium business market and January 1, 2005 for the residential market in the
historical service territory, US Holdings has had flexibility to offer prices
other than the regulated price-to-beat rate, so long as it continues to also
offer the price-to-beat rate. The challenge in adjusting these rates is
determining the appropriate timing, considering past and projected movements in
natural gas prices, such that margin levels can be sustained while remaining
competitive with other retailers who have price flexibility. In response to
rising natural gas prices, US Holdings increased the price-to-beat rates twice
in both 2004 and 2003.





One of US
Holdings’ cost advantages, particularly in a time of historically high natural
gas prices, is its nuclear-powered and coal/lignite-fired generation assets.
Variable costs of this baseload generation, which provided approximately 50% of
supply volumes in 2004, have in recent history been, and are expected to be,
less than the costs of gas-fired generation. Consequently, maintaining the
efficiency and reliability of the baseload assets is of critical importance in
managing gross margin risk. Completing scheduled maintenance outages at the
nuclear-powered facility on a timely basis, for example, is a critical
management process.





US
Holdings is both a producer and a buyer of wholesale electricity. The generation
operations supply power to the wholesale market and the retail business, which
also purchases power in the wholesale market. The combination of these two
businesses provides a partial natural hedge against near-term price volatility
in wholesale electricity and natural gas markets. With this natural hedge and US
Holdings’ wholesale market positions, for 2005 TXU Corp.’s portfolio position is
substantially balanced with respect to changes in natural gas prices, given US
Holdings’ projections of baseload unit availability and customer churn and
assuming no changes in the price-to-beat rates. The primary sensitivity to
natural gas prices over the near term derives from the price-to-beat structure
for residential and small business customers; higher gas prices could trigger
higher price-to-beat rates and potentially increased profitability, and vice
versa. In the near term, US Holdings has more significant exposure to changes in
market heat rates than natural gas prices, in part due to US Holdings’ 8,825 MW
of active gas-fired generation capacity in Texas that US Holdings currently
dispatches for its own use. US Holdings expects that increases in heat rates
would increase the profitability of its overall market position and its
gas-fired generation fleet, and vice versa.





Over the
longer term, US Holdings’ exposure to changes in natural gas prices and market
heat rates is expected to increase. The magnitude of this exposure is determined
by several key assumptions including, but not limited to, baseload generation
capacity factors, gas plant availability, the size of the retail business (both
large business and residential), and the levels and stability of margins in the
retail business. In the unlikely case that US Holdings’ retail price changes
exactly and immediately mirrored changes in wholesale electricity markets, TXU
Corp. could experience an approximate $245 million reduction in annual pretax
earnings for every $0.50 per million British thermal units reduction in natural
gas prices (approximate 8% change in current price) sustained over a full year.
In the same scenario of retail price linkage to wholesale markets, if natural
gas prices and other nonprice conditions remained unchanged, but ERCOT
electricity prices declined by $5/MWh (approximate 10% change in current price)
for a full year because of declining market heat rates, US Holdings could
experience an approximate $320 million reduction in annual pretax
earnings.


US
Holdings’ longer term approach to managing this risk focuses on:
 
 ·
    Improving
      customer service to increase customer retention;
 ·
    Refining
      retail pricing strategy to more appropriately reflect the magnitude and
      costs of natural gas price risk;
 ·
    Reducing
      fixed costs to better withstand gross margin volatility;
    and
 ·
    Employing
      disciplined hedging and risk management strategies, through physical and
      financial energy-related (power and natural gas) contracts to partially
      hedge gross margins.


See
additional discussion of risk measures under “Commodity Price
Risk”.





**A-7**


*Cost
Exposure Related to Nuclear Asset Outages*





US
Holdings is currently undertaking a strategic review of its nuclear assets,
comprised of two electricity generating units at Comanche Peak, each with a
capacity of 1,150 MW. The objectives of this strategic review are to evaluate
potential means to reduce the cost exposure associated with outages of these
facilities and improve the long-term availability and certainty of electricity
supply for customers. The nuclear generation facilities represent US Holdings’
lowest marginal cost source of electricity. Assuming both nuclear generating
units experienced an outage, the negative impact to gross margin is estimated to
be $2 million per day. US Holdings continues to identify and evaluate various
potential initiatives as part of this review. The review is expected to be
completed in 2005, and no determination has been made as to the likelihood of
implementing any of the initiatives. Also see discussion of nuclear insurance in
Note 17 to Financial Statements.





**CRITICAL
ACCOUNTING POLICIES**





US
Holdings’ significant accounting policies are detailed in Note 2 to Financial
Statements. US Holdings follows accounting principles generally accepted in the
US. In applying these accounting policies in the preparation of US Holdings’
consolidated financial statements, management is required to make estimates and
assumptions about future events that affect the reporting of assets and
liabilities at the balance sheet dates and revenue and expense during the
periods covered. **** The
following is a summary of certain critical accounting policies of US Holdings
that are impacted by judgments and uncertainties and under which different
amounts might be reported using different assumptions or estimation
methodologies.





***Financial
Instruments and Mark-to-Market Accounting*** ** — ** US
Holdings enters into financial instruments, including options, swaps, futures,
forwards and other contractual commitments primarily to manage commodity price
and interest rate risks. In accordance with SFAS 133, the fair values of
derivatives are recognized on the balance sheet and changes in the fair values
are recognized in earnings. This recognition is referred to as “mark-to-market”
accounting. However, if certain criteria are met, US Holdings may elect the
normal purchase and sale exception or may designate the derivative as a cash
flow or fair value hedge. As these elections can reduce the volatility in
earnings resulting from fluctuations in fair value, results of operations could
be materially affected by such elections. A cash flow hedge mitigates the risk
associated with variable future cash flows (e.g., a future sale at market
prices), while a fair value hedge mitigates risk associated with fixed future
cash flows (e.g., debt with fixed interest rate payments).





In
accounting for cash flow hedges, derivative assets and liabilities are recorded
on the balance sheet at fair value with an offset in other comprehensive income.
Amounts remain in other comprehensive income, provided the underlying
transactions remain probable of occurring, and are reclassified into earnings as
the underlying transactions occur. Fair value hedges are recorded as derivative
assets or liabilities with an offset to the carrying value of the related asset
or liability. Any ineffectiveness associated with the hedges is recorded in
earnings.





Mark-to-market
accounting recognizes changes in the value of financial instruments as reflected
by market price fluctuations. In the energy market, the availability of quoted
market prices is dependent on the type of commodity (e.g., natural gas,
electricity, etc.), time period specified and location of delivery. In computing
the mark-to-market valuations, each market segment is split into liquid and
illiquid periods. The liquid period varies by region and commodity. Generally,
the liquid period is supported by broker quotes and frequent trading activity.
In illiquid periods, little or no market information may exist, and the fair
value is estimated through market modeling techniques.





For those
periods where quoted market prices are not available, forward price curves are
developed based on the available information or through the use of industry
accepted modeling techniques and practices based on market fundamentals (e.g.,
supply/demand, replacement cost, etc.). US Holdings does not recognize net gains
in illiquid periods.





Prior to
October 2002, US Holdings accounted for energy-related contracts, whether or not
derivatives under SFAS 133, that were deemed to be entered into for trading
purposes under the guidance from EITF 98-10. See Note 3 to Financial Statements
for discussion of the rescission of EITF 98-10 and the cumulative effect of
changes in accounting principles.





In the
fourth quarter of 2004, US Holdings reviewed its approach to evaluating the
economic performance of its large business customer sales operations. US
Holdings decided to no longer elect the normal sale exception for fixed price
sales contracts entered into after December 1, 2004, and as part of its risk
management activities, will use hedging transactions to mitigate the risk of
gross margin exposure. Both the sales contracts and the hedging instruments are
now marked-to-market. The day-one gains on the marked sales contracts are
amortized over the lives of the contracts, which average between twelve and
eighteen months. The
effect of marking-to-market the sales contracts in 2004 was a pretax loss of $3
million.





**A-8**


The net
effect of mark-to-market accounting under SFAS 133, including hedge
ineffectiveness, totaled $109 million, $100 million and $113 million of
unrealized losses in 2004, 2003 and 2002, respectively. The 2003 amount excludes
the cumulative effect of changes in accounting principles discussed in Note 3 to
Financial Statements.





***Revenue
Recognition*** ** — US
Holdings records revenue from electricity sales and delivery service under the
accrual method. R evenues
are recognized when power or delivery is provided to customers on the basis of
periodic cycle meter readings and include an estimated accrual for the value
provided from the meter reading date to the end of the period. The unbilled
revenue is calculated at the end of the period based on estimated daily
consumption after the meter read date to the end of the period. For retail
electric sales, estimated daily consumption is derived using historical customer
profiles adjusted for weather and other measurable factors affecting
consumption. Calculations of unbilled revenues during certain interim periods
are generally subject to more estimation variability than at year-end because of
seasonal changes in demand. Accrued
unbilled revenues totaled $422 million, $411 million and $441 million at
December 31, 2004, 2003 and 2002, respectively.





Realized
and unrealized gains and losses from transacting in energy-related contracts,
principally for the purpose of hedging margins on sales of energy, are reported
as a component of revenues. As discussed above under “Financial Instruments and
Mark-to-Market Accounting”, recognition of unrealized gains and losses involves
elections, assumptions and estimates that could have a significant effect on
reported revenues and earnings.





***Accounting
for Contingencies*** *—* The
financial results of US Holdings may be affected by judgments and estimates
related to loss contingencies. Accruals for loss contingencies are recorded when
management determines that it is probable that an asset has been impaired or a
liability has been incurred and that such economic loss can be reasonably
estimated. Such determinations are subject to interpretations of current facts
and circumstances, forecasts of future events and estimates of the financial
impacts of such events.





A
significant contingency that US Holdings accounts for is the loss associated
with uncollectible trade accounts receivable. The determination of such bad debt
expense is based on factors such as historical write-off experience, aging of
accounts receivable balances, changes in operating practices, regulatory
rulings, general economic conditions and customers' behaviors. With the opening
of the Texas electricity market to competition, many historical measures used to
estimate bad debts may be less reliable. The changing environment, including
recent regulatory changes that allow REPs to disconnect nonpaying customers, and
customer churn due to competitor actions has added a level of complexity to the
estimation process. Bad debt expense totaled $90 million, $119 million and $160
million for the years ended December 31, 2004, 2003 and 2002, respectively.





In
connection with the opening of the Texas market to competition, the Texas
Legislature established a retail clawback provision intended to incent
affiliated REPs of utilities to actively compete for customers outside their
historical service territories. A retail clawback liability arises unless 40% of
the electricity consumed by residential and small business customers in the
affiliated REP’s historical service territory is supplied by competing REPs
after the first two years of competition. This threshold was reached for small
business customers in 2003, but not for residential customers. The amount of the
liability is equal to the number of such customers retained by TXU Energy
Holdings as of January 1, 2004, less the number of new customers from outside
the historical service territory, multiplied by $90. The credit, which is funded
by TXU Energy Holdings, is applied to delivery fees charged by TXU Electric
Delivery to REPs, including TXU Energy Holdings, over a two-year period
beginning January 1, 2004. In 2002, TXU Energy Holdings recorded a charge to
cost of energy sold and delivery fees of $185 million ($120 million after-tax)
to accrue an estimated retail clawback liability. In 2003, TXU Energy Holdings
reduced the accrual by $12 million ($8 million after-tax), to reflect the
calculation of the estimated liability applicable only to residential customers
in accordance with the Settlement Plan. In 2004, TXU Energy Holdings further
reduced the estimated liability by $12 million ($8 million after-tax) to reflect
revised estimates of customer counts. The balance of the liability at December
31, 2004 was $82 million.





***ERCOT
Settlements -*** ERCOT’s
responsibilities include the balancing and settlement of electricity volumes and
related ancillary services among the various participants in the deregulated
Texas market. ERCOT settles balancing energy with market participants through a
load and resource imbalance charge or credit for any differences between actual
and scheduled volumes. Ancillary services and various fees are allocated to
market participants based on each participant’s load.





Initial
settlement information is due from ERCOT within 17 days after the operating day,
final settlement is due from ERCOT within two months and true-up settlements are
due from ERCOT within six months after the operating day. All periods continue
to be subject to a dispute resolution process. During 2003, the ERCOT settlement
process was delayed several times to address operational data management
problems among ERCOT, the transmission and distribution service providers and
the REPs, which arose as a result of new processes and systems associated with
the opening of the market to competition. These operational data management
issues were resolved during 2004.





**A-9**


As a
result of time lags in ERCOT settlements, TXU Energy Holdings’ operating
revenues and costs of energy sold contain estimates for load and resource
imbalance charges or credits with ERCOT and for ancillary services and related
fees that are subject to change and may result in charges or credits impacting
future reported results of operations. The amounts recorded represent the best
estimate of these settlements based on available information. During 2004, TXU
Energy Holdings recorded a net expense of $4 million to adjust amounts
previously recorded for 2003, 2002, and 2001 ERCOT settlements. During 2003, TXU
Energy Holdings recorded a net expense of $20 million to adjust amounts
previously recorded for 2002 and 2001 ERCOT settlements.





***Impairment
of Long-Lived Assets*** — US
Holdings evaluates long-lived assets for impairment whenever indications of
impairment exist, in accordance with the requirement of SFAS 144. One of those
indications is a current expectation that “more likely than not” a long-lived
asset will be sold or otherwise disposed of significantly before the end of its
previously estimated useful life. In this circumstance, impairment would be
evaluated based on the current market price of the asset. For US Holdings’
baseload generation assets, another indication would be a significant drop in
natural gas prices. In this circumstance, the impairment test would be based on
future undiscounted cash flow associated with the asset, in accordance with SFAS
144. The determination of the existence of these and other indications of
impairment involves judgments that are subjective in nature and may require the
use of estimates in forecasting future results and cash flows related to an
asset or group of assets. Further, the unique nature of US Holdings’ property,
plant and equipment, which includes a fleet of generation assets using different
fuels and individual plants that have varying utilization rates, requires the
use of significant judgments in determining the existence of impairment
indications and grouping assets for impairment testing.





US
Holdings’ most significant long-lived asset in terms of carrying value is its
Comanche Peak nuclear generation facility. The net book value of the facility
was $7.5 billion at December 31, 2004. US Holdings believes that the net book
value of the facility significantly exceeds the estimated current market value.
However, US Holdings estimates that future undiscounted cash flows from the
facility significantly exceed net book value. Significant assumptions used in
this analysis are forward price curves for natural gas and power, market heat
rates (the amount of natural gas required to produce a given amount of power)
and production estimates. **** A
significant decline in forward price curves for natural gas and/or heat rates
could trigger an evaluation of impairment of the facility. US Holdings has
conservatively estimated that a sustained structural decline in natural gas
prices of at least 40% would need to occur before any risk of impairment would
arise, assuming market heat rates remain unchanged.





In 2002,
US Holdings recorded an impairment charge of $237 million ($154 million
after-tax), reported in other deductions, for the writedown of two generation
plant construction projects as a result of weaker wholesale electricity market
conditions and reduced planned developmental capital spending. Fair value was
determined based on appraisals of property and equipment.





***Depreciation*** — The
depreciable lives of plant and equipment are based on management’s
estimates/determinations of the assets’ economically useful lives. To the extent
that the actual lives differ from these estimates there would be an impact on
the amount of depreciation charged to the financial statements. As is common in
the industry, US Holdings records depreciation expense using composite
depreciation rates that reflect blended estimates of the lives of major asset
components, as compared to depreciation expense calculated on an
asset-by-asset-basis.





Effective
January 1, 2004, the estimates of depreciable lives of lignite-fired generation
facilities were extended an average of nine years to better reflect the useful
lives of the assets, and depreciation rates for the Comanche Peak nuclear
generating plant were decreased as a result of an increase in the estimated
lives of boiler and turbine generator components of the plant by an average of
five years. The net impact of these changes was a reduction in depreciation
expense of $44 million ($29 million after-tax) in 2004.





Effective
April 1, 2003, the estimates of the depreciable lives of the Comanche Peak
nuclear generating plant and several gas generation plants were extended to
better reflect the useful lives of the assets. At the same time, depreciation
rates were increased on lignite and gas generation facilities to reflect
investments in emissions control equipment. The net impact of these changes was
a reduction in depreciation expense of an additional $12 million ($8 million
after-tax) in 2004 and $37 million ($24 million after-tax) in 2003.





**A-10**


The
Comanche Peak nuclear-powered generation units were originally estimated to have
a useful life of 40 years, based on the life of the operating licenses granted
by the NRC. Over the last several years, the NRC has granted 20-year extensions
to the initial 40-year terms for several commercial power reactors. Based on
these extensions and current expectations of industry practice, the useful life
of the Comanche Peak nuclear-powered generation units is now estimated to be 60
years. TXU Energy Holdings expects to file a license extension request in
accordance with timing and other provisions established by the NRC.





US
Holdings continues to review estimates of depreciable lives and in 2005 expects
to adjust composite depreciation rates related to the lignite-fired facilities,
resulting in lower future depreciation expense.





***Regulatory
Assets and Liabilities*** — The
financial statements of TXU Electric Delivery reflect regulatory assets and
liabilities under cost-based rate regulation in accordance with SFAS 71. The
assumptions and judgments used by regulatory authorities continue to have an
impact on the recovery of costs, the rate earned on invested capital and the
timing and amount of assets to be recovered by rates. (See discussion in Note 19
to Financial Statements under “Regulatory Assets and Liabilities.”)





Approximately
$1.8 billion in regulatory asset stranded costs arising prior to the 1999
Restructuring Legislation became subject to recovery through issuance of
transition (securitization) bonds in accordance with the Settlement Plan with
the Commission as described in Note 16 to Financial Statements. As a result of
the final approval of the Settlement Plan in January 2003, US Holdings recorded
an extraordinary loss of $134 million (net of income tax benefit of $72 million)
in the fourth quarter of 2002 principally to write down this regulatory asset.
The carrying value of the regulatory asset after the write down represented the
projected future cash flows to be recovered from REPs through revenues as a
transition charge to service the principal and estimated interest of the bonds.
An extraordinary gain of $16 million (net of tax of $9 million) was recorded in
the second quarter of 2004, representing an increase in the carrying value of
TXU Electric Delivery’s regulatory asset subject to securitization, due to the
issuance of the second and final tranche of the securitization bonds in June
2004. The increase in the related regulatory asset was due to the effect of
higher than estimated interest rates on the bonds and therefore increased
amounts to be recovered from REPs through revenues as a transition charge to
service the bonds. The balance of the regulatory asset was $1.6 billion at
December 31, 2004.





***Pension
and Other Postretirement Benefit Plans*** — US
Holdings is a participating employer in the pension plan sponsored by TXU Corp.
US Holdings also participates with TXU Corp. and other subsidiaries of TXU Corp.
to offer health care and life insurance benefits to eligible employees and their
eligible dependents upon the retirement of such employees. Reported costs of
providing noncontributory pension and other postretirement benefits are
dependent upon numerous factors, assumptions and estimates.





These
costs are impacted by actual employee demographics (including age, compensation
levels and employment periods), the level of contributions made to retiree plans
and earnings on plan assets. TXU Corp.’s retiree plan assets are primarily made
up of equity and fixed income investments. Changes made to the provisions of the
plans may also impact current and future benefit costs. Fluctuations in actual
equity market returns as well as changes in general interest rates may result in
increased or decreased benefit costs in future periods. Benefit costs may also
be significantly affected by changes in key actuarial assumptions, including
anticipated rates of return on plan assets and the discount rates used in
determining the projected benefit obligation.





In
accordance with accounting rules, changes in benefit obligations associated with
these factors may not be immediately recognized as costs on the income
statement, but are recognized in future years over the remaining average service
period of plan participants. As such, significant portions of benefit costs
recorded in any period may not reflect the actual level of cash benefits
provided to plan participants. US Holdings recorded allocated pension costs and
other postretirement benefit costs and had funding requirements for these plans
as summarized in the following table:





**2004**
    
    **2003**
    
    **2002**Pension
      costs under SFAS 87 (a)
    
    $
    44
    
    $
    29
    
    $
    (4
    )Other
      postretirement benefit costs under SFAS 106 (a)
    
    
    63
    
    
    76
    
    
    62Total
    
    $
    107
    
    $
    105
    
    $
    58Funding
      of pension and other postretirement benefit plans
    
    $
    67
    
    $
    58
    
    $
    48


________________





(a) Includes
amounts capitalized as part of construction projects.








**A-11**





Additional
data regarding pension and other postretirement benefit plans:

·
    During
      2004, the discount rate assumption for the pension and other
      postretirement benefit plans was revised as a result of remeasurements
      required by the Capgemini transaction, divestures, and changing interest
      rates. For the first half of 2004, the discount rate was 6.25%. The rate
      used for the third quarter was 6.5%, and the rate used in the fourth
      quarter was 6.0%. The discount rate for 2005 is expected to be 6.0%.
·
    During
      2004, the expected rate of return remained at 8.5% for the pension plan
      assets and 8.01% for the other postretirement benefit plan. The rate of
      return for 2005 is expected to be 8.75% for the pension plan and 8.66% for
      the other postretirement benefit plan.
·
    The
      decline in other postretirement benefit costs of $13 million to $63
      million in 2004 was due primarily to the effect of the Medicare
      Prescription and Drug Improvement and Modernization Act of 2003 enacted in
      December 2003.
·
    Pension
      and other postretirement benefit costs are expected to decrease $10
      million to $97 million in 2005 due primarily to fewer active
      employees.
·
    Funding
      requirements for pension and other postretirement benefit plans are
      expected to decrease by $14 million to $53 million in 2005.


See Note
13 to Financial Statements for additional information on pension and other
postretirement benefit plans.





***Stock-based
compensation*** ─ TXU
Corp. grants awards of restricted stock and performance units paid in stock
under its Long Term Incentive Compensation Plan (LTIP). The awards ultimately
distributed are based on the performance of TXU Corp. stock versus peer company
stock performance over a future period (generally three years) and the number of
shares ultimately awarded varies depending upon that relative performance. TXU
Corp. early adopted SFAS 123R in the fourth quarter of 2004, which provides for
the recognition of expense related to LTIP awards based on the grant-date fair
value of those awards. Under the previous accounting rule (APB 25), expense
recognition was based on the current estimate of shares expected to be awarded
and the current market value of shares; consequently, recorded LTIP was subject
to significant volatility. LTIP expense recorded in 2004 under SFAS 123R and
reported in SG&A expenses totaled $33 million
 
 The
determination of fair value of LTIP awards at grant date is based on valuation
techniques involving a number of assumptions. TXU Corp. determined the fair
value of its LTIP awards utilizing a valuation model that takes into account
three principal factors: the probability weighted expected number of shares to
be distributed upon vesting, the risk of uncertainty during the vesting period,
and the restrictions limiting liquidation of vested stock awards. See Note 9 to
Financial Statements.


**RESULTS
OF OPERATIONS**





The
results of operations and the related management’s discussion of those results
for all periods presented reflect the discontinuance of certain operations (see
Note 4 to Financial Statements regarding discontinued operations).





**Accounting
Changes** ─ US
Holdings participates in the TXU Corp. Long-term Incentive Compensation Plan.
Under this plan, TXU Corp. grants awards of restricted stock and performance
units payable in stock to management employees. During 2004, TXU Corp. reviewed
a number of alternatives with respect to its management incentive compensation
programs, including potential changes to levels and criteria of awards under the
stock-based program. The review is ongoing and changes are likely for the 2005
awards. In December 2004, the FASB issued SFAS 123R, which addresses accounting
for stock-based compensation. TXU Corp. elected to early adopt this new standard
because its application better reflects the underlying economic cost of the
awards. TXU Corp. adopted the standard effective with results for the fourth
quarter of 2004 in accordance with the “modified retrospective” transition rules
of the standard. The adoption resulted in the recognition of a cumulative effect
of change in accounting principle of a $6 million after-tax credit. See Note 11
to Financial Statements for additional discussion. Assuming TXU Corp. had taken
no other action to reduce the expense for the 2004 year, US Holdings would have
recorded an additional $66 million ($43 million after-tax) of expense under the
previous accounting rules (APB 25) as compared to the expense under SFAS
123R.





In
October 2002, the EITF, through EITF 02-3, rescinded EITF 98-10, which required
mark-to-market accounting for all trading activities. Pursuant to this
rescission, only financial instruments that are derivatives under SFAS 133 are
subject to mark-to-market accounting. Effective January 1, 2003, nonderivative
energy contracts were required to be accounted for on a settlement basis. SFAS
143, regarding asset retirement obligations, became effective on January 1,
2003. As a result of the implementation of these two accounting standards, in
2003 US Holdings recorded a cumulative effect of changes in accounting
principles of a net $58 million after-tax charge. See Note 3 to Financial
Statements for additional discussion.





Also, **** see Note
2 to Financial Statements for discussion of other changes in accounting
standards.





**Consolidated
US Holdings**





***2004
compared to 2003***





Reference
is made to comparisons of results by business segment following the discussion
of consolidated results. The business segment comparisons provide additional
detail and quantification of items affecting financial results.





**A-12**


US
Holdings’ operating revenues increased $721 million, or 8%, to $9.3 billion in
2004. Operating revenues in the TXU Energy Holdings segment rose $509 million,
or 6%, to $8.5 billion reflecting higher retail and wholesale pricing, partially
offset by the effect of a mix shift to lower-price wholesale sales. Retail
volumes declined 12% due to competitive activity and milder weather primarily in
the summer. Operating revenues in the TXU Electric Delivery segment increased
$139 million, or 7%, to $2.2 billion reflecting $87 million in transition
charges associated with securitization bonds issued in August 2003 and June 2004
as well as higher transmission and distribution fees (tariffs). Consolidated
revenue growth also reflected a $68 million reduction in the intercompany sales
elimination, reflecting lower sales by TXU Electric Delivery to TXU Energy
Holdings as sales to nonaffiliated REPs increased.





**Gross
Margin*
**Year
      Ended December 31,****2004**
    
    **%
      of Revenue**
    
    **2003**
    
    **%
      of Revenue**Operating
      revenues
    
    $
    9,294
    
    
    100
    %
    $
    8,573
    
    
    100
    %Cost
      and expenses:Cost
      of energy sold and delivery fees
    
    
    3,836
    
    
    41
    %
    
    3,620
    
    
    42
    %Operating
      costs
    
    
    1,433
    
    
    15
    %
    
    1,391
    
    
    16
    %Depreciation
      and amortization
    
    
    713
    
    
    8
    %
    
    654
    
    
    8
    %Gross
      margin
    
    $
    3,312
    
    
    36
    %
    $
    2,908
    
    
    34
    %*


Gross
margin is considered a key operating metric as it measures the effect of changes
in sales volumes and pricing versus the variable and fixed costs of energy sold,
whether generated or purchased, as well as the variable and fixed costs to
deliver energy.





Gross
margin increased $404 million, or 14%, to $3.3 billion in 2004. The TXU Energy
Holdings segment’s gross margin increased $383 million, or 21%, to $2.2 billion.
Higher gross margin reflected initiatives taken to respond to higher natural gas
prices, including retail pricing actions and more cost-effective sourcing of
power. The gross margin increase reflected higher retail and wholesale prices
partially offset by the effect of lower retail volumes and lower results from
hedging and risk management activities. The average cost per MWh of power
produced and purchased was about even with 2003 as higher purchased power costs
due to rising natural gas prices were largely offset by lower cost of power
produced due to reduced utilization of high heat rate gas-fired generation and
higher lignite and nuclear facility output. The TXU Electric Delivery segment’s
gross margin increased $17 million, or 2%, to $1.1 billion reflecting an
increase in transmission-related tariffs, partially offset by the effect of
milder weather primarily in the summer and an increase in operating costs.





Operating
costs increased $42 million, or 3%, to $1.4 billion in 2004, driven by $25
million in incremental costs primarily associated with a planned outage for
refueling at the nuclear generation facility and a $12 million increase in
third-party transmission costs.





Depreciation
and amortization (including amounts shown in the gross margin table above) rose
$35 million, or 5%, to $739 million in 2004. This increase reflected $87 million
in higher regulatory asset amortization arising from issuance of TXU Electric
Delivery securitization bonds issued in August 2003 and June 2004, normal
additions and replacements of equipment and the effect of higher asset
retirement obligations due to new mining activity. These increases were
partially offset by a $56 million impact of lower depreciation related to TXU
Energy Holdings’ generation fleet, due primarily to extensions of estimated
depreciable lives to better reflect useful lives (see Note 2 to Financial
Statements) and a decrease in amortization due to a reduction in the carrying
values of software assets in connection with the Capgemini outsourcing
transaction. Depreciation and amortization included in gross margin relates to
assets directly used in the generation and delivery of electricity and also
includes amortization of the regulatory assets associated with securitization
bonds.





SG&A
expense increased $42 million, or 5%, to $886 million in 2004. The increase
reflected $80 million in higher incentive compensation expense due to the
improved performance of the business and achievement of certain targets related
to trading activities, partially offset by $29 million in lower bad debt
expense.





Other
income increased $90 million to $142 million in 2004. Other income in 2004
included the remaining $58 million of previously deferred gain on the 2002 sale
of two generation plants recognized as the result of the termination, late in
the fourth quarter of 2004, of an existing power purchase and tolling agreement
discussed above under “TXU Corp. Management Change and Restructuring Plan,” a
$19 million gain on sale of undeveloped land and $27 million of amortization of
a gain on the June 2004 sale of TXU Fuel. Other income in both 2004 and 2003
included $30 million in amortization of the gain on the 2002 sale of two
generation plants. The 2003 period also included a $9 million gain on the sale
of contracts related to retail gas activities outside of Texas.





**A-13**


Other
deductions increased $644 million to $665 million in 2004. The 2004 amount
reflected the initiatives discussed above under “TXU Corp. Management Change and
Restructuring Plan” and included $180 million in lease-related charges primarily
related to generation and mining assets taken, or to be taken, out of service,
$130 million in employee severance charges, $109 million in software write-offs,
$101 million in termination costs for an existing power purchase and tolling
agreement, $79 million in spare parts inventory write-downs and $21 million for
estimated settlement payments arising from the resolution of a distribution rate
inquiry initiated by a number of Texas cities.





Interest
income rose $19 million to $38 million in 2004 primarily due to higher average
advances to affiliates.





Interest
expense and related charges decreased $10 million, or 2%, to $595 million in
2004 reflecting $23 million due to lower average rates, partially offset by $15
million due to higher average borrowings.





The
effective income tax rate on income from continuing operations before
extraordinary gain and cumulative effect of change in accounting principle was
29.6% in 2004 compared to 32.1% in 2003 driven by the effects of ongoing tax
benefits of depletion allowances and amortization of investment tax credits on a
lower taxable income base in 2004.





Income
from continuing operations before extraordinary gain and cumulative effect of
changes in accounting principles (an after-tax measure) decreased $64 million,
or 9%, to $672 million in 2004. This performance reflected a decrease of $89
million in the TXU Energy Holdings segment. Results in the TXU Energy Holdings
segment reflected several unusual charges reported in other deductions discussed
above, partially offset by higher gross margin. Earnings in the TXU Electric
Delivery segment declined $3 million reflecting $13 million in after-tax
severance costs and $14 million after-tax for a rate case settlement, partially
offset by higher transmission-related revenues. Results of US Holdings’ holding
company improved $28 million primarily reflecting amortization of the deferred
gain on the sale of TXU Fuel.





Net
pension and postretirement benefit costs reduced income from continuing
operations by $55 million after-tax in 2004 and 2003.





Loss from
the discontinued operations was $34 million in 2004 and $18 million in 2003. The
2004 loss included a $17 million after-tax impairment charge arising from a June
2004 decision to sell Pedricktown, New Jersey generation facility, a $6 million
after-tax charge to settle a contract dispute related to the strategic retail
services business and $6 million after-tax in costs to complete various
strategic retail services contracts.





An
extraordinary gain of $16 million (net of tax of $9 million) in 2004 represents
an increase in carrying value of TXU Electric Delivery’s regulatory asset
subject to securitization. The second and final tranche of the securitization
bonds was issued in June 2004. The increase in the related regulatory asset is
due to the effect of higher interest rates than previously estimated on the
bonds and therefore increased amounts to be recovered from REPs through revenues
as a transition charge to service the bonds.





Cumulative
effect of changes in accounting principles, representing after-tax income of $6
million in 2004 and an after-tax charge of $58 million in 2003, reflect the
adoption of SFAS 123R in 2004 and the impact of commodity contract
mark-to-market accounting from rescission of EITF 98-10 and the recording of
asset retirement obligations under SFAS 143 in 2003. (See Note 3 to Financial
Statements).





**Consolidated
US Holdings**





***2003
compared to 2002***





US
Holdings’ operating revenues increased $493 million, or 6%, to $8.6 billion in
2003. The revenue growth reflected an increase in the TXU Energy Holdings
segment of $308 million, or 4%, to $8.0 billion and an increase in the TXU
Electric Delivery segment of $93 million, or 5%, to $2.1 billion. Operating
revenues in the TXU Energy Holdings segment reflected higher retail and
wholesale pricing, partially offset by the effect of a mix shift to lower-price
wholesale sales and lower sales volumes. The growth in revenues in the TXU
Electric Delivery segment reflected increased electricity transmission and
distribution tariffs, higher transition charges related to the issuance of
securitization bonds and higher disconnect/reconnect fees. Consolidated revenue
growth also reflected a $92 million reduction in the intercompany sales
elimination, primarily reflecting lower sales by TXU Electric Delivery to TXU
Energy Holdings as sales to nonaffiliated REPs increased.





**A-14**


*Gross
Margin*





**Year
      Ended December 31,****2003**
    
    **%
      of Revenue**
    
    **2002**
    
    **%
      of Revenue**Operating
      revenues
    
    $
    8,573
    
    
    100
    %
    $
    8,080
    
    
    100
    %Cost
      and expenses:Cost
      of energy sold and delivery fees
    
    
    3,620
    
    
    42
    %
    
    3,181
    
    
    40
    %Operating
      costs
    
    
    1,391
    
    
    16
    %
    
    1,372
    
    
    17
    %Depreciation
      and amortization
    
    
    654
    
    
    8
    %
    
    662
    
    
    8
    %Gross
      margin
    
    $
    2,908
    
    
    34
    %
    $
    2,865
    
    
    35
    %


Gross
margin increased $43 million, or 2%, to $2.9 billion in 2003. This increase
reflected growth in the TXU Electric Delivery segment of $29 million, or 3%, to
$1.1 billion and an increase in the TXU Energy Holdings segment of $15 million,
or 1%, to $1.8 billion. The gross margin increase in the TXU Electric Delivery
segment was driven by the higher electricity delivery fees. The TXU Energy
Holdings segment gross margin was favorably impacted by $197 million due to
regulatory-related retail clawback accrual adjustments (a $185 million charge
and a $12 million credit in 2003). The balance of the TXU Energy Holdings
segment’s gross margin change reflected a 12% decline in retail sales volumes,
partially offset by lower depreciation expense as described immediately
below.





Depreciation
and amortization (including amounts shown in the gross margin table above)
decreased $10 million, or 1%, to $704 million in 2003, reflecting the impact of
lower depreciation related to TXU Energy Holdings’ generation fleet due
primarily to an extension of the estimated depreciable life of the nuclear
generation facility to better reflect its useful life, largely offset by
investments in delivery facilities to support growth and normal replacements of
equipment and the start of amortization of regulatory assets associated with
securitization bonds issued in 2003.





SG&A
expense decreased $142 million, or 14%, to $844 million in 2003. The decrease
was driven by the TXU Energy Holdings segment and reflected lower staffing and
related administrative expenses arising from cost reduction and productivity
enhancing initiatives and a focus on activities in the Texas
market.





Franchise
and revenue-based taxes decreased $35 million, or 9%, to $375 million in 2003
due primarily to a decrease in local gross receipts taxes, partially offset by
increases in property and state franchise taxes. The decrease in local gross
receipts taxes reflects a regulatory change, applicable to TXU Electric
Delivery, in the basis for the calculation from revenue dollars to
kilowatt-hours.





Other
income increased $14 million to $52 million in 2003. **** The 2003
and 2002 periods included $30 million of amortization of a gain on the sale of
two generation plants in 2002. The 2003 period also included gains on the sale
of certain retail business market gas contracts. See Note 19 to Financial
Statements under *Other
Income and Deductions* for
additional detail.





Other
deductions decreased $229 million to $21 million in 2003, reflecting a $237
million ($154 million after-tax) write-down in 2002 of an investment in
generation plant construction projects. See Note 19 to Financial Statements
under *Other
Income and Deductions* for
additional detail.





Interest
income rose $13 million to $19 million in 2003, the increase primarily reflected
interest income on higher cash balances due to actions taken in late 2002, to
ensure ample liquidity, as well as interest received on restricted cash balances
held as collateral for a credit facility.





Interest
expense and related charges increased $165 million, or 38%, to $605 million in
2003. The increase reflected higher average interest rates and higher average
borrowings. Higher average rates reflected replacement of short-term borrowings
with higher rate long-term debt.





The
effective income tax rate on income from continuing operations before
extraordinary loss and cumulative effect of changes in accounting principles was
32.1% in 2003 compared to 29.1% in 2002. The increase reflected the effect of
comparable (to 2002) tax benefit amounts of depletion allowances and
amortization of investment tax credits on a higher income base in 2003. (See
Note 12 for an analysis of the effective tax rate.)





**A-15**


Income
from continuing operations before extraordinary loss and cumulative effect of
changes in accounting principles (an after-tax measure) increased $189 million,
or 35%, to $736 million in 2003. Earnings in the TXU Energy Holdings segment
rose $175 million, or 54%, to $497 million in 2003. Results in 2002 included
impairment charges related to generation plant construction projects ($154
million) and accrual of the retail clawback credit ($120 million). Excluding
these items, earnings declined on gross margin compression due to lower retail
sales volumes as well as higher interest expenses, partially offset by lower
SG&A expenses. Earnings in the TXU Electric Delivery segment rose $13
million, or 5%, to $258 million in 2003, reflecting higher revenues, partially
offset by higher interest, depreciation and amortization and operating expenses.
Net pension and postretirement benefit costs, reported in operating costs and
SG&A expenses, reduced income from continuing operations before
extraordinary loss and cumulative effect of changes in accounting principles by
$55 million in 2003 and $32 million in 2002.





Loss from
the discontinued operations was $18 million in 2003 and $52 million in 2002. The
decline reflected reductions in headcount and other SG&A-related expenses.
See Note 4 to Financial Statements.





An
extraordinary loss of $134 million (net of income tax benefit of $72 million) in
2002 principally represents the write-down of the regulatory assets subject to
recovery through the issuance of securitization bonds. (See Note 5 to Financial
Statements.)





A
cumulative effect of changes in accounting principles, representing an after-tax
charge of $58 million in 2003, reflects the impact on commodity contract
mark-to-market accounting from rescission of EITF 98-10 and the recording of
asset retirement obligations under SFAS 143. (See Note 3 to Financial
Statements.)





**Energy-Related
Commodity Contracts and Mark-to-Market Activities**





The table
below summarizes the changes in ** commodity
contract assets and liabilities for the years ended December 31, 2004, 2003 and
2002. The net changes in these assets and liabilities, excluding “cumulative
effect of change in accounting principle” and “other activity” as described
below, represent the net effect of recording unrealized gains/(losses) under
mark-to-market accounting for positions in the commodity contract portfolio.
These positions consist largely of economic hedge transactions, with speculative
trading representing a small fraction of the activity.





**2004**
    
    **2003**
    
    **2002**Balance
      of net commodity contract assets at beginning of year
    
    $
    108
    
    $
    316
    
    $
    371Cumulative
      effect of change in accounting principle (1)
    
    
    ─
    
    
    (75
    )
    
    ─Settlements
      of positions included in the opening balance (2)
    
    
    (59
    )
    
    (145
    )
    
    (225
    )Unrealized
      mark-to-market valuations of positions held at end of period (3)
    
    
    (31
    )
    
    9
    
    
    153Other
      activity (4)
    
    
    5
    
    
    3
    
    
    17Balance
      of net commodity contract assets at end of year
    
    $
    23
    
    $
    108
    
    $
    316


**_________________**(1) Represents
a portion of the pre-tax cumulative effect of the rescission of EITF 98-10 (see
Note 3 to Financial Statements).
(2) Represents
unrealized mark-to-market valuations of these positions recognized in earnings
as of the beginning of the period.
(3) There
were no significant changes in fair value attributable to changes in valuation
techniques. Includes $14 million in origination
gains recognized in 2002 related to
nonderivative wholesale contracts.
(4) Includes
initial values of positions involving the receipt or payment of cash or other
consideration, such as option premiums, the
amortization of such values and
reflects the exit of certain retail gas activities in 2003. Also reflects $71
million of contract-related
liabilities to Enron Corporation
reclassified to other current liabilities in 2002. These activities have no
effect on unrealized mark-to-
market valuations.


The
decline in net commodity contract assets over the last three years reflects an
accounting rule change issued in 2003 that limited mark-to-market accounting to
agreements that met the definition of a derivative. Certain energy contracts
previously marked-to-market were not derivatives (see Note 3 to Financial
Statements). The decline also reflected reduced trading activities following the
sale of retail gas operations outside of Texas in 2003 and the appropriate use
of normal and cash flow hedge designations in the remaining contract portfolio.





In
addition to the net effect of recording unrealized mark-to-market gains and
losses that are reflected in changes in commodity contract assets and
liabilities, similar effects arise in the recording of unrealized
ineffectiveness mark-to-market gains and losses associated with
commodity-related cash flow hedges. These effects are reflected in the balance
sheet as changes in cash flow hedge and other derivative assets and liabilities.
The total net effect of recording unrealized gains and losses under
mark-to-market accounting is summarized as follows (excludes cumulative effect
of change in accounting principle):




**A-16**





**2004**
    
    **2003**
    
    **2002**Unrealized
      losses in mark-to-market commodity contract portfolio
    
    $
    (90
    )
    $
    (136
    )
    $
    (72
    )Ineffectiveness
      gains/(losses) related to cash flow hedges
    
    
    (19
    )
    
    36
    
    
    (41
    )Total
      unrealized losses associated with energy-relatedcommodity
      contracts
    
    $
    (109
    )
    $
    (100
    )
    $
    (113
    )





These
amounts are included in the “hedging and risk management activities” component
of revenues as presented in the TXU Energy Holdings segment data.





As a
result of guidance provided in EITF 02-3, US Holdings has not recognized
origination gains on energy contracts in 2003 or 2004. US Holdings recognized
origination gains on retail sales contracts of $40 million in 2002. Because of
the short-term nature of these contracts, a portion of these gains would have
been recognized on a settlement basis in the year the origination gain was
recorded.





***Maturity
Table*** — Of the
net commodity contract asset balance above at December 31, 2004, the amount
representing unrealized mark-to-market net gains that have been recognized in
current and prior years’ earnings is $31 million. The offsetting net liability
of $8 million included in the December 31, 2004 balance sheet is comprised
principally of amounts representing current and prior years’ net receipts of
cash or other consideration, including option premiums, associated with contract
positions, net of any amortization. The following table presents the unrealized
mark-to-market balance at December 31, 2004, scheduled by contractual settlement
dates of the underlying positions.





**Maturity
      dates of unrealized net mark-to-market balances at December 31,
      2004****Source
      of fair value**
    
    **Maturity
      less than**
      **1
      year**
    
    **Maturity
      of**
      **1-3
      years**
    
    **Maturity
      of**
      **4-5
      years**
    
    **Maturity
      in**
      **Excess
      of**
      **5
      years**
    
    **Total**Prices
      actively quoted
    
    $
    59
    
    $
    ─
    
    $
    ─
    
    $
    ─
    
    $
    59Prices
      provided by otherexternal
      sources
    
    
    ─
    
    
    (38
    )
    
    8
    
    
    (3
    )
    
    (33
    )Prices
      based on models
    
    
    5
    
    
    ─
    
    
    ─
    
    
    ─
    
    
    5Total
    
    $
    64
    
    $
    (38
    )
    $
    8
    
    $
    (3
    )
    $
    31Percentage
      of total fair value
    
    
    207
    %
    
    (123
    )%
    
    26
    %
    
    (10
    )%
    
    100
    %





As the
above table indicates, 84% of the unrealized mark-to-market valuations at
December 31, 2004 mature within three years. This is reflective of the terms of
the positions and the methodologies employed in valuing positions for periods
where there is less market liquidity and visibility. The “prices actively
quoted” category reflects only exchange traded contracts with active quotes
available. The “prices provided by other external sources” category represents
forward commodity positions at locations for which over-the-counter broker
quotes are available. Over-the-counter quotes for power and natural gas
generally extend through 2005 and 2010, respectively. The “prices based on
models” category contains the value of all nonexchange traded options, valued
using industry accepted option pricing models. In addition, this category
contains other contractual arrangements which may have both forward and option
components. In many instances, these contracts can be broken down into their
component parts and modeled as simple forwards and options based on prices
actively quoted. As the modeled value is ultimately the result of a combination
of prices from two or more different instruments, it has been included in this
category.








**A-17**








**TXU
Energy Holdings**





***Financial
Results***





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**Operating
      revenues
    
    $
    8,495
    
    $
    7,986
    
    $
    7,678Costs
      and expenses:Cost
      of energy sold and delivery fees
    
    
    5,265
    
    
    5,117
    
    
    4,771Operating
      costs
    
    
    704
    
    
    685
    
    
    698Depreciation
      and amortization
    
    
    350
    
    
    407
    
    
    450Selling,
      general and administrative expenses
    
    
    667
    
    
    636
    
    
    774Franchise
      and revenue-based taxes
    
    
    117
    
    
    124
    
    
    120Other
      income
    
    
    (110
    )
    
    (48
    )
    
    (33
    )Other
      deductions
    
    
    610
    
    
    22
    
    
    254Interest
      income
    
    
    (31
    )
    
    (8
    )
    
    (10
    )Interest
      expense and other charges
    
    
    353
    
    
    323
    
    
    215Total
      costs and expenses
    
    
    7,925
    
    
    7,258
    
    
    7,239Income
      from continuing operations before income taxes andcumulative
      effect of changes in accounting principles
    
    
    570
    
    
    728
    
    
    439Income
      tax expense
    
    
    162
    
    
    231
    
    
    117Income
      from continuing operations before cumulative effectof
      changes in accounting principles
    
    $
    408
    
    $
    497
    
    $
    322








**A-18**





**TXU
Energy Holdings**





***Sales
Volume and Customer Count Data***







**Year
      Ended December 31,********2004**
    
    **2003**
    
    **2002****Sales
      volumes:**Retail
      electricity sales volumes (GWh):Historical
      service territory (a):Residential
    
    
    30,897
    
    
    34,082
    
    
    36,967Small
      business (b)
    
    
    10,476
    
    
    12,673
    
    
    15,480Total
      historical service territory
    
    
    41,373
    
    
    46,755
    
    
    52,447Other
      territories (a):Residential
    
    
    3,089
    
    
    1,899
    
    
    725Small
      business (b)
    
    
    363
    
    
    313
    
    
    427Total
      other territories
    
    
    3,452
    
    
    2,212
    
    
    1,152Large
      business and other customers
    
    
    25,466
    
    
    30,955
    
    
    36,982Total
      retail electricity
    
    
    70,291
    
    
    79,922
    
    
    90,581Wholesale
      electricity sales volumes
    
    
    48,309
    
    
    36,809
    
    
    29,353Total
      retail and wholesale electricity sales volumes
    
    
    118,600
    
    
    116,731
    
    
    119,934**Average
      volume (kWh) per retail customer (c):**Residential
    
    
    15,619
    
    
    15,959
    
    
    16,272Small
      business
    
    
    34,095
    
    
    39,728
    
    
    47,235Large
      business and other customers
    
    
    351,542
    
    
    421,203
    
    
    450,674**Weather
      (service territory average) - percent of normal
    (d):**Percent
      of normal:Cooling
      degree days
    
    
    89.9
    %
    
    95.7
    %
    
    99.8
    %Heating
      degree days
    
    
    89.2
    %
    
    98.1
    %
    
    102.0
    %**Customer
      counts:**Retail
      electricity customers (end of period and in thousands)
(e):Historical
      service territory (a):Residential
    
    
    1,951
    
    
    2,059
    
    
    2,204Small
      business (b)
    
    
    309
    
    
    316
    
    
    328Total
      historical service territory
    
    
    2,260
    
    
    2,375
    
    
    2,532Other
      territories (a):Residential
    
    
    194
    
    
    148
    
    
    98Small
      business (b)
    
    
    6
    
    
    5
    
    
    5Total
      other territories
    
    
    200
    
    
    153
    
    
    103Large
      business and other customers
    
    
    76
    
    
    69
    
    
    78Total
      retail electricity customers
    
    
    2,536
    
    
    2,597
    
    
    2,713




(a)
    Historical
      service and other territory data for 2003 and 2002 are best estimates.
 (b)
    Customers
      with demand of less than 1 MW annually.
 (c)
    Calculated
      using average number of customers for period.
 (d)
    Weather
      data is obtained from Weatherbank, Inc., an independent company that
      collects and archives weather data from reporting stations of the National
      Oceanic and Atmospheric Administration (a federal agency under the US
      Department of Commerce).
 (e)
    Based
      on number of meters.





**A-19**








**TXU
Energy Holdings**





***Revenue
and Market Share Data***


**Year
      Ended December 31,********2004**
    
    **2003**
    
    **2002****Operating
      revenues (millions of dollars):**Retail
      electricity revenues:Historical
      service territory (a):Residential
    
    $
    3,164
    
    $
    3,152
    
    $
    3,044Small
      business (b)
    
    
    1,103
    
    
    1,213
    
    
    1,312Total
      historical service territory
    
    
    4,267
    
    
    4,365
    
    
    4,356Other
      territories (a):Residential
    
    
    298
    
    
    159
    
    
    64Small
      business (b)
    
    
    34
    
    
    25
    
    
    18Total
      other territories
    
    
    332
    
    
    184
    
    
    82Large
      business and other customers
    
    
    1,771
    
    
    1,935
    
    
    2,085Total
      retail electricity revenues
    
    
    6,370
    
    
    6,484
    
    
    6,523Wholesale
      electricity revenues
    
    
    1,886
    
    
    1,258
    
    
    841Hedging
      and risk management activities
    
    
    (103
    )
    
    30
    
    
    147Other
      revenues
    
    
    342
    
    
    214
    
    
    167Total
      operating revenues
    
    $
    8,495
    
    $
    7,986
    
    $
    7,678**Hedging
      and risk management activities:**Net
      unrealized mark-to-market losses
    
    $
    (109
    )
    $
    (100
    )
    $
    (113
    )Realized
      gains
    
    
    6
    
    
    130
    
    
    260Total
    
    $
    (103
    )
    $
    30
    
    $
    147**Average
      revenues per MWh:**Residential
    
    $
    101.88
    
    $
    92.02
    
    $
    82.44Small
      business
    
    $
    104.87
    
    $
    95.38
    
    $
    81.75Large
      business and other customers
    
    $
    69.54
    
    $
    62.51
    
    $
    56.93**Estimated
      share of ERCOT retail markets (c):**Historical
      service territory (a):Residential
      (d)
    
    
    81
    %
    
    86
    %
    
    95
    %Small
      business (d)
    
    
    78
    %
    
    82
    %
    
    89
    %Total
      ERCOT:Residential
    
    
    44
    %
    
    46
    %
    
    49
    %Small
      business
    
    
    31
    %
    
    32
    %
    
    35
    %Large
      business and other customers
    
    
    33
    %
    
    37
    %
    
    43
    %


**__________________________**


(a)  Historical
service and other territory data for 2003 and 2002 are best
estimates.


(b)  Customers
with demand of less than 1 MW annually.


(c)  Based on
number of meters, except large business which is based upon annualized
consumption.


(d)  Estimated
market share is based on the number of customers that have choice.








**A-20**





**TXU
Energy Holdings**





***Cost
of Energy Sold Data***


**Year
      Ended December 31,********2004**
    
    **2003**
    
    **2002****Fuel
      and purchased power costs (cost of energy sold) per
      MWh:**Nuclear
      generation
    
    $
    4.31
    
    $
    4.49
    
    $
    4.61Lignite/coal
      generation
    
    $
    12.96
    
    $
    12.53
    
    $
    12.65Gas/oil
      generation and purchased power
    
    $
    47.95
    
    $
    46.12
    
    $
    34.06Average
      total electricity supply
    
    $
    29.02
    
    $
    28.73
    
    $
    23.61**Delivery
      fees per MWh**
    
    $
    21.75
    
    $
    18.93
    
    $
    19.45**Production
      and purchased power volumes (GWh):**Nuclear
      (baseload)
    
    
    18,979
    
    
    17,717
    
    
    16,557Lignite/coal
      (baseload)
    
    
    42,339
    
    
    41,311
    
    
    38,181Gas/oil
    
    
    4,726
    
    
    13,250
    
    
    19,572Purchased
      power
    
    
    56,007
    
    
    49,915
    
    
    50,546Total
      energy supply
    
    
    122,051
    
    
    122,193
    
    
    124,856Less
      line loss and other
    
    
    3,451
    
    
    5,462
    
    
    4,922Net
      energy supply volumes
    
    
    118,600
    
    
    116,731
    
    
    119,934**Baseload
      capacity factors (%):**Nuclear
    
    
    94.3
    %
    
    88.1
    %
    
    82.2
    %Lignite/coal
    
    
    86.2
    %
    
    84.7
    %
    
    78.0
    %








**A-21**





**TXU
Energy Holdings**





***2004
compared to 2003***





Operating
revenues increased $509 million, or 6%, to $8.5 billion in 2004. Retail
electricity revenues decreased $114 million, or 2%, to $6.4 billion. This
decline reflected a $781 million decrease attributable to a 12% drop in sales
volumes, driven by the effect of competitive activity and milder weather
primarily in the summer, partially offset by a $667 million increase due to
higher average pricing. Lower business market volumes also reflected a strategy
to target higher margin customer segments. Higher pricing reflected increased
price-to-beat rates, reflecting regulatory-approved fuel factor increases and
higher pricing in the competitive business market, both resulting from higher
natural gas prices. Retail electricity customer counts at December 31, 2004
declined 2.3% from December 31, 2003. Wholesale electricity revenues grew $628
million, or 50%, to $1.9 billion reflecting a $393 million increase attributable
to a 31% rise in sales volumes and a $235 million increase due to the effect of
increased natural gas prices on wholesale prices. Higher wholesale electricity
sales volumes reflected, principally during the first half of the year, the
establishment of the new northeast zone in ERCOT. Because TXU Energy Holdings
has a generation plant and a relatively small retail customer base in the new
zone, wholesale sales volumes increased, and wholesale power purchases also
increased to meet retail sales demand in other zones and minimize congestion
costs. Completion of transmission projects later in the year reduced congestion
costs, resulting in normalized sales and purchase volumes. The increase in
wholesale sales volumes also reflected a partial shift in TXU Energy Holdings’
customer base from retail to wholesale services, particularly in the business
market.





Net
results from hedging and risk management activities, which are reported in
revenues and include both realized and unrealized gains and losses, declined
$133 million from a net gain of $30 million in 2003 to a net loss of $103
million in 2004. Results from these activities included the net effect of
recording unrealized gains and losses under mark-to-market accounting, versus
settlement accounting, of $109 million in net losses in 2004 and $100 million in
net losses in 2003. Because the hedging activities are intended to mitigate the
risk of commodity price movements on revenues and cost of energy sold, the
changes in such results should not be viewed in isolation, but rather taken
together with the effects of pricing and cost changes on gross margin. The
decline included $22 million in mark-to-market losses associated with required
2004 capacity auctions, $19 million in increased reserves, primarily reflecting
the release in 2003 of liquidity reserves related to retail contracts settled
and $26 million of increased cash flow accounting hedge ineffectiveness. The
comparison also reflected $34 million of gas storage and retail gas business
margin in 2003, primarily related to businesses sold in late 2003, and $18
million due to a favorable settlement with a counterparty in 2003. The majority
of TXU Energy Holdings’ natural gas physical sales and purchases are in the
wholesale markets and essentially represent hedging activities. These activities
are accounted for on a net basis with the exception of retail sales to business
customers, which effective October 1, 2003 are reported gross in accordance with
new accounting rules and totaled $126 million in revenues for the first nine
months of 2004. The increase in other revenues of $128 million to $342 million
in 2004 was primarily driven by this change.








*Gross
Margin*
 **Year
      Ended December 31,****2004**
    
    **%
      of Revenue**
    
    **2003**
    
    **%
      of Revenue**Operating
      revenues
    
    $
    8,495
    
    
    100
    %
    $
    7,986
    
    
    100
    %Costs
      and expenses:Cost
      of energy sold and delivery fees
    
    
    5,265
    
    
    62
    %
    
    5,117
    
    
    64
    %Operating
      costs
    
    
    704
    
    
    8
    %
    
    685
    
    
    8
    %Depreciation
      and amortization
    
    
    327
    
    
    4
    %
    
    368
    
    
    5
    %Gross
      margin
    
    $
    2,199
    
    
    26
    %
    $
    1,816
    
    
    23
    %





Gross
margin increased $383 million, or 21%, to $2.2 billion in 2004. Higher gross
margin reflected initiatives taken to respond to higher natural gas prices,
including retail pricing actions and more cost effective sourcing of power. The
gross margin increase reflected higher retail and wholesale prices partially
offset by the effect of lower retail volumes, lower results from hedging and
risk management activities and increased delivery fees. The average cost per MWh
of power produced and purchased was about even with 2003, as higher purchased
power costs due to rising natural gas prices were largely offset by lower cost
of power produced due to reduced utilization of high heat rate gas-fired
generation and higher lignite and nuclear facility output. Delivery fees
increased on a per MWh basis due to a lower retail clawback credit applied to
delivery fees in 2004 compared to the excess mitigation credit applied in 2003,
as well as increased transition charges related to the issuance of regulatory
asset securitization bonds by TXU Electric Delivery.





**A-22**


Operating
costs increased $19 million, or 3%, to $704 million in 2004. The increase
reflected $30 million in incremental testing, inspection and component repair
costs associated with the planned outage for refueling at the nuclear facility
and planned lignite/coal plant outages, $11 million in higher incentive
compensation expense, an increase of $4 million in ad valorem taxes due to
higher gas prices and a $4 million increase in property insurance premiums.
Operating costs reflected a decline of $16 million related to customer care
support services previously provided to TXU Gas (largely offset by lower related
revenues), and $14 million due to the absence of the gas transportation
subsidiary sold in June 2004 (largely offset by higher costs of energy sold
related to gas-fired production).





Depreciation
and amortization (including amounts shown in the gross margin table above)
decreased $57 million, or 14%, to $350 million. The decrease was driven by
extensions of estimated average depreciable lives of lignite and nuclear
generation facilities’ assets to better reflect their useful lives, partially
offset by the effect of mining activity and the related asset retirement
obligation and the effect of the transfer of information technology assets,
principally capitalized software, to a TXU Corp. affiliate in connection with
the Capgemini transaction. Depreciation and amortization included in gross
margin represents depreciation of assets directly used in the generation of
electricity.





SG&A
expenses increased by $31 million, or 5%, to $667 million reflecting $72 million
in higher incentive compensation expense due to improved performance of the
business and achievement of certain targets related to trading activities,
partially offset by $24 million in lower bad debt expense reflecting stricter
disconnect policies, more focused collection activities, targeted customer
marketing and lower accounts receivable balances, $8 million from various cost
reduction initiatives and $4 million in reduced marketing costs outside the
historical service territory.





Other
income increased by $62 million to $110 million in 2004. Other income in 2004
included $58 million of the remaining unamortized gain on the 2002 sale of two
generation plants recognized as a result of the termination of an existing power
purchase and tolling agreement discussed above under “Business Restructuring and
Other Actions” and a $19 million gain on the sale of undeveloped land. Other
income in both 2004 and 2003 reflected $30 million in amortization of the gain
on the 2002 sale of two generation plants. The 2003 period also included a $9
million gain on the sale of contracts related to retail gas activities outside
of Texas.





Other
deductions increased $588 million to $610 million in 2004. Other deductions in
2004 consist largely of $180 million in lease-related charges primarily related
to generation and mining assets taken, or to be taken, out of service, $107
million in software write-offs, $107 million for employee severance, $101
million in termination costs for an existing power purchase and tolling
agreement and $79 million for spare parts inventory writedowns, all discussed
above under “Business Restructuring and Other Actions.”





Interest
income increased by $23 million to $31 million in 2004 primarily due to higher
average advances to affiliates.





Interest
expense and related charges increased by $30 million, or 9%, to $353 million in
2004. The increase reflected $40 million due to higher average debt levels and
$12 million representing higher interest reimbursement to TXU Electric Delivery
for carrying costs related to securitized regulatory assets, partially offset by
$21 million due to lower average interest rates.





The
effective income tax rate decreased to 28.4% in 2004 from 31.7% in 2003 driven
by the effects of ongoing tax benefits of depletion allowances and amortization
of investment tax credits on a lower income base in 2004.





Income
from continuing operations before cumulative effect of changes in accounting
principles decreased $89 million to $408 million in 2004, reflecting the net
restructuring related charges reported in other deductions and other income and
higher SG&A expenses, partially offset by the higher gross margin. Net
pension and postretirement benefit costs reduced net income by $36 million in
both 2004 and 2003.





**A-23**








**TXU
Energy Holdings**





***2003
compared to 2002***





Effective
with reporting for 2003, results for the TXU Energy Holdings segment exclude
expenses incurred by the US Holdings parent company in order to present the
segment on the same basis as the results of the business are evaluated by
management. Prior year amounts are presented on this revised basis.





Operating
revenues increased $308 million, or 4%, to $8.0 billion in 2003. Total retail
and wholesale electricity revenues rose $378 million, or 5%, to $7.7 billion.
This growth reflected higher retail and wholesale pricing, partially offset by
the effects of a mix shift to lower-price wholesale sales and a 3% decline in
total sales volumes. Retail electricity revenues decreased $39 million, or 1%,
to $6.5 billion reflecting a $768 million decline attributable to a 12% drop in
sales volumes, driven by the effect of competitive activity in the business
market, largely offset by a $730 million increase due to higher pricing. Higher
prices reflected increased price-to-beat rates, due to approved fuel factor
increases, and higher contract pricing in the competitive large business market,
both resulting from higher natural gas prices. Retail electricity customer
counts declined 4.3% from year-end 2002. Wholesale electricity revenues grew
$417 million, or 50%, to $1.3 billion reflecting a $223 million increase
attributable to a 25% rise in sales volumes and a $194 million increase due to
the effect of increased natural gas prices on wholesale prices. Higher wholesale
electricity sales volumes reflected a partial shift in the customer base from
retail to wholesale services, particularly in the business market.





Net gains
from hedging and risk management activities, which are reported in revenues and
include both realized and unrealized gains and losses, declined $117 million to
$30 million in 2003. Changes in these results reflect market price movements on
commodity contracts entered into to hedge gross margin; the comparison to 2002
also reflects a decline in activities in markets outside of Texas. Because the
hedging activities are intended to mitigate the risk of commodity price
movements on revenues and cost of energy sold, the changes in such results
should not be viewed in isolation, but rather taken together with the effects of
pricing and cost changes on gross margin. Results from these activities include
net unrealized losses arising from mark-to-market accounting of $100 million in
2003 and $113 million in 2002. The majority of TXU Energy Holdings’ natural gas
physical sales and purchases are in the wholesale markets and essentially
represent hedging activities. These activities are accounted for on a net basis
with the exception of retail sales to business customers, which effective
October 1, 2003 are reported gross in accordance with new accounting rules and
totaled $39 million in revenues since that date. The increase in other revenues
of $47 million to $214 million in 2003 was driven by this change.





*Gross
Margin*


**Year
      Ended December 31,****2003**
    
    **%
      of Revenue**
    
    **2002**
    
    **%
      of Revenue**Operating
      revenues
    
    $
    7,986
    
    
    100
    %
    $
    7,678
    
    
    100
    %Costs
      and expenses:Cost
      of energy sold and delivery fees
    
    
    5,117
    
    
    64
    %
    
    4,771
    
    
    62
    %Operating
      costs
    
    
    685
    
    
    8
    %
    
    698
    
    
    9
    %Depreciation
      and amortization
    
    
    368
    
    
    5
    %
    
    408
    
    
    5
    %Gross
      margin
    
    $
    1,816
    
    
    23
    %
    $
    1,801
    
    
    24
    %





The
depreciation and amortization expense reported in the gross margin amounts above
excluded $39 million and $42 million of such expense for the years ended
December 31, 2003 and 2002, respectively, related to assets that are not
directly used in the generation of electricity.





Gross
margin increased $15 million, or 1%, to $1.8 billion in 2003. The gross margin
comparison was favorably impacted by $197 million due to regulatory-related
retail clawback accrual adjustments (a $185 million charge in 2002 and a $12
million credit in 2003), as described in Note 16 to Financial Statements, and
$53 million in lower operating costs and depreciation and amortization.
Adjusting for these effects, margin declined $235 million, driven by the effect
of lower retail sales volumes. The combined effect of higher costs of energy
sold and lower results from hedging and risk management activities was
essentially offset by higher sales prices. Higher costs of energy sold were
driven by higher natural gas prices, but were mitigated by increased sourcing of
retail and wholesale sales demand from TXU Energy Holdings’ baseload
(nuclear-powered and coal-fired) generation plants. Baseload supply of sales
demand increased by five percentage points to 51% in 2003. The balance of sales
demand in 2003 was met with gas-fired generation and purchased power.





**A-24**


Operating
costs decreased $13 million, or 2%, to $685 million in 2003. The decline
reflected $20 million due to one scheduled outage for nuclear generation unit
refueling and maintenance in 2003 compared to two in 2002 and $15 million from
various cost reduction initiatives, partially offset by $27 million in higher
employee benefits and insurance costs.





Depreciation
and amortization (including amounts shown in the gross margin table above)
decreased $43 million, or 10%, to $407 million largely due to the effect of
adjusted depreciation rates related to the generation fleet effective April
2003. The adjusted rates reflect an extension in the estimated average
depreciable life of the nuclear generation facility’s assets of approximately 11
years (to 2041) to better reflect its useful life, partially offset by higher
depreciation rates for lignite and gas facilities to reflect investments in
emissions equipment made in recent years.





SG&A
expenses declined $138 million, or 18%, to $636 million in 2003. Lower staffing
and related administrative expenses contributed approximately $95 million to the
decrease, reflecting cost reduction and productivity enhancing initiatives and a
focus on activities in the Texas market. Lower SG&A expenses also reflected
a $40 million decline in bad debt expense. In the retail electricity business,
the effect of enhanced credit and collection activities was largely offset by
increased write-offs arising from disconnections now allowed under new
regulatory rules and increased churn of non-paying customers. The decrease in
bad debt expense primarily reflected the wind down of retail gas (business
customer supply) activities outside of Texas and the recording of related
reserves in 2002.





Other
income increased $15 million to $48 million in 2003. Other income in both
periods included approximately $30 million of amortization of a gain on the sale
of two generation plants in 2002. The 2003 period also included a $9 million
gain on the sale of contracts related to retail gas activities outside of Texas.





Other
deductions decreased $232 million to $22 million in 2003, reflecting a $237
million ($154 million after-tax) writedown in 2002 of an investment in two
generation plant construction projects. In addition, both periods include
several individually immaterial items.





Interest
expense and related charges increased $108 million, or 50%, to $323 million in
2003. The increase reflected $108 million due to higher average interest rates
as short-term borrowings were replaced with higher-rate long-term financing. An
$11 million full-year effect of the amortization of the discount on the
exchangeable subordinated notes issued in 2002 (subsequently exchanged by TXU
Energy Holdings for exchangeable preferred membership interests), was largely
offset by the effect of lower average short-term debt levels.





The
effective income tax rate increased to 31.7% in 2003 from 26.7% in 2002. The
increase was driven by the effect of comparable (to 2002) tax benefit amounts of
depletion allowances and amortization of investment tax credits on a higher
income base in 2003. (See Note 12 for analysis of the effective tax rate.)





Income
from continuing operations before cumulative effect of changes in accounting
principles increased $175 million, or 54%, to $497 million in 2003. Results in
2002 included impairment charges related to generation plant construction
projects and an accrual for retail clawback of $154 million after-tax and $120
million after-tax, respectively. Excluding these items, earnings declined on
gross margin compression due to lower retail sales volumes as well as higher
interest expense, partially offset by lower SG&A expenses. Net pension and
postretirement benefit costs reduced net income by $36 million in 2003 and by
$21 million in 2002.











**A-25**





**TXU
Electric Delivery**





***Financial
Results***





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**Operating
      revenues
    
    $
    2,226
    
    $
    2,087
    
    $
    1,994Costs
      and expenses:Operating
      costs
    
    
    730
    
    
    709
    
    
    676Depreciation
      and amortization
    
    
    389
    
    
    297
    
    
    264Selling,
      general and administrative expenses
    
    
    219
    
    
    207
    
    
    213Franchise
      and revenue-based taxes
    
    
    248
    
    
    250
    
    
    272Other
      income
    
    
    (7
    )
    
    (8
    )
    
    (9
    )Other
      deductions
    
    
    52
    
    
    —
    
    
    —Interest
      income
    
    
    (56
    )
    
    (52
    )
    
    (49
    )Interest
      expense and related charges
    
    
    280
    
    
    300
    
    
    265Total
      costs and expenses
    
    
    1,855
    
    
    1,703
    
    
    1,632Income
      from continuing operations before income taxes,
    extraordinaryitems
      and cumulative effect of change in accounting principle
    
    
    371
    
    
    384
    
    
    362Income
      tax expense
    
    
    116
    
    
    126
    
    
    117Income
      from continuing operations before extraordinary itemsand
      cumulative effect of change in accounting principle
    
    $
    255
    
    $
    258
    
    $
    245








**A-26**





**TXU
Electric Delivery**





***Operating
Data***





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002****Volumes:**Electric
      energy delivered (GWh)
    
    
    101,928
    
    
    101,810
    
    
    102,481**Reliability
      statistics:**System
      Average Interruption Duration Index (SAIDI) (non-storm) (a)
    
    
    75.54
    
    
    74.15
    
    
    90.36System
      Average Interruption Frequency Index (SAIFI) (non-storm) (a)
    
    
    1.10
    
    
    1.17
    
    
    1.39Customer
      Average Interruption Duration Index (CAIDI) (non-storm) (a)
    
    
    68.67
    
    
    63.30
    
    
    64.81**Electricity
      points of delivery (end of period and in
    thousands):**Electricity
      distribution points of delivery - based on number of meters
      (b)
    
    
    2,971
    
    
    2,932
    
    
    2,909**Operating
      revenues (millions of dollars):**Electricity
      distribution revenues (c):Affiliated
      (TXU Energy Holdings)
    
    $
    1,418
    
    $
    1,485
    
    $
    1,581Nonaffiliated
    
    
    590
    
    
    410
    
    
    239Total
      distribution revenues
    
    
    2,008
    
    
    1,895
    
    
    1,820Third-party
      transmission revenues
    
    
    192
    
    
    167
    
    
    151Other
      miscellaneous revenues and eliminations
    
    
    26
    
    
    25
    
    
    23Total
      operating revenues
    
    $
    2,226
    
    $
    2,087
    
    $
    1,994


**__________________________**


(a)  SAIDI is
the average number of total electric service outage minutes per customer in the
past year. SAIFI is the average number of electric service interruptions per
customer in the past year. CAIDI is the average number of electric service
outage minutes per interruption in the past year.


(b)  Includes
lighting sites, principally guard lights, for which TXU Energy Holdings is the
REP but are not included in TXU Energy Holdings’ customer count. Such sites
totaled 95,252 in 2004, 100,901 in 2003 and 105,987 in 2002.


(c)  Includes
disconnect/reconnect fees.








**A-27**





**TXU
Electric Delivery**





***2004
compared to 2003***





Operating
revenues increased $139 million, or 7%, to $2.2 billion in 2004. The growth
reflected $87 million in transition charges associated with the issuance of
securitization bonds in August 2003 and June 2004, $26 million in increased
distribution tariffs to recover higher transmission costs, $23 million in
transmission rate increases approved in 2003 and 2004 and $9 million from
implementation of power factor billing. Power factor billing is a tariff on
nonresidential end-use consumers that utilize inefficient equipment. Revenue
growth also included $7 million in increased disconnect/reconnect fees,
reflecting activities initiated by REPs. Milder weather, primarily in the
summer, and consumer usage efficiencies, partially offset by growth in points of
delivery resulted in an estimated net $16 million decrease in revenue. A 44%
increase in the nonaffiliated component of TXU Electric Delivery’s distribution
revenues, as well as a 5% decrease in the affiliated component, reflects
competitive retail sales activity in the historical service territory. Delivered
electricity volumes were about even with 2003.





*Gross
Margin*


**Year
      Ended December 31,****2004**
    
    **%
      of Revenue**
    
    **2003**
    
    **%
      of Revenue**Operating
      revenues
    
    $
    2,226
    
    
    100
    %
    $
    2,087
    
    
    100
    %Costs
      and expenses:Operating
      costs
    
    
    730
    
    
    33
    %
    
    709
    
    
    34
    %Depreciation
      and amortization
    
    
    386
    
    
    17
    %
    
    285
    
    
    14
    %Gross
      margin
    
    $
    1,110
    
    
    50
    %
    $
    1,093
    
    
    52
    %





Gross
margin increased $17 million, or 2%, to $1.1 billion in 2004, driven by an
increase in transmission-related tariffs, partially offset by the effect of
milder weather primarily in the summer and an increase in operating costs. The
increase in operating costs of $21 million, or 3%, to $730 million, reflected
$12 million in third-party transmission costs, $8 million in property taxes due
to property additions and increased value, $6 million in metering-related costs
associated with the increased disconnect/reconnect activity, and $5 million in
vegetation management to improve system reliability, partially offset by $4
million decrease in labor and benefits as a result of 2004 storm activity
(recorded to a regulatory asset or billed to companies affected by hurricane
damage) and $6 million of various other costs that were individually
insignificant. Depreciation and amortization included in gross margin represents
depreciation of assets directly used in the transmission and distribution of
electricity and amortization of regulatory assets. The increase in depreciation
and amortization of $101 million, or 35%, to $386 million reflected $87 million
in higher amortization of regulatory assets associated with the issuance of
securitization bonds (offsetting the same amount of revenue increase) and $13
million in higher depreciation due to normal additions and replacements of
property, plant and equipment.





Depreciation
and amortization not included in gross margin totaled $3 million and $12 million
for 2004 and 2003, respectively. This decline reflected a transfer of
information technology assets, principally capitalized software, to a TXU Corp.
affiliate in connection with the Capgemini outsourcing transaction (see Note 1
to Financial Statements).





SG&A
expenses increased $12 million, or 6%, to $219 million in 2004. The increase
primarily reflected an $8 million increase in incentive compensation expense due
to the improved performance of the business. Increases in various costs that
were individually insignificant were largely offset by lower bad debt expense
reflecting a $4 million write-off in 2003.





Other
deductions totaled $52 million in 2004. This line item includes a charge of $21
for estimated settlement payments arising from the resolution of a distribution
rate inquiry initiated by a number of Texas cities. Other deductions also
includes $20 million of severance-related charges in connection with the
Capgemini outsourcing transaction and other cost reduction initiatives, $4
million for costs associated with transitioning the outsourced activities to
Capgemini, $2 million related to TXU Electric Delivery’s portion of the equity
losses (representing depreciation expense) in the TXU Corp. entity holding the
capitalized software licensed to Capgemini, and $4 million in asset write-downs
and other unusual charges. See the discussion above under “TXU Corp. Management
Change and Restructuring Plan” for additional information.





**A-28**


Interest
income increased by $4 million, or 8%, to $56 million in 2004 driven by an $11
million increase in interest income from TXU Energy Holdings related to
securitized regulatory assets, partially offset by a $6 million decrease in
interest income from TXU Energy Holdings related to the excess mitigation credit
that ceased at the end of 2003.





Interest
expense and related charges decreased $20 million, or 7%, to $280 million in
2004. The decrease reflected a $23 million impact of lower average interest
rates and $6 million in interest paid to REPs in 2003 related to the excess
mitigation credit that ceased at the end of 2003, partially offset by a $9
million impact of higher average borrowings.





The
effective income tax rate decreased to 31.3% in 2004 from 32.8% in 2003. The
decrease was due primarily to the effects of the Medicare Prescription and Drug
Improvement and Modernization Act of 2003, the nontaxable prescription drug
subsidy.





Income
before extraordinary gain and cumulative effect of change in accounting
principle (an after-tax measure) decreased $3 million, or 1%, to $255 million in
2004, as unusual charges reported in other deductions and higher operating costs
were partially offset by higher transmission-related revenues and lower interest
expense. Net pension and postretirement benefit costs reduced net income by $19
million for both 2004 and 2003.





**TXU
Electric Delivery**





***2003
compared to 2002***





TXU
Electric Delivery’s operating revenues increased $93 million, or 5%, to $2.1
billion in 2003. The growth reflected $19 million in transition charges
associated with the issuance of securitization bonds in August 2003, $19 million
in increased distribution tariffs to recover higher transmission costs and $18
million in transmission rate increases. Revenue growth also included $26 million
in increased disconnect/reconnect fees, reflecting activities initiated by REPs,
and $10 million from increased pricing to certain business consumers due to
higher peak demands in 2003. The 72% increase in the nonaffiliated component of
TXU Electric Delivery’s revenues, as well as the 6% decrease in the affiliated
component, reflected competitive retail sales activity in the historical service
territory. Delivered electricity volumes were about even with 2002.





*Gross
Margin*


**Year
      Ended December 31,****2003**
    
    **%
      of Revenue**
    
    **2002**
    
    **%
      of Revenue**Operating
      revenues
    
    $
    2,087
    
    
    100
    %
    $
    1,994
    
    
    100
    %Costs
      and expenses:Operating
      costs
    
    
    709
    
    
    34
    %
    
    676
    
    
    34
    %Depreciation
      and amortization
    
    
    285
    
    
    14
    %
    
    254
    
    
    13
    %Gross
      margin
    
    $
    1,093
    
    
    52
    %
    $
    1,064
    
    
    53
    %





Gross
margin increased $29 million, or 3%, to $1.1 billion in 2003, driven by the
benefit of higher transmission-related tariffs, partially offset by increased
operating costs. The increase in operating costs of $33 million, or 5%, to $709
million reflects $22 million in third-party transmission costs and $8 million in
higher pension and other postretirement benefit costs. The increase in
depreciation and amortization of $31 million, or 12%, to $285 million reflects
$11 million in higher depreciation due to investments in delivery facilities to
support growth and normal replacements of equipment and $19 million in
amortization of regulatory assets associated with the issuance of securitization
bonds in August 2003 (offsetting the same amount of revenue increase).





Depreciation
and amortization not included in gross margin rose $2 million to $12 million in
2003.





SG&A
expenses decreased $6 million, or 3%, to $207 million in 2003 due primarily to
lower outside services and consulting expenses arising from cost reduction
initiatives implemented in late 2002.





Franchise
and revenue-based taxes declined $22 million, or 8%, to $250 million in 2003 due
to the full implementation of a regulatory change in the basis for the
calculation of local gross receipts taxes from revenue dollars to kWh.





**A-29**


Interest
income increased $3 million, or 6%, to $52 million in 2003 reflecting a $15
million increase in the reimbursement from TXU Energy Holdings for higher
carrying costs on regulatory assets (see discussion of higher average interest
rates below) and a $3 million increase in investment income, partially offset by
$15 million less interest on the excess mitigation credit note receivable from
TXU Energy Holdings due to principal payments.





Interest
expense and related charges rose by $35 million, or 13%, to $300 million in
2003. The increase reflected a $48 million impact of higher average interest
rates and a $2 million impact of higher average borrowings, partially offset by
$15 million less interest credited to REPs related to the excess mitigation
credit. The change in average interest rates reflected the refinancing of
affiliate borrowings with higher rate long-term debt issuances.





The
effective income tax rate was 32.8% in 2003 compared to 32.3% in 2002. There
were no significant unusual items impacting the effective rates.





Income
from continuing operations before extraordinary loss increased **** $13
million, or 5%, to $258 million in 2003, reflecting higher transmission-related
revenues, partially offset by higher operating expenses and higher interest
expense. Net pension and postretirement benefit costs reduced net income by $19
million in 2003 and $11 million in 2002.





**OTHER
COMPREHENSIVE INCOME (OCI) — Continuing Operations**





Cash flow
hedge activity reported in other comprehensive income from continuing operations
included:


**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**Cash
      flow hedge activity (net of tax):Net
      change in fair value of hedges - gains/(losses):Commodities
    
    $
    (86
    )
    $
    (138
    )
    $
    (96
    )Financing
      - interest rate swaps
    
    
    —
    
    
    —
    
    
    (88
    )(86
    )
    
    (138
    )
    
    (184
    )Losses
      realized in earnings (net of tax):Commodities
    
    
    32
    
    
    162
    
    
    16Financing
      - interest rate swaps
    
    
    8
    
    
    6
    
    
    240
    
    
    168
    
    
    18Effect
      of cash flow hedges reported in comprehensiveresults
      related to continuing operations
    
    $
    (46
    )
    $
    30
    
    $
    (166
    )





US
Holdings has
historically used, and expects to continue to use, derivative financial
instruments that are highly effective in offsetting future cash flow volatility
in energy commodity prices and interest rates. Amounts in accumulated other
comprehensive income include (i) the value of the cash flow hedges (for the
effective portion), based on current market conditions, and (ii) the value of
dedesignated and terminated cash flow hedges at the time of such dedesignation,
less amortization, providing the transaction that was hedged is still probable.
The effects of the hedge will be recorded in the statement of income as the
hedged transactions are actually settled.





Other
comprehensive income also included adjustments related to minimum pension
liabilities.  Minimum pension liability adjustments were a gain of $6
million ($3 million after-tax) in 2004, a gain of $35 million ($23 million
after-tax) in 2003, and a loss of $57 million ($37 million after-tax) in 2002.
The gain in 2003 reflected the impact of improved returns on plan assets. The
minimum pension liability represents the excess of the accumulated benefit
obligation over the plans’ assets and the liability reflected in the balance
sheet under SFAS 87. The recording of the liability did not affect US Holdings’
financial covenants in any of its credit agreements.





See also
Note 15 to Financial Statements.








**A-30**





**FINANCIAL
CONDITION**





***LIQUIDITY
AND CAPITAL RESOURCES***





***Cash
Flows*** — Cash
flows provided by operating activities in 2004 were $1.8 billion compared to
$2.0 billion in 2003. The decline was driven by unfavorable working capital
(accounts receivable, accounts payable and inventories) changes of $315 million,
which reflected improvements in 2003 due to higher collections following billing
delays experienced during the transition to competition and included $73 million
in decreased funding under the accounts receivable sales program, partially
offset by increased earnings after adjusting for noncash unusual
charges.





The
increase in cash flows in 2003 from 2002 of $668 million was driven by favorable
working capital (accounts receivable, accounts payable and inventories) changes
of $745 million, which primarily reflects the effect of billing and collection
delays in 2002, due to data compilation and reconciliation issues among ERCOT
and the market participants in the newly deregulated market, and included $100
million in increased funding under the accounts receivable sales
program.





Cash
flows used in financing activities were $2.0 billion in 2004 compared to $1.9
billion in 2003. Financing activities provided cash flows of $774 billion in
2002. The drivers of the $105 million increase in cash used in financing
activities from 2003 to 2004 and the $2.7 billion change from 2002 to 2003 are
summarized in the table below:





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**Cash
      provided by (used in) financing activities:Bank
      borrowings
    
    $
    210
    
    $
    (1,804
    )
    $
    1,804Net
      change in advances from affiliates
    
    
    (1,755
    )
    
    (59
    )
    
    (799
    )Net
      issuances (repayments) of other borrowings
    
    
    273
    
    
    975
    
    
    705Repurchase
      of common stock
    
    
    —
    
    
    (463
    )
    
    —Dividends
      paid to parent
    
    
    (775
    )
    
    (588
    )
    
    (927
    )Preferred
      stock dividends
    
    
    (2
    )
    
    (5
    )
    
    (9
    )Total
    
    $
    (2,049
    )
    $
    (1,944
    )
    $
    774





Cash
flows used in investing activities totaled $499 million, $712 million, and $572
million in 2004, 2003 and 2002, respectively. The drivers of the $213 million
decrease in cash used in investing activities from 2003 to 2004 and the $140
million increase in cash used in investing activities from 2002 to 2003 are
summarized in the table below:





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**Cash
      used in investing activities:Capital
      expenditures, including nuclear fuel
    
    $
    (968
    )
    $
    (750
    )
    $
    (848
    )Sale
      of TXU Fuel
    
    
    500
    
    
    ─
    
    
    ─Sale
      of retail gas business
    
    
    ─
    
    
    14
    
    
    ─Sale
      of two generation plants
    
    
    ─
    
    
    ─
    
    
    443Proceeds
      from sale of other assets
    
    
    30
    
    
    10
    
    
    4Termination
      of out-of-the-money interest rate cash flow hedges
    
    
    ─
    
    
    ─
    
    
    (133
    )Other,
      including transaction costs
    
    
    (61
    )
    
    14
    
    
    (38
    )Total
    
    $
    (499
    )
    $
    (712
    )
    $
    (572
    )





The $218
million increase in capital expenditures, including nuclear fuel, in 2004 was
driven by a $161 million increase at TXU Energy Holdings. The increase primarily
reflected increased spending on generation projects and security improvements.
The balance of the growth reflected increased spending in the TXU Electric
Delivery operations to improve system reliability and performance and support
growth.





***Future
Capital Expenditures***  —  Capital
expenditures are expected to total $1.1 billion for 2005, substantially all of
which are for maintenance and organic growth of existing operations, and are
expected to be funded by cash flows from operations. Approximately 63% is
planned for the TXU Electric Delivery segment and 37% for the TXU Energy
Holdings segment.





**A-31**


Depreciation
and amortization expense reported in the statement of cash flows exceeds the
amount reported in the statement of income by $65 million for 2004. This
difference reflected amortization of nuclear fuel, which is reported as cost of
energy sold in the statement of income consistent with industry
practice.





**Financing
Activities**





***Capital
Resources —*** Over the
next twelve months, US Holdings and its subsidiaries will need to fund ongoing
working capital requirements and maturities of debt. US Holdings and its
subsidiaries have funded or intend to fund these requirements through cash on
hand, cash flows from operations, the sale of assets, short-term credit
facilities and the issuance of long-term debt or other securities.







***Long-term
Debt Activity —*** During
the year ended December 31, 2004, US Holdings and its subsidiaries issued,
reacquired, or made scheduled principal payments on long-term debt as follows
(all amounts presented are principal):





**Issuances**
    
    **Retirements**TXU
      Energy Holdings:Pollution
      control revenue bonds
    
    $
    —
    
    $
    222Senior
      notes
    
    
    800
    
    
    400Other
      long-term debt
    
    
    —
    
    
    8TXU
      Electric Delivery:Transition
      bonds
    
    
    790
    
    
    32First
      mortgage bonds
    
    
    —
    
    
    613US
      Holdings:Long-term
      debt
    
    
    —
    
    
    5Total
    
    $
    1,590
    
    $
    1,280





See Notes
7, 8, 9 and 10 to Financial Statements for further detail of debt issuance and
retirements, repurchase of exchangeable preferred membership interest, financing
arrangements, preferred securities and capitalization.





***Regulatory
Asset Securitization—*** The
Settlement Plan approved by the Commission provided TXU Electric Delivery with a
financing order authorizing the issuance of securitization bonds in the
aggregate principal amount of up to $1.3 billion to recover regulatory asset
stranded costs. TXU Electric Delivery’s bankruptcy remote subsidiary issued $790
million of the bonds in June of 2004 and $500 million of the bonds in August of
2003. The proceeds were used to retire debt. Because the bond principal and
interest payments are secured by the collection of transition charges by TXU
Electric Delivery, the $1.3 billion in debt is excluded TXU Electric Delivery’s
capitalization by credit rating agencies. There is no further issuance authority
under the financing order.





***Credit
Facilities***  ***—*** At March
31, 2005, US Holdings had access to credit facilities totaling $4.0 billion of
which $3.0 billion was unused. These credit facilities are used for working
capital and general corporate purposes and to support issuances of letters of
credit. In January 2005, TXU Corp.’s $425 million credit facility was terminated
and $419 of related outstanding letters of credit were effectively transferred
to facilities of TXU Energy Holdings. See Note 7 to Financial Statements for
details of the arrangements.




In March
2005, TXU Energy Holdings and TXU Electric Delivery amended and restated their
$2.5 billion credit facilities. The amended and restated credit facilities
provide an aggregate borrowing and letter of credit capacity of $3.5 billion
(with a maximum amount of $2.8 billion available for TXU Electric Delivery),
with a $1.4 billion facility maturing in June 2008, a $1.6 billion facility
maturing in March 2010 and a $500 million facility maturing in June 2010. The
amended and restated facility can be used for working capital and general
corporate purposes including providing back-up for any future issuances of
commercial paper by TXU Energy Holdings or TXU Electric Delivery and the making
of advances to affiliates.


***Registered
Financing Arrangements*** ** — US
Holdings may issue and sell additional debt and equity securities as needed,
including issuances of up to $25 million of c umulative
preferred stock  and up to
an aggregate of $924 million of additional cumulative preferred stock, debt
securities and/or preferred securities of subsidiary trusts, all of which are
currently registered with the SEC for offering pursuant to Rule 415 under the
Securities Act of 1933.





In March
2005, TXU Energy Holdings and TXU Electric Delivery amended and restated their
$2.5 billion credit facilities. The amended and restated credit facilities
provide an aggregate borrowing and letter of credit capacity of $3.5 billion
(with a maximum amount of $2.8 billion available for TXU Electric Delivery),
with a $1.4 billion facility maturing in June 2008, a $1.6 billion facility
maturing in March 2010 and a $500 million facility maturing in June 2010. The
amended and restated facility can be used for working capital and general
corporate purposes including providing back-up for any future issuances of
commercial paper by TXU Energy Holdings or TXU Electric Delivery and the making
of advances to affiliates.


***Capitalization*** ** — The
capitalization ratios of US holdings at December 31, 2004, consisted of
long-term debt (less amounts due currently) of 52.2%, exchangeable preferred
membership interests (net of unamortized discount balance of $239 million) of
3.5%, preferred stock of 0.3% and common stock equity of 44.0%.





TXU
Electric Delivery’s cash distributions may take the legal form of common stock
share repurchases or the payment of dividends on outstanding shares of its
common stock. The form of the distributions is primarily determined by current
and forecasted levels of retained earnings. The common stock share repurchases
made subsequent to January 1, 2002 are cash distributions to US Holdings that
for financial reporting purposes have been recorded as a return of capital. Any
future cash distributions to US Holdings will be reported (i) as a return of
capital if made through repurchases or (ii) as a dividend if so declared by the
board of directors. Any future common stock share repurchases will reduce the
amount of TXU Electric Delivery's equity, but will not change US Holdings' 100%
ownership of TXU Electric Delivery.





**A-32**


***Short-term
Borrowings —*** At
December 31, 2004, US Holdings had outstanding short-term borrowings consisting
of bank borrowings of $210 million at a weighted average interest rate of
5.25%. **** At
December 31, 2003, US Holdings had outstanding short-term advances from
affiliates of $691 million at a weighted average interest rate of 2.92%.





***Sale
of Receivables*** — TXU
Corp. has established an accounts receivable securitization program. The
activity under this program is accounted for as a sale of accounts receivable in
accordance with SFAS 140. Under the program, subsidiaries of TXU Corp.
(originators) sell trade accounts receivable to TXU Receivables Company, a
consolidated wholly-owned bankruptcy remote direct subsidiary of TXU Corp.,
which sells undivided interests in the purchased accounts receivable for cash to
special purpose entities established by financial institutions. All new trade
receivables under the program generated by the originators are continuously
purchased by TXU Receivables Company with the proceeds from collections of
receivables previously purchased. Funding to US Holdings under the program
totaled $474 million and $547 million at December 31, 2004 and 2003,
respectively. See Note 7 to Financial Statements for a more complete description
of the program including the financial impact on earnings and cash flows for the
periods presented and the contingencies that could result in termination of the
program.





***Cash
and Cash Equivalents —*** Cash on
hand totaled $70 million and $806 million at December 31, 2004 and 2003,
respectively. The decline reflects repayments of advances from
affiliates.





***Credit
Ratings*** — Current
credit ratings for TXU Corp. and certain of its subsidiaries are presented
below:





TXU
      Corp.
    US
      Holdings
    TXU
      Electric Delivery
    TXU
      Electric Delivery
    TXU
      Energy Holdings(Senior
      Unsecured)
    (Senior
      Unsecured)
    (Secured)
    (Senior
      Unsecured)
    (Senior
      Unsecured)S&P
    BBB-
    BBB-
    BBB
    BBB-
    BBBMoody’s
    Ba1
    Baa3
    Baa1
    Baa2
    Baa2Fitch
    BBB-
    BBB-
    A-/BBB+
    BBB+
    BBB





TXU
Electric Delivery’s first mortgage bonds are rated A- and its senior secured
notes are rated BBB+ by Fitch. Moody’s and Fitch currently maintain a stable
outlook for TXU Corp., US Holdings, TXU Energy Holdings and TXU Electric
Delivery. S&P currently maintains a negative outlook for each such entity.





These
ratings are investment grade, except for Moody’s rating of TXU Corp.’s senior
unsecured debt, which is one notch below investment grade.





A rating
reflects only the view of a rating agency, and is not a recommendation to buy,
sell or hold securities. Any rating can be revised upward or downward at any
time by a rating agency if such rating agency decides that circumstances warrant
such a change.





***Financial
Covenants, Credit Rating Provisions and Cross Default
Provisions*** — The
terms of certain financing arrangements of US Holdings contain financial
covenants that require maintenance of specified fixed charge coverage ratios and
leverage ratios and/or contain minimum net worth covenants. As of December 31,
2004, all such applicable covenants were complied with.





*Material
Credit Rating Covenants*





TXU
Energy Holdings has provided a guarantee of the obligations under TXU Corp.’s
lease of its headquarters building (approximately $120 million at December 31,
2004). In the event of a downgrade of TXU Energy Holdings’ credit rating to
below investment grade, a letter of credit would need to be provided within 30
days of any such rating decline.





TXU
Energy Holdings has entered into certain commodity contracts and lease
arrangements that in some instances give the other party the right, but not the
obligation, to request TXU Energy Holdings to post collateral in the event that
its credit rating falls below investment grade. Based on its current commodity
contract positions, if TXU Energy Holdings were downgraded to below investment
grade by specified rating agencies, counterparties would have the option to
request TXU Energy Holdings to post additional collateral of up to approximately
$181 million at December 31, 2004. The amount TXU Energy Holdings could be
required to post under these transactions depends in part on the value of the
contracts at that time.





**A-33**


Under the
terms of leases aggregating $154 million in remaining lease payments, if TXU
Energy Holdings’ credit rating were downgraded to below investment grade by any
specified rating agency, TXU Energy Holdings could be required to sell the
assets, assign the leases to a new obligor that is investment grade, post a
letter of credit or defease the leases.





ERCOT
also has rules in place to assure adequate credit worthiness for parties that
schedule power on the ERCOT System. Under those rules, if TXU Energy Holdings’
credit rating were downgraded to below investment grade by any specified rating
agency, TXU Energy Holdings could be required to post collateral of
approximately $46 million.





Other
arrangements of TXU Corp., including credit facilities, contain terms pursuant
to which the interest rates charged under the agreements may be adjusted
depending on the credit ratings of TXU Corp. or its subsidiaries.





*Material
Cross Default Provisions*





Certain
financing arrangements contain provisions that would result in an event of
default if there were a failure under other financing arrangements to meet
payment terms or to observe other covenants that would result in an acceleration
of payments due. Such provisions are referred to as “cross default” provisions.





A default
by TXU Energy Holdings or TXU Electric Delivery or any subsidiary thereof in
respect of indebtedness in a principal amount in excess of $50 million would
result in a cross default under the $3.5 billion joint credit facilities
expiring in June 2005, 2007 and 2009. Under these credit facilities, a default
by TXU Energy Holdings or any subsidiary thereof would cause the maturity of
outstanding balances under such facility to be accelerated as to TXU Energy
Holdings but not as to TXU Electric Delivery. Also, under this credit facility,
a default by TXU Electric Delivery or any subsidiary thereof would cause the
maturity of outstanding balances under such facility to be accelerated as to TXU
Electric Delivery but not as to TXU Energy Holdings.





A default
by US Holdings or any subsidiary thereof on financing arrangements of $50
million or more would result in a cross default under the TXU Mining (a
subsidiary of TXU Energy Holdings) $30 million senior notes agreement, which has
a $1 million cross default threshold.





TXU
Energy Holdings has entered into certain mining and related equipment leasing
arrangements aggregating $68 million that would terminate upon the default of
any other obligations of TXU Energy Holdings owed to the lessor.





The
accounts receivable securitization program also contains a cross default
provision with a threshold of $50 million applicable to each of the originators
under the program. TXU Receivables Company and TXU Business Services Company
each have a cross default threshold of $50 thousand. If either an originator,
TXU Business Services or TXU Receivables Company defaults on indebtedness of the
applicable threshold, the facility could terminate.





TXU
Energy Holdings enters into energy-related and financial contracts, the master
forms of which contain provisions whereby an event of default or acceleration of
settlement would occur if TXU Energy Holdings were to default under an
obligation in respect of borrowings in excess of thresholds, which vary, stated
in the contracts.





Other
arrangements, including leases, have cross default provisions, the triggering of
which would not result in a significant effect on liquidity.





**A-34**


***Long-term*** **** ***Contractual
Obligations and Commitments***  **—** The
following table summarizes US Holdings’ contractual cash obligations as of
December 31, 2004 (see Notes 8 and 17 to Financial Statements for additional
disclosures regarding these obligations).










**Contractual
      Cash Obligations**
    
    **Less
      Than****One Year**
    
    **One
      to Three****Years**
    
    **Three
      to Five****Years**
    
    **More
      Than Five****Years**Long-term
      debt - principal
    
    $
    217
    
    $
    811
    
    $
    467
    
    $
    6,288Long-term
      debt - interest(a)
    
    
    449
    
    
    859
    
    
    793
    
    
    4,427Operating
      and capital leases (b)
    
    
    78
    
    
    161
    
    
    152
    
    
    410Obligations
      under commodity purchase and services agreements (c)
    
    
    2,722
    
    
    2,428
    
    
    1,204
    
    
    1,667Total
      contractual cash obligations
    
    $
    3,466
    
    $
    4,259
    
    $
    2,616
    
    $
    12,792


_________________


(a)
    Includes
      net amounts payable under interest rate swaps. Variable interest payments
      and net amounts payable under interest rate swaps are calculated based on
      interest rates in effect at December 31,
2004.
 
  (b)
    Includes short-term noncancelable
  leases.




(c)
    Includes
      capacity payments, gas take-or-pay contracts, coal contracts, business
      services outsourcing and other purchase commitments. Amounts presented for
      variable priced contracts assumed the year-end 2004 price remained in
      effect for all periods except where contractual price adjustment or
      index-based prices were specified.




The
following contractual obligations were excluded from the table above:
 ·  contracts
between affiliated entities and intercompany debt;
 ·  individual
contracts that have an annual cash requirement of less than $1 million (however,
multiple contracts with one counterparty that are more than $1 million on an
aggregated basis have been included);
 ·  contracts
that are cancelable without payment of a substantial cancellation
penalty;
 ·  employment
contracts with management; and
 ·  projected
funding for TXU Corp.’s pension and other postretirement benefit plans.


***Guarantees
—*** See Note
17 to Financial Statements for details of guarantees.





**OFF
BALANCE SHEET ARRANGEMENTS**





See
discussion above under “ *Sale
of Receivables”* and in
Note 7 to Financial Statements.





**COMMITMENTS
AND CONTINGENCIES**





Consistent
with industry practices, TXU Energy Holdings has decided to replace the four
steam generators in one of the two generation units of the Comanche Peak nuclear
plant in order to maintain the operating efficiency of the unit. An agreement
for the manufacture and delivery of the equipment was completed in October 2003,
and delivery is scheduled for late 2006. Estimated project capital requirements,
including purchase and installation, are $175 million to $225 million, of which
$9 million was paid in 2004. Cash outflows of approximately $80 million are
expected to occur in 2005 and the remaining spending is expected to occur in
2006 and 2007.





See Note
17 to Financial Statements for a discussion of other commitments and
contingencies, including guarantees.





**REGULATION
AND RATES**





***Price-to-Beat
Rates*** ** ─ ** Under the
1999 Restructuring Legislation, TXU Energy Holdings was required to charge a
price-to-beat rate established by the Commission to residential customers in the
historical service territory through December 31, 2004. As of January 1, 2005,
TXU Energy Holdings can offer rates other than the price-to-beat to residential
customers, but must make service at the price-to-beat price available until
January 1, 2007. TXU Energy Holdings must continue to make price-to-beat rates
available to small business customers; however, it may continue to offer rates
other than price-to-beat, since it met the requirements of the 40% threshold
target calculation in December 2003. The fuel factor component of the
price-to-beat rate can be adjusted upward or downward twice a year, subject to
approval by the Commission, for changes in the market price of natural gas.





TXU
Energy Holdings implemented two price-to-beat increases in 2003. The first,
requested in January and approved by the Commission and implemented in March,
raised the average monthly residential bill of a customer using 1,000 kilowatt
hours by 12%. The second increase, requested in July and approved and
implemented in August, raised the average monthly residential bill by
4%.





**A-35**


TXU
Energy Holdings also implemented two price-to-beat increases in 2004. The first,
requested in March and approved and implemented in May, raised the average
monthly residential bill of a customer by 3%. The second increase, requested in
June and approved in July and implemented in August, raised the average monthly
residential bill by 6%.





***Transmission
Rates*** *—* Provisions of the 1999 Restructuring Legislation allow TXU Electric Delivery to
annually update its wholesale transmission rates to reflect changes in invested
capital. These provisions encourage investment in the transmission system to
help ensure reliability and efficiency by allowing for timely recovery of and
return on new transmission investments. In April 2004, the Commission approved
an increase in TXU Electric Delivery’s wholesale transmission rate, resulting in
an annualized revenue increase of $14 million. Approximately $8.5 million of
this increase is recoverable through transmission rates charged to wholesale
customers, and the remaining $5.5 million is recoverable from REPs through the
retail transmission cost recovery factor (TCRF) component of TXU Electric
Delivery’s distribution rates charged to REPs.




In order
to recover increased affiliate and third-party transmission rates, TXU Electric
Delivery is also allowed to request an update to the TCRF component of its
distribution rates twice a year. In March
2004, the Commission approved an estimated annualized increase of $9 million in
the TCRF component of TXU Electric Delivery’s distribution rates. In September
2004, TXU Electric Delivery implemented a second increase in the TCRF component
of its distribution rates. The new rate will increase annual revenues by an
estimated $29.5 million. The effect of the wholesale transmission rate increase
described in the preceding paragraph is included in the September 2004 TCRF
update. Consolidated results are not benefited by higher distribution rates to
the extent that such higher rates are absorbed by TXU Energy Holdings (as a
REP).





***Other
Commission Matters*** — On May
27, 2004, the Commission opened an investigation to gather information regarding
TXU Electric Delivery’s and its affiliates’ compliance with the Commission’s
affiliate code of conduct rules. Conversations with the Commission indicate that
this investigation was prompted in large part by TXU Electric Delivery’s change
in its legal corporate name from Oncor Electric Delivery Company back to TXU
Electric Delivery Company. Those discussions indicate a reasonable expectation
that the Commission would focus its investigation on TXU Energy Holdings’
implementation of a disclaimer rule that requires TXU Energy Holdings to place a
disclaimer in certain advertisements and on business cards to explain the
distinction between TXU Energy Holdings and TXU Electric Delivery. TXU Energy
Holdings has received no formal or informal request for information in this
investigation.





TXU
Electric Delivery filed formal notice of its name change at the Commission on
June 1, 2004, by filing for approval of reissued tariffs that display the new
company name, but are in all other respects identical to the preexisting
tariffs. On August 9, 2004, the Commission Policy Development Division approved
the reissued tariffs and ordered TXU Electric Delivery to implement use of a
disclaimer regarding the difference between TXU Electric Delivery and its
competitive affiliates.





Certain
cities within US Holdings’ historical service territory, acting in their role as
a regulatory authority (with original jurisdiction), have initiated inquiries to
determine if the rates of TXU Electric Delivery, which have been established by
the Commission, are just and reasonable.  Twenty-three cities have passed
such resolutions (and eleven have passed resolutions supporting the other
cities). TXU Electric Delivery has the right to appeal any city action to the
Commission. In the fourth quarter of 2004, TXU Electric Delivery recorded a $21
million charge, reported in other deductions, for estimated settlement payments
to resolve these inquiries. The settlement agreement, which was finalized
February 22, 2005, avoids any immediate rate actions, but requires TXU Electric
Delivery to file a rate case in 2006, based on a 2005 test year, unless the
cities and TXU Electric Delivery mutually agree that such a filing is
unnecessary. The final settlement amounts are undetermined; however, TXU
Electric Delivery believes it will approximate the amount accrued.





TXU
Energy Holdings, along with several ERCOT wholesale market participants, has
filed an appeal at the Court of Appeals for the Third District of Texas (Austin)
contesting certain aspects of a recently adopted Commission rule regarding
enforcement standards applicable to the wholesale power market. TXU Energy
Holdings believes that certain portions of the rule as adopted are
unconstitutionally vague and other portions may exact an unconstitutional taking
of private property without just compensation. The Court of Appeals heard oral
arguments in the case on December 15, 2004. There is no statutory deadline by
which the court must act on the appeal.





**A-36**


In August
2004, TXU Energy Holdings proposed a tiered pricing program for out-of-territory
customers (i.e., those customers outside of the historical service territory)
that would provide the lowest prices to customers that TXU Energy Holdings has
determined will pose the lowest risk of poor payment behavior, and higher prices
to customers who will pose a higher risk of poor payment behavior. TXU Energy
Holdings’ proposed tiered pricing program would have made use of credit
information obtained from a credit reporting agency to make the payment risk
determination. On September 8, 2004, the Texas Office of Public Utility Counsel
(OPC) filed a complaint at the Commission alleging generally that the use of
credit information is unlawfully discriminatory. Subsequently, on September 14,
2004, TXU Energy Holdings filed its response to the OPC complaint and in that
response, in addition to asserting that the proposed pricing plan is lawful,
notified the Commission that, pursuant to the Commission Staff’s request, TXU
Energy Holdings would suspend implementation of the proposed tiered pricing
program for at least 45 days, so that TXU Energy Holdings could engage in
discussions with Commission Staff, OPC, and others regarding other tools to
address the pressing issue of bad debt write-offs. OPC requested, and the
Commission granted, the dismissal of the complaint without prejudice to
refiling. Discussions began shortly thereafter and are continuing. TXU Energy
Holdings has not yet implemented the proposed tiered pricing program.





***ERCOT
Market Issues*** - The
Texas Public Utility Regulatory Act (PURA) and the Commission are subject to
“sunset review” by the Texas Legislature in the 2005 legislative session. Sunset
review entails, generally, a comprehensive review of the need for and efficacy
of an administrative agency (e.g., the Commission), along with an evaluation of
the advisability of any changes to that agency’s authorizing legislation (e.g.,
PURA). As part of the sunset review process, the legislative Sunset Advisory
Commission has recommended that the Legislature reauthorize the Commission for
at least six years, and has recommended other changes to PURA that are not
expected to have a material impact upon US Holdings’ operations. The Legislature
could consider and enact other changes to PURA, but US Holdings cannot predict
whether any such changes might have a material impact on its operations.





In
addition to sunset review, the Texas Legislature and other Texas governmental
entities have initiated investigations into alleged improprieties regarding some
contracting practices of ERCOT, the nongovernmental entity that has operational
control of the electric grid for much of Texas. To date, these activities have
not resulted in actions that are expected to have a material impact on US
Holdings’ operations, but US Holdings cannot predict whether the culmination of
these or other governmental activities that may affect the ERCOT market may
result in any such material adverse effect.


******


***Wholesale
market design*** ***-*** ****** In August
2003, the Commission adopted a rule that, if fully implemented, would alter the
wholesale market design in ERCOT. The rule requires ERCOT:


·
    to
      use a stakeholder process to develop a new wholesale market
      model;


·
    to
      operate a voluntary day-ahead energy
market;


·
    to
      directly assign all congestion rents to the resources that caused the
      congestion;


·
    to
      use nodal energy prices for resources;


·
    to
      provide information for energy trading hubs by aggregating
      nodes;


·
    to
      use zonal prices for loads; and


·
    to
      provide congestion revenue rights (but not physical rights).





Under the
rule, the proposed market design and associated cost-benefit analysis was to be
filed with the Commission by November 1, 2004 and is to be implemented by
October 1, 2006. On October 28, 2004 the Commission adopted a rule change that
would delay the filing date for the proposed market design from November 1, 2004
to March 18, 2005. Additionally, the Commission approved an extension until
December 31, 2004 for the filing of the cost-benefit analysis. The third-party
consultant produced its cost-benefit analysis at the end of November 2004 and it
was filed by ERCOT with the Commission in December. TXU Energy Holdings is
currently unable to predict the cost or impact of implementing any proposed
change to the current wholesale market design.





On
December 8, 2004 the Commission Staff opened a project (PUC Project No. 30513)
to facilitate an ongoing informal fact-finding review of the electric wholesale
market activities of TXU Energy Holdings and its affiliates. Commission Staff
indicated that it “created this project because of substantial concerns publicly
expressed by the Commission and market participants about TXU’s recent
activities.” TXU Corp.’s discussions with Commission staff and the requests for
information indicate that the informal review is focused on TXU Corp.’s offers
to sell balancing energy services in ERCOT. Balancing energy constitutes only
about five to ten percent of the energy sold at wholesale in ERCOT. TXU Corp.
has been fully cooperating with the Commission Staff in its investigation and
has fully responded to Commission Staff’s requests for information. As indicated
in those responses, TXU Corp. believes that its activities in the electric
wholesale market are both reasonable and lawful.





**A-37**


***Summary***  —
Although US Holdings cannot predict future regulatory or legislative actions or
any changes in economic and securities market conditions, no changes are
expected in trends or commitments, other than those discussed in this report,
which might significantly alter its basic financial position, results of
operations or cash flows.





**QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**




Market
risk is the risk that US Holdings may experience a loss in value as a result of
changes in market conditions affecting commodity prices and interest rates,
which US
Holdings is exposed to in the ordinary course of business. US
Holdings’ exposure to market risk is affected by a number of factors, including
the size, duration and composition of its energy and financial portfolio, as
well as volatility and liquidity of markets. US
Holdings enters into financial instruments such as interest rate swaps to manage
interest rate risks related to its indebtedness, as well as exchange traded,
over-the-counter contracts and other contractual commitments to manage commodity
price risk as part of its wholesale markets management activities.





***RISK
OVERSIGHT***





US
Holdings’ wholesale markets management operation manages the market, credit and
operational risk related to commodity prices of the unregulated energy business
within limitations established by senior management and in accordance with US
Holdings’ overall risk management policies. Interest rate risks are managed
centrally by the corporate treasury function. Market risks are monitored daily
by risk management groups that operate and report independently of the wholesale
markets management operations, utilizing industry accepted practices and
analytical methodologies. These techniques measure the risk of change in value
of the portfolio of contracts and the hypothetical effect on this value from
changes in market conditions and include, but are not limited to, Value at Risk
(VaR) methodologies.





TXU Corp.
has a corporate risk management organization that is headed by a Chief Risk
Officer. The Chief Risk Officer, through his designees, enforces all applicable
risk limits, including the respective policies and procedures to ensure
compliance with such limits and evaluates the risks inherent in the various
businesses of TXU Corp. and their associated transactions. Key risk control
activities include, but are not limited to, credit review and approval,
operational and market risk measurement, validation of transaction capture,
portfolio valuation and daily portfolio reporting, including mark-to-market
valuation, VaR and other risk measurement metrics.





***COMMODITY
PRICE RISK***





US
Holdings is subject to the inherent risks of market fluctuations in the price of
electricity, natural gas and other energy-related products marketed and
purchased. US Holdings actively manages its portfolio of owned generation
assets, fuel supply and retail sales load to mitigate the near-term impacts of
these risks on its results of operations. US Holdings, as well as any
participant in the market, cannot fully manage the long-term value impact of
structural declines or increases in natural gas, power and oil prices and spark
spreads (differences between the market price of electricity and its cost of
production).





Also see
discussion of *Natural
Gas Price & Market Heat-Rate Exposure* under
“Key Challenges and Initiatives” above.





In
managing energy price risk, US Holdings enters into short- and long-term
physical contracts, exchange traded and over-the-counter financial contracts as
well as bilateral contracts with customers. US Holdings’ risk management
activities also incorporate some speculative trading activity. The
operation continuously monitors the valuation of identified risks and adjusts
the portfolio based on current market conditions. Valuation adjustments or
reserves are established in recognition that certain risks exist until full
delivery of energy has occurred, counterparties have fulfilled their financial
commitments and related financial instruments have either matured or are closed
out.





US
Holdings strives to use consistent assumptions regarding forward market price
curves in evaluating and recording the effects of commodity price risk.





**A-38**


US
Holdings continuously reviews its disclosed risk analysis metrics. In the course
of this review, it was determined that the Portfolio VaR metric would no longer
be disclosed as it is not a meaningful measure of actionable commodity price
risk. Portfolio VaR represented the estimated potential loss in value, due to
changes in market conditions, of the entire energy portfolio, including owned
generation assets, estimates of retail sales load and all contractual positions.
Other metrics that measure the effect of such risk on earnings, cash flows and
the value of its mark-to-market contract portfolio continue to be disclosed. US
Holdings may in the future add or eliminate other metrics in its disclosures of
risks.





***VaR
Methodology*** — A VaR
methodology is used to measure the amount of market risk that exists within the
portfolio under a variety of market conditions. The resultant VaR produces an
estimate of a portfolio’s potential for loss given a specified confidence level
and considers among other things, market movements utilizing standard
statistical techniques given historical and projected market prices and
volatilities. Stress testing of market variables is also conducted to simulate
and address abnormal market conditions.





The use
of this method requires a number of key assumptions, such as use of (i) an
assumed confidence level; (ii) an assumed holding period (i.e. the time
necessary for management action, such as to liquidate positions); and (iii)
historical estimates of volatility and correlation data.





***VaR
for Energy Contracts Subject to Mark-to-Market
Accounting*** — This
measurement estimates the potential loss in value, due to changes in market
conditions, of all energy-related contracts subject to mark-to-market
accounting, based on a specific confidence level and an assumed holding period.
Assumptions in determining this VaR include using a 95% confidence level and a
five-day holding period. A probabilistic simulation methodology is used to
calculate VaR, and is considered by management to be the most effective way to
estimate changes in a portfolio’s value based on assumed market conditions for
liquid markets.





**December
      31,**
    
    **December
      31,****2004**
    
    **2003**Period-end
      MtM VaR:
    
    $
    20
    
    $
    15Average
      Month-end MtM VaR:
    
    $
    20
    
    $
    25





***Earnings
at Risk (EaR) —*** EaR
measures the estimated potential loss of expected pretax earnings for the year
presented due to changes in market conditions. EaR metrics include the owned
generation assets, estimates of retail load and all contractual positions except
for accrual positions expected to be settled beyond the fiscal year. Assumptions
include using a 95% confidence level over a five-day holding period under normal
market conditions.





***Cash
Flow at Risk (CFaR)*** — CFaR
measures the estimated potential loss of expected cash flow over the next six
months, due to changes in market conditions. CFaR metrics include all owned
generation assets, estimates of retail load and all contractual positions that
impact cash flow during the next six months. Assumptions include using a 99%
confidence level over a six-month holding period under normal market conditions.








**December
      31,**
    
    **December
      31,****2004**
    
    **2003****EaR**
    
    $
    24
    
    $
    15**CFaR**
    
    $
    116
    
    $
    67








**A-39**





***INTEREST
RATE RISK***




The table
below provides information concerning US Holdings’ financial instruments as of
December 31, 2004 and 2003, that are sensitive to changes in interest rates. The
weighted average rate is based on the rate in effect at the reporting date. US
Holdings has entered into interest rate swaps under which it has agreed to
exchange the difference between fixed-rate and variable-rate interest amounts
calculated with reference to specified notional principal amounts at dates that
generally coincide with interest payments. Capital leases and the effects of
unamortized premiums and discounts and fair value hedges are excluded from the
table. See Note 8 to Financial Statements for a discussion of changes in debt
obligations.
 **Expected
      Maturity Date**
    
    
    
    **2004**
    
    
    
    **2003****There-**
    
    **2004**
    
    **Fair**
    
    **2003**
    
    **Fair****2005**
    
    **2006**
    
    **2007**
    
    **2008**
    
    **2009**
    
    **After**
    
    **Total**
    
    **Value**
    
    **Total**
    
    **Value**Long-term
      debt
      (including
      current maturities)Fixed
      rate (a)
    
    $
    217
    
    $
    99
    
    $
    313
    
    $
    356
    
    $
    111
    
    $
    5,912
    
    $
    7,008
    
    $
    7,641
    
    $
    7,078
    
    $
    7,726Average
      interest rate
    
    
    5.27
    %
    
    3.36
    %
    
    4.71
    %
    
    5.51
    %
    
    4.35
    %
    
    6.46
    %
    
    6.00
    %
    
    —
    
    
    6.47
    %
    
    —Variable
      rate
    
    $
    —
    
    $
    400
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    376
    
    $
    776
    
    $
    715
    
    $
    396
    
    $
    396Average
      interest rate
    
    
    —
    
    
    2.84
    %
    
    —
    
    
    —
    
    
    —
    
    
    1.79
    %
    
    2.33
    %
    
    —
    
    
    1.24
    %
    
    —Exchangeable
      preferred membership interests (b)Fixed
      rate
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    750
    
    $
    750
    
    $
    750
    
    $
    750
    
    $
    1,580Average
      interest rate
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    9.00
    %
    
    —
    
    
    9.00
    %
    
    —Interest
      rate swaps(notional
      amounts)Fixed
      to variable
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    250
    
    $
    —
    
    $
    —
    
    $
    250
    
    $
    (5
    )
    $
    500
    
    $
    10Average
      pay rate
    
    
    —
    
    
    —
    
    
    —
    
    
    5.84
    %
    
    —
    
    
    —
    
    
    5.84
    %
    
    —
    
    
    3.31
    %
    
    —Average
      receive rate
    
    
    —
    
    
    —
    
    
    —
    
    
    6.13
    %
    
    —
    
    
    —
    
    
    6.13
    %
    
    —
    
    
    7.00
    %
    
    —
  (a)  Reflects
the maturity date and not the remarketing date for certain debt which is subject
to mandatory tender for remarketing prior to  maturity.
See Note 8 to Financial Statements for details concerning long-term debt subject
to mandatory tender for remarketing.
 (b)  Exchanged
for preferred membership interest in 2003 and repurchased by TXU Corp. in
2004.


***CREDIT
RISK***





***Credit
Risk*** **** — Credit
risk relates to the risk of loss associated with nonperformance by
counterparties. US Holdings maintains credit risk policies with regard to its
counterparties to minimize overall credit risk. These policies require an
evaluation of a potential counterparty’s financial condition, credit rating, and
other quantitative and qualitative credit criteria and specify authorized risk
mitigation tools, including but not limited to use of standardized agreements
that allow for netting of positive and negative exposures associated with a
single counterparty. US Holdings has standardized documented processes for
monitoring and managing its credit exposure, including methodologies to analyze
counterparties’ financial strength, measurement of current and potential future
credit exposures and standardized contract language that provides rights for
netting and set-off. Credit enhancements such as parental guarantees, letters of
credit, surety bonds and margin deposits are also utilized. Additionally,
individual counterparties and credit portfolios are managed to preset limits and
stress tested to assess potential credit exposure. This evaluation results in
establishing credit limits or collateral requirements prior to entering into an
agreement with a counterparty that creates credit exposure to US Holdings.
Additionally, US Holdings has established controls to determine and monitor the
appropriateness of these limits on an ongoing basis. Any prospective material
adverse change in the payment history or financial condition of a counterparty
or downgrade of its credit quality will result in the reassessment of the credit
limit with that counterparty. This process can result in the subsequent
reduction of the credit limit or a request for additional financial assurances.





***Credit
Exposure*** — US
Holdings’ gross exposure to credit risk related to trade accounts receivable as
well as commodity contract assets and other derivative assets that arise
primarily from hedging activities totaled $2.141 billion at December 31, 2004.





**A-40**


A large
share of gross assets subject to credit risk represents accounts receivable from
the retail sale of electricity to residential and small business customers. The
risk of material loss (after consideration of allowances) from nonperformance by
these customers is unlikely based upon historical experience. Allowances for
uncollectible accounts receivable are established for the potential loss from
nonpayment by these customers based on historical experience and market or
operational conditions. In addition, TXU Electric Delivery has exposure to
credit risk as a result of nonperformance by nonaffiliated REPs.





US
Holdings is also exposed to credit risk related to the Capgemini put option with
a carrying value of $154 million as discussed in Note 1 to Financial
Statements.





Most of
the remaining trade accounts receivable are with large business customers and
hedging counterparties. These counterparties include major energy companies,
financial institutions, electric utilities, independent power producers, oil and
gas producers and energy trading companies. The exposure to credit risk from
these customers and counterparties, excluding credit collateral, as of December
31, 2004, was $983 million net of standardized master netting contracts and
agreements that provide the right of offset of positive and negative credit
exposures with individual customers and counterparties. When considering
collateral currently held by US Holdings (cash, letters of credit and other
security interests), the net credit exposure was $784 million. Of this amount,
approximately 80% of the associated exposure is with investment grade customers
and counterparties, as determined using publicly available information including
major rating agencies’ published ratings and US Holdings’ internal credit
evaluation process. Those customers and counterparties without an S&P rating
of at least BBB- or similar rating from another major rating agency are rated
using internal credit methodologies and credit scoring models to estimate an
S&P equivalent rating. US Holdings routinely monitors and manages its credit
exposure to these customers and counterparties on this basis.





The
following table presents the distribution of credit exposure as of December 31,
2004, for trade accounts receivable from large business customers, commodity
contract assets and other derivative assets that arise primarily from hedging
activities, by investment grade and noninvestment grade, credit quality and
maturity.





**Exposure
      by Maturity****Exposure
      before Credit Collateral**
    
    **Credit
      Collateral**
    
    **Net
      Exposure**
    
    **2
      years or less**
    
    **Between**
      **2-5
      years**
    
    **Greater
      than 5 years**
    
    **Total**Investment
      grade
    
    $
    780
    
    $
    149
    
    $
    631
    
    $
    465
    
    $
    89
    
    $
    77
    
    $
    631Noninvestment
      grade
    
    
    203
    
    
    50
    
    
    153
    
    
    112
    
    
    22
    
    
    19
    
    
    153Totals
    
    $
    983
    
    $
    199
    
    $
    784
    
    $
    577
    
    $
    111
    
    $
    96
    
    $
    784Investment
      grade
    
    
    79
    %
    
    75
    %
    
    80
    %Noninvestment
      grade
    
    
    21
    %
    
    25
    %
    
    20
    %





US
Holdings had no exposure to any customer or counterparty greater than 10% of the
net exposure of $784 million at December 31, 2004. Additionally, approximately
74% of the credit exposure, net of collateral held, has a maturity date of two
years or less. US Holdings does not anticipate any material adverse effect on
its financial position or results of operations as a result of nonperformance by
any customer or counterparty.





**RISK
FACTORS THAT MAY AFFECT FUTURE RESULTS**





Some
important factors, in addition to others specificall y
addressed in this Management’s Discussion and Analysis of Financial Condition
and Results of Operations, that could have a material impact on US Holdings’
operations, financial results and financial condition, and could cause US
Holdings’ actual results or outcomes to differ materially from any projected
outcome contained in any forward-looking statement in this report, include:





The
implementation of performance improvement initiatives identified by management
may not produce the desired results and may result in disruptions arising from
employee displacements and the rapid pace of changes to organizational structure
and operating practices and processes. Most notably, US Holdings is subject to
the risk that the joint venture outsourcing arrangement with Capgemini may not
produce the desired cost savings as well as potential transition costs, which
would likely be significant, in the event US Holdings needed to switch to
another vendor if Capgemini failed to perform its obligations to US
Holdings.





**A-41**


ERCOT is
the independent system operator that is responsible for maintaining reliable
operation of the bulk electric power supply system in the ERCOT region. Its
responsibilities include the clearing and settlement of electricity volumes and
related ancillary services among the various participants in the deregulated
Texas market. Because of new processes and systems associated with the opening
of the market to competition, which continue to be improved, there have been
delays in finalizing these settlements. As a result, US Holdings is subject to
settlement adjustments from ERCOT related to prior periods, which may result in
charges or credits impacting future reported results of operations.





US
Holdings’ businesses operate in changing market environments influenced by
various legislative and regulatory initiatives regarding deregulation,
regulation or restructuring of the energy industry, including deregulation of
the production and sale of electricity. US Holdings will need to adapt to these
changes and may face increasing competitive pressure.





US
Holdings’ businesses are subject to changes in laws (including PURA, the Federal
Power Act, as amended, the Atomic Energy Act, as amended, the Public Utility
Regulatory Policies Act of 1978, as amended, the Clean Air Act, as amended, and
the Public Utility Holding Company Act of 1935, as amended) and changing
governmental policy and regulatory actions (including those of the Commission,
the FERC, the EPA and the NRC) with respect to matters including, but not
limited to, market structure and design, operation of nuclear power facilities,
construction and operation of other power generation facilities, construction
and operation of transmission facilities, acquisition, disposal, depreciation,
and amortization of regulated assets and facilities, recovery of purchased gas
costs, decommissioning costs, and return on invested capital for US Holdings’
regulated businesses, and present or prospective wholesale and retail
competition. In particular, PURA and the Commission will be subject to sunset
review by the Texas Legislature during this 2005 legislative session. See “ERCOT
Market Issues” and “Wholesale Market Design” above.





TXU
Energy Holdings, along with other market participants, is subject to oversight
by the Commission. In that connection, TXU Energy Holdings and other market
participants may be subject to various competition-related rules and
regulations, including but not limited to possible price-mitigation rules, as
well as rules related to market behavior.





US
Holdings is not guaranteed any rate of return on its capital investments in
unregulated businesses. US Holdings markets and trades power, including power
from its own production facilities, as part of its wholesale markets management
operation. US Holdings’ results of operations are likely to depend, in large
part, upon prevailing retail rates, which are set, in part, by regulatory
authorities, and market prices for electricity, gas and coal in its regional
market and other competitive markets. Market prices may fluctuate substantially
over relatively short periods of time. Demand for electricity can fluctuate
dramatically, creating periods of substantial under- or over-supply. During
periods of over-supply, prices might be depressed. Also, at times there may be
political pressure, or pressure from regulatory authorities with jurisdiction
over wholesale and retail energy commodity and transportation rates, to impose
price limitations, bidding rules and other mechanisms to address volatility and
other issues in these markets.





US
Holdings’ regulated businesses are subject to cost-of-service regulation and
annual earnings oversight. This regulatory treatment does not provide any
assurance as to achievement of earnings levels. TXU Electric Delivery’s rates
are regulated by the Commission based on an analysis of TXU Electric Delivery’s
costs, as reviewed and approved in a regulatory proceeding. While rate
regulation is premised on the full recovery of prudently incurred costs and a
reasonable rate of return on invested capital, there can be no assurance that
the Commission will judge all of TXU Electric Delivery’s costs to have been
prudently incurred or that the regulatory process in which rates are determined
will always result in rates that will produce full recovery of TXU Electric
Delivery’s costs and the return on invested capital allowed by the Commission.





Some of
the fuel for US Holdings’ power production facilities is purchased under
short-term contracts or on the spot market. Prices of fuel, including natural
gas, may also be volatile, and the price US Holdings can obtain for power sales
may not change at the same rate as changes in fuel costs. In addition, US
Holdings purchases and sells natural gas and other energy related commodities,
and volatility in these markets may affect US Holdings’ costs incurred in
meeting its obligations.





**A-42**


Volatility
in market prices for fuel and electricity may result from:





·
    severe
      or unexpected weather conditions,


·
    seasonality,


·
    changes
      in electricity usage,


·
    illiquidity
      in the wholesale power or other markets,


·
    transmission
      or transportation constraints, inoperability or inefficiencies,


·
    availability
      of competitively priced alternative energy sources,


·
    changes
      in supply and demand for energy commodities,


·
    changes
      in power production capacity,


·
    outages
      at US Holdings’ power production facilities or those of its competitors,


·
    changes
      in production and storage levels of natural gas, lignite, coal and crude
      oil and refined products,


·
    natural
      disasters, wars, sabotage, terrorist acts, embargoes and other
      catastrophic events, and


·
    federal,
      state, local and foreign energy, environmental and other regulation and
      legislation.





All but
one of US Holdings’ facilities for power production are located in the ERCOT
region, a market with limited interconnections to other markets. Electricity
prices in the ERCOT region are correlated to gas prices because gas-fired plant
is the marginal cost unit during the majority of the year in the ERCOT region.
Accordingly, the contribution to earnings and the value of US Holdings’ baseload
power production is dependent in significant part upon the price of gas. US
Holdings cannot fully hedge the risk associated with dependency on gas because
of the expected useful life of US Holdings’ power production assets and the size
of its position relative to market liquidity.





To manage
its near-term financial exposure related to commodity price fluctuations, US
Holdings routinely enters into contracts to hedge portions of its purchase and
sale commitments, weather positions, fuel requirements and inventories of
natural gas, lignite, coal, refined products, and other commodities, within
established risk management guidelines. As part of this strategy, US Holdings
routinely utilizes fixed-price forward physical purchase and sales contracts,
futures, financial swaps and option contracts traded in the over-the-counter
markets or on exchanges. However, US Holdings can normally cover only a small
portion of the exposure of its assets and positions to market price volatility,
and the coverage will vary over time. To the extent US Holdings has unhedged
positions, fluctuating commodity prices can materially impact US Holdings’
results of operations and financial position, either favorably or unfavorably.





Although
US Holdings devotes a considerable amount of management time and effort to the
establishment of risk management procedures as well as the ongoing review of the
implementation of these procedures, the procedures it has in place may not
always be followed or may not always function as planned and cannot eliminate
all the risks associated with these activities. As a result of these and other
factors, US Holdings cannot predict with precision the impact that risk
management decisions may have on its business, results of operations or
financial position.





US
Holdings might
not be able to satisfy all of its guarantees and indemnification obligations,
including those related to hedging and risk management activities, if they were
to come due at the same time.





US
Holdings’ hedging and risk management activities are exposed to the risk that
counterparties that owe US Holdings money, energy or other commodities as a
result of market transactions will not perform their obligations. The likelihood
that certain counterparties may fail to perform their obligations has increased
due to financial difficulties, brought on by various factors including improper
or illegal accounting and business practices, affecting some participants in the
industry. Some of these financial difficulties have been so severe that certain
industry participants have filed for bankruptcy protection or are facing the
possibility of doing so. Should the counterparties to these arrangements fail to
perform, US Holdings might be forced to acquire alternative hedging arrangements
or honor the underlying commitment at then-current market prices. In such event,
US Holdings might incur losses in addition to amounts, if any, already paid to
the counterparties. ERCOT market participants are also exposed to risks that
another ERCOT market participant may default in its obligations to pay ERCOT for
power taken in the ancillary services market, in which case such costs, to the
extent not offset by posted security and other protections available to ERCOT,
may be allocated to various nondefaulting ERCOT market participants.





The
current credit ratings for US Holdings and its subsidiaries’ long-term debt are
investment grade. A rating reflects only the view of a rating agency, and it is
not a recommendation to buy, sell or hold securities. Any rating can be revised
upward or downward at any time by a rating agency if such rating agency decides
that circumstances warrant such a change. If S&P, Moody’s or Fitch were to
downgrade US Holdings and/or its subsidiaries’ ratings, particularly below
investment grade, borrowing costs would increase and the potential pool of
investors and funding sources would likely decrease. If the downgrade were below
investment grade, liquidity demands would be triggered by the terms of a number
of commodity contracts, leases and other agreements.





**A-43**


Most of
US Holdings’ large customers, suppliers and counterparties require sufficient
creditworthiness in order to enter into transactions. If US Holdings
subsidiaries’ ratings were to decline to below investment grade, costs to
operate the power business would increase because counterparties may require the
posting of collateral in the form of cash-related instruments, or counterparties
may decline to do business with US Holdings’ subsidiaries.





In
addition, as discussed in this Annual Report on Form 10-K, the terms of certain
of US Holdings’ financing and other arrangements contain provisions that are
specifically affected by changes in credit ratings and could require the posting
of collateral, the repayment of indebtedness or the payment of other amounts.





The
operation of power production and energy transportation facilities involves many
risks, including start up risks, breakdown or failure of facilities, lack of
sufficient capital to maintain the facilities, the dependence on a specific fuel
source or the impact of unusual or adverse weather conditions or other natural
events, as well as the risk of performance below expected levels of output or
efficiency, the occurrence of any of which could result in lost revenues and/or
increased expenses. A significant portion of US Holdings’ facilities was
constructed many years ago. In particular, older generating equipment, even if
maintained in accordance with good engineering practices, may require
significant capital expenditures to keep it operating at peak efficiency. The
risk of increased maintenance and capital expenditures arises from (a) increased
starting and stopping of generation equipment due to the volatility of the
competitive market, (b) any unexpected failure to produce power, including
failure caused by breakdown or forced outage, and (c) repairing damage to
facilities due to storms, natural disasters, wars, terrorist acts and other
catastrophic events. Further, US Holdings’ ability to successfully and timely
complete capital improvements to existing facilities or other capital projects
is contingent upon many variables and subject to substantial risks. Should any
such efforts be unsuccessful, US Holdings could be subject to additional costs
and/or the write-off of its investment in the project or improvement.





Insurance,
warranties or performance guarantees may not cover all or any of the lost
revenues or increased expenses, including the cost of replacement power.
Likewise, US Holdings’ ability to obtain insurance, and the cost of and coverage
provided by such insurance, could be affected by events outside its control.





The
ownership and operation of nuclear facilities, including US Holdings’ ownership
and operation of the Comanche Peak generation plant, involve certain risks.
These risks include: mechanical or structural problems; inadequacy or lapses in
maintenance protocols; the impairment of reactor operation and safety systems
due to human error; the costs of storage, handling and disposal of nuclear
materials; limitations on the amounts and types of insurance coverage
commercially available; and uncertainties with respect to the technological and
financial aspects of decommissioning nuclear facilities at the end of their
useful lives. The following are among the more significant of these
risks:





·
    *Operational
      Risk -*Operations at any nuclear power production plant could degrade to the
      point where the plant would have to be shut down. Over the next three
      years, certain equipment at Comanche Peak is expected to be replaced. The
      cost of these actions is currently expected to be material and could
      result in extended outages. If this were to happen, the process of
      identifying and correcting the causes of the operational downgrade to
      return the plant to operation could require significant time and expense,
      resulting in both lost revenue and increased fuel and purchased power
      expense to meet supply commitments. Rather than incurring substantial
      costs to restart the plant, the plant may be shut down. Furthermore, a
      shut-down or failure at any other nuclear plant could cause regulators to
      require a shut-down or reduced availability at Comanche Peak.





·
    *Regulatory
      Risk**-*The NRC may modify, suspend or revoke licenses and impose civil penalties
      for failure to comply with the Atomic Energy Act, the regulations under it
      or the terms of the licenses of nuclear facilities. Unless extended, the
      NRC operating licenses for Comanche Peak Unit 1 and Unit 2 will expire in
      2030 and 2033, respectively. Changes in regulations by the NRC could
      require a substantial increase in capital expenditures or result in
      increased operating or decommissioning costs.





·
    *Nuclear
      Accident Risk**-*Although the safety record of Comanche Peak and other nuclear reactors
      generally has been very good, accidents and other unforeseen problems have
      occurred both in the US and elsewhere. The consequences of an accident can
      be severe and include loss of life and property damage. Any resulting
      liability from a nuclear accident could exceed US Holdings’ resources,
      including insurance coverage.





US
Holdings is subject to extensive environmental regulation by governmental
authorities. In operating its facilities, US Holdings is required to comply with
numerous environmental laws and regulations, and to obtain numerous governmental
permits. US Holdings may incur significant additional costs to comply with these
requirements. If US Holdings fails to comply with these requirements, it could
be subject to civil or criminal liability and fines. Existing environmental
regulations could be revised or reinterpreted, new laws and regulations could be
adopted or become applicable to US Holdings or its facilities, and future
changes in environmental laws and regulations could occur, including potential
regulatory and enforcement developments related to air emissions.





**A-44**


US
Holdings may not be able to obtain or maintain all required environmental
regulatory approvals. If there is a delay in obtaining any required
environmental regulatory approvals or if US Holdings fails to obtain, maintain
or comply with any such approval, the operation of its facilities could be
stopped or become subject to additional costs. Further, at some of US Holdings’
older facilities, including baseload lignite and coal plants, it may be
uneconomical for US Holdings to install the necessary equipment, which may cause
US Holdings to shut down those facilities.





In
addition, US Holdings may be responsible for any on-site liabilities associated
with the environmental condition of facilities that it has acquired or
developed, regardless of when the liabilities arose and whether they are known
or unknown. In connection with certain acquisitions and sales of assets, US
Holdings may obtain, or be required to provide, indemnification against certain
environmental liabilities. Another party could fail to meet its indemnification
obligations to US Holdings.





The Texas
electricity market was deregulated as of January 1, 2002. Competition has
resulted, and may continue to result in, declines in customer counts and sales
volumes.





While US
Holdings may now offer prices other than the price-to-beat, it is obligated to
offer the price to beat to its residential and small business customers in the
historical service territory through January 1, 2007. The results of US
Holdings’ retail electric operations in its historical service territory are
largely dependent upon the amount of headroom available to US Holdings in its
price-to-beat rate. The margin or “headroom” available in the price-to-beat rate
for any REP equals the difference between the price-to-beat rate and the sum of
delivery charges and the price that REP pays for power. Headroom may be a
positive or a negative number. Since headroom is dependent, in part, on power
production and purchase costs, US Holdings does not know nor can it estimate the
amount of headroom that it will have in its price-to-beat rate. There is no
assurance that future adjustments to US Holdings’ price-to-beat rate will be
adequate to cover future increases in its costs of electricity to serve its
price-to-beat rate customers or that US Holdings’ price-to-beat rate will not
result in negative headroom in the future.





In most
retail electric markets outside the historical service territory, US Holdings’
principal competitor may be the retail affiliate of the local incumbent utility
company. The incumbent retail affiliates have the advantage of long-standing
relationships with their customers. In addition to competition from the
incumbent utilities and their affiliates, US Holdings may face competition from
a number of other energy service providers, or other energy industry
participants, who may develop businesses that will compete with US Holdings and
nationally branded providers of consumer products and services. Some of these
competitors or potential competitors may be larger and better capitalized than
US Holdings. If there is inadequate margin in these retail electric markets, it
may not be profitable for US Holdings to enter these markets.





US
Holdings depends on transmission and distribution facilities owned and operated
by other utilities, as well as its own such facilities, to deliver the
electricity it produces and sells to consumers, as well as to other REPs. If
transmission capacity is inadequate, US Holdings’ ability to sell and deliver
electricity may be hindered, it may have to forgo sales or it may have to buy
more expensive wholesale electricity that is available in the
capacity-constrained area. In particular, during some periods transmission
access is constrained to some areas of the Dallas-Fort Worth metroplex. US
Holdings expects to have a significant number of customers inside these
constrained areas. The cost to provide service to these customers may exceed the
cost to provide service to other customers, resulting in lower headroom. In
addition, any infrastructure failure that interrupts or impairs delivery of
electricity to US Holdings’ customers could negatively impact the satisfaction
of its customers with its service.





US
Holdings offers its customers a bundle of services that include, at a minimum,
the electric commodity itself plus transmission, distribution and related
services. The prices US Holdings charges for this bundle of services or for the
various components of the bundle, either of which may be fixed by contract with
the customer for a period of time, could fall below US Holdings’ underlying cost
to obtain the commodities or services.





**A-45**


Research
and development activities are ongoing to improve existing and alternative
technologies to produce electricity, including gas turbines, fuel cells,
microturbines and photovoltaic (solar) cells. It is possible that advances in
these or other alternative technologies will reduce the costs of electricity
production from these technologies to a level that will enable these
technologies to compete effectively with electricity production from traditional
power plants like US Holdings’. While demand for electric energy services is
generally increasing throughout the US, the rate of construction and development
of new, more efficient power production facilities may exceed increases in
demand in some regional electric markets. Consequently, where US Holdings has
facilities, the market value of US Holdings’ power production and/or energy
transportation facilities could be significantly reduced. Also, electricity
demand could be reduced by increased conservation efforts and advances in
technology, which could likewise significantly reduce the value of US Holdings’
facilities. Changes in technology could also alter the channels through which
retail electric customers buy electricity.





US
Holdings is a
holding company and conducts its operations primarily through wholly-owned
subsidiaries. Substantially all of US Holdings’ consolidated assets are held by
these subsidiaries. Accordingly, US Holdings’ cash flows and ability to meet its
obligations and to pay dividends are largely dependent upon the earnings of its
subsidiaries and the distribution or other payment of such earnings to US
Holdings in the form of distributions, loans or advances, and repayment of loans
or advances from US Holdings. The subsidiaries are separate and distinct legal
entities and have no obligation to provide US Holdings with funds for its
payment obligations, whether by dividends, distributions, loans or otherwise.





Because
US Holdings is a holding company, its obligations to its creditors are
structurally subordinated to all existing and future liabilities and existing
and future preferred stock of its subsidiaries. Therefore, US Holdings’ rights
and the rights of its creditors to participate in the assets of any subsidiary
in the event that such a subsidiary is liquidated or reorganized are subject to
the prior claims of such subsidiary’s creditors and holders of its preferred
stock. To the extent that US Holdings may be a creditor with recognized claims
against any such subsidiary, its claims would still be subject to the prior
claims of such subsidiary’s creditors to the extent that they are secured or
senior to those held by US Holdings. Subject to restrictions contained in US
Holdings’ other financing arrangements, US Holdings’ subsidiaries may incur
additional indebtedness and other liabilities.





The
inability to raise capital on favorable terms, particularly during times of
uncertainty in the financial markets, could impact US Holdings’ ability to
sustain and grow its businesses, which are capital intensive, and would increase
its capital costs. US Holdings relies on access to financial markets as a
significant source of liquidity for capital requirements not satisfied by cash
on hand or operating cash flows. US Holdings’ access to the financial markets
could be adversely impacted by various factors, such as:





·
    changes
      in credit markets that reduce available credit or the ability to renew
      existing liquidity facilities on acceptable terms;


·
    inability
      to access commercial paper markets;


·
    a
      deterioration of US Holdings’ credit or the credit of its subsidiaries or
      a reduction in US Holdings’ credit ratings or the credit ratings of its
      subsidiaries;


·
    extreme
      volatility in US Holdings’ markets that increases margin or credit
      requirements;


·
    a
      material breakdown in TXU Corp.’s risk management procedures;


·
    prolonged
      delays in billing and payment resulting from delays in switching customers
      from one REP to another; and


·
    the
      occurrence of material adverse changes in US Holdings’ businesses that
      restrict US Holdings’ ability to access its liquidity facilities.





A lack of
necessary capital and cash reserves could adversely impact the evaluation of US
Holdings’ credit worthiness by counterparties and rating agencies, and would
likely increase its capital costs. Further, concerns on the part of
counterparties regarding US Holdings’ liquidity and credit could limit its
wholesale markets management activities.





As a
result of the energy crisis in California during 2001, the recent volatility of
natural gas prices in North America, the bankruptcy filing by Enron Corporation,
accounting irregularities of public companies, and investigations by
governmental authorities into energy trading activities, companies in the
regulated and nonregulated utility businesses have been under a generally
increased amount of public and regulatory scrutiny. Accounting irregularities at
certain companies in the industry have caused regulators and legislators to
review current accounting practices and financial disclosures. The capital
markets and ratings agencies also have increased their level of scrutiny.
Additionally, allegations against various energy trading companies of “round
trip” or “wash” transactions, which involve the simultaneous buying and selling
of the same amount of power at the same price and delivery location and provide
no true economic benefit, power market manipulation and inaccurate power and
commodity price reporting have had a negative effect on the industry. US
Holdings believes that it is complying with all applicable laws, but it is
difficult or impossible to predict or control what effect events and
investigations in the energy industry may have on US Holdings’ financial
condition or access to the capital markets. Additionally, it is unclear what
laws and regulations may develop, and US Holdings cannot predict the ultimate
impact of any future changes in accounting regulations or practices in general
with respect to public companies, the energy industry or its operations
specifically. Any such new accounting standards could negatively impact reported
financial results.





**A-46**


The
issues and associated risks and uncertainties described above are not the only
ones US Holdings may face. Additional issues may arise or become material as the
energy industry evolves.





**FORWARD-LOOKING
STATEMENTS**





This
report and other presentations made by US Holdings and its subsidiaries
(collectively, US Holdings) contain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All
statements, other than statements of historical facts, that are included in this
report, or made in presentations, in response to questions or otherwise, that
address activities, events or developments that US Holdings expects or
anticipates to occur in the future, including such matters as projections,
capital allocation and cash distribution policy, future capital expenditures,
business strategy, competitive strengths, goals, future acquisitions and
dispositions, development or operation of power production assets, market and
industry developments and the growth of US Holdings’ business and operations
(often but not always, through the use of words or phrases such as “will likely
result,” “are expected to,” “will continue,” “is anticipated,” “estimated,”
“projection,” “target,” “outlook”), are forward-looking statements. Although US
Holdings believes that in making any such statement its expectations are based
on reasonable assumptions, any such forward-looking statement involves
uncertainties and is qualified in its entirety by reference to the risks
discussed above under “RISK FACTORS THAT MAY AFFECT FUTURE RESULTS” and the
following important factors, among others, that could cause the actual results
of US Holdings to differ materially from those projected in such forward-looking
statements:




·
    prevailing
      governmental policies and regulatory actions, including those of the FERC,
      the Commission, the RRC and the NRC, with respect
to:




o
    allowed
      rates of return;


o
    industry,
      market and rate structure;


o
    purchased
      power and recovery of investments;


o
    operations
      of nuclear generating facilities;


o
    acquisitions
      and disposal of assets and facilities;


o
    operation
      and construction of plant facilities;


o
    decommissioning
      costs;


o
    present
      or prospective wholesale and retail
competition;


o
    changes
      in tax laws and policies; and


o
    changes
      in and compliance with environmental and safety laws and
      policies;





·
    continued
      implementation of, and “sunset” provisions regarding, the 1999
      Restructuring Legislation;




·
    legal
      and administrative proceedings and
settlements;




·
    general
      industry trends;




·
    power
      costs (including repair costs) and
availability;




·
    weather
      conditions and other natural phenomena, and acts of sabotage, wars or
      terrorist activities;




·
    unanticipated
      population growth or decline, and changes in market demand and demographic
      patterns;




·
    changes
      in business strategy, development plans or vendor relationships;




·
    US
      Holdings’ ability to implement the initiatives that are part of its
      restructuring, operational improvement and cost reduction program, and the
      terms which those initiatives are executed;






**A-47**




·
    competition
      for retail and wholesale customers;




·
    access
      to adequate transmission facilities to meet changing
    demands;




·
    pricing
      and transportation of crude oil, natural gas and other
      commodities;




·
    unanticipated
      changes in interest rates, commodity prices or rates of
      inflation;




·
    unanticipated
      changes in operating expenses, liquidity needs and capital
      expenditures;




·
    commercial
      bank market and capital market conditions;




·
    competition
      for new energy development and other business
    opportunities;




·
    inability
      of various counterparties to meet their obligations with respect to US
      Holdings’ financial instruments;




·
    changes
      in technology used by and services offered by US
  Holdings;




·
    significant
      changes in US Holdings’ relationship with its employees, including the
      availability of qualified personnel, and the potential adverse effects if
      labor disputes or grievances were to occur;




·
    significant
      changes in critical accounting policies material to US Holdings;
      and




·
    actions
      by credit rating agencies.




Any
forward-looking statement speaks only as of the date on which it is made, and US
Holdings undertakes no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which it is made or to reflect
the occurrence of unanticipated events. New factors emerge from time to time,
and it is not possible for US Holdings to predict all of them; nor can US
Holdings assess the impact of each such factor or the extent to which any
factor, or combination of factors, may cause results to differ materially from
those contained in any forward-looking statement.








**A-48**








**TXU
US HOLDINGS COMPANY**


**STATEMENT
OF RESPONSIBILITY**





The
management of TXU US Holdings Company is responsible for the preparation,
integrity and objectivity of the consolidated financial statements of TXU US
Holdings Company and other information included in this report. The consolidated
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America. As appropriate, the
statements include amounts based on informed estimates and judgments of
management.





The
management of TXU US Holdings Company is responsible for establishing and
maintaining a system of internal control, which includes the internal controls
and procedures for financial reporting, that is designed to provide reasonable
assurance, on a cost-effective basis, that assets are safeguarded, transactions
are executed in accordance with management's authorization and financial records
are reliable for preparing consolidated financial statements. Management
believes that the system of control provides reasonable assurance that errors or
irregularities that could be material to the consolidated financial statements
are prevented or would be detected within a timely period. Key elements in this
system include the effective communication of established written policies and
procedures, selection and training of qualified personnel and organizational
arrangements that provide an appropriate division of responsibility. This system
of control is augmented by an ongoing internal audit program designed to
evaluate its adequacy and effectiveness. Management considers the
recommendations of the internal auditors and independent auditors concerning TXU
US Holdings Company’s system of internal control and takes appropriate actions
which are cost-effective in the circumstances. Management believes that, as of
December 31, 2004, TXU US Holdings Company’s system of internal control was
adequate to accomplish the objectives discussed herein.





The
independent registered public accounting firm of Deloitte & Touche LLP is
engaged to audit, in accordance with auditing standards generally accepted in
the United States of America, the consolidated financial statements of TXU US
Holdings Company and its subsidiaries and to issue their report
thereon.











/s/T.L.
      Baker
    /s/KIRK
      R.
      OLIVERT.L.
      Baker, Chairman of the Board,
    Kirk
      R. Oliver, Executive Vice PresidentPresident
      and Chief Executive
    and
      Chief Financial Officer








**A-49**




















**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





**To
the Board of Directors of**


**TXU
US Holdings Company:**











We have
audited the accompanying consolidated balance sheets of TXU US Holdings Company
and subsidiaries (US Holdings) as of December 31, 2004 and 2003, and the related
consolidated statements of income, comprehensive income, cash flows and
shareholders’ equity for each of the three years in the period ended December
31, 2004. These financial statements are the responsibility of US Holdings’
management. Our responsibility is to express an opinion on these financial
statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. US Holdings is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of US Holdings’ internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit includes assessing the accounting principles
used and significant estimates and assumptions made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.




In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of US Holdings and subsidiaries at December 31,
2004 and 2003, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of America.




As
discussed in Note 3 to the Notes to Financial Statements, US Holdings changed
its method of accounting for stock based compensation with the election to early
adopt Statement of Financial Accounting Standards No. 123 (revised 2004) *Share-Based
Payment* .




As
discussed in Note 3 to the Notes to Financial Statements, US Holdings changed
its method of accounting for certain contracts with the rescission of Emerging
Issues Task Force Issue No. 98-10, *Accounting
for Contracts Involved in Energy Trading and Risk Management
Activities* .







DELOITTE
& TOUCHE LLP




Dallas,
Texas


March 28,
2005

















**A-50**





**TXU
US HOLDINGS COMPANY AND SUBSIDIARIES**


**STATEMENTS
OF CONSOLIDATED INCOME**





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002****(millions
      of dollars)**Operating
      revenues
    
    $
    9,294
    
    $
    8,573
    
    $
    8,080Costs
      and expenses:Cost
      of energy sold and delivery fees
    
    
    3,836
    
    
    3,620
    
    
    3,181Operating
      costs
    
    
    1,433
    
    
    1,391
    
    
    1,372Depreciation
      and amortization
    
    
    739
    
    
    704
    
    
    714Selling,
      general and administrative expenses
    
    
    886
    
    
    844
    
    
    986Franchise
      and revenue-based taxes
    
    
    366
    
    
    375
    
    
    410Other
      income
    
    
    (142
    )
    
    (52
    )
    
    (38
    )Other
      deductions
    
    
    665
    
    
    21
    
    
    250Interest
      income
    
    
    (38
    )
    
    (19
    )
    
    (6
    )Interest
      expense and related charges
    
    
    595
    
    
    605
    
    
    440Total
      costs and expenses
    
    
    8,340
    
    
    7,489
    
    
    7,309Income
      from continuing operations before income taxes, extraordinary items and
      cumulative effect of changes in accounting principles
    
    
    954
    
    
    1,084
    
    
    771Income
      tax expense
    
    
    282
    
    
    348
    
    
    224Income
      from continuing operations before extraordinary items and cumulative
      effect of changes in accounting principles
    
    
    672
    
    
    736
    
    
    547Discontinued
      operations, net of tax effect
    
    
    (34
    )
    
    (18
    )
    
    (52
    )Extraordinary
      gain (loss), net of tax effect
    
    
    16
    
    
    —
    
    
    (134
    )Cumulative
      effect of changes in accounting principles, net of tax effect
    
    
    6
    
    
    (58
    )
    
    —Net
      income
    
    
    660
    
    
    660
    
    
    361Preferred
      stock dividends
    
    
    2
    
    
    5
    
    
    9Net
      income available for common stock
    
    $
    658
    
    $
    655
    
    $
    352





**STATEMENTS
OF CONSOLIDATED COMPREHENSIVE INCOME**





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002****(millions
      of dollars)**Income
      from continuing operations before extraordinary gain (loss) and
      cumulativeeffect
      of changes in accounting principles
    
    $
    672
    
    $
    736
    
    $
    547Other
      comprehensive income (loss), net of tax effects —Minimum
      pension liability adjustments (net of tax (expense)
benefitof
      $(2), $(12) and $20)
    
    
    3
    
    
    23
    
    
    (37
    )Cash
      flow hedges:Net
      change in fair value of derivatives (net of tax benefit of $46, $74 and
      $99)
    
    
    (86
    )
    
    (138
    )
    
    (184
    )Amounts
      realized in earnings during the year (net of tax expenseof
      $21, $90 and $10)
    
    
    40
    
    
    168
    
    
    18Total
    
    
    (43
    )
    
    53
    
    
    (203
    )Comprehensive
      income related to continuing operations
    
    
    629
    
    
    789
    
    
    344Comprehensive
      loss related to discontinued operations
    
    
    (34
    )
    
    (18
    )
    
    (52
    )Extraordinary
      gain (loss), net of tax effect
    
    
    16
    
    
    —
    
    
    (134
    )Cumulative
      effect of changes in accounting principles, net of tax effect
    
    
    6
    
    
    (58
    )
    
    —Comprehensive
      income
    
    $
    617
    
    $
    713
    
    $
    158


See Notes
to Financial Statements.





**A-51**





**TXU
US HOLDINGS COMPANY AND SUBSIDIARIES**


**STATEMENTS
OF CONSOLIDATED CASH FLOWS**





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002****(millions
      of dollars)**Cash
      flows — operating activitiesIncome
      from continuing operations before extraordinary gain (loss)
      andcumulative
      effect of changes in accounting principles
    
    $
    672
    
    $
    736
    
    $
    547Adjustments
      to reconcile income from continuing operations before extraordinarygain
      (loss) and cumulative effect of changes in accounting principles to
      cashprovided
      by operating activities:Depreciation
      and amortization
    
    
    804
    
    
    773
    
    
    783Deferred
      income taxes and investment tax credits — net
    
    
    (127
    )
    
    119
    
    
    58Losses
      on early extinguishment of debt
    
    
    1
    
    
    —
    
    
    ─Asset
      writedowns and lease related charges
    
    
    373
    
    
    —
    
    
    237Net
      gain from sales of assets
    
    
    (135
    )
    
    (45
    )
    
    (32
    )Net
      effect of unrealized mark-to-market valuations of commodity
      contracts
    
    
    109
    
    
    100
    
    
    113Change
      in regulatory-related liability
    
    
    (70
    )
    
    (144
    )
    
    34Net
      equity loss from unconsolidated affiliates
    
    
    7
    
    
    —
    
    
    ─Stock-based
      compensation expense
    
    
    33
    
    
    13
    
    
    (1
    )Bad
      debt expense
    
    
    90
    
    
    119
    
    
    160Changes
      in operating assets and liabilities:Accounts
      receivable — trade (including affiliates)
    
    
    (229
    )
    
    108
    
    
    (561
    )Impact
      of accounts receivable sales program
    
    
    (73
    )
    
    100
    
    
    (15
    )Inventories
    
    
    16
    
    
    (46
    )
    
    (44
    )Accounts
      payable — trade (including affiliates)
    
    
    153
    
    
    20
    
    
    57Commodity
      contract assets and liabilities
    
    
    (5
    )
    
    24
    
    
    (45
    )Margin
      deposits
    
    
    34
    
    
    25
    
    
    (6
    )Other
      net assets
    
    
    (33
    )
    
    (283
    )
    
    (43
    )Other
      net liabilities
    
    
    218
    
    
    340
    
    
    49Cash
      provided by operating activities
    
    
    1,838
    
    
    1,959
    
    
    1,291Cash
      flows — financing activitiesIssuances
      of securities:Exchangeable
      subordinated notes
    
    
    —
    
    
    —
    
    
    750Other
      long-term debt
    
    
    1,590
    
    
    2,320
    
    
    3,111Retirements/repurchases
      of securities:Long-term
      debt
    
    
    (1,280
    )
    
    (1,391
    )
    
    (2,772
    )Preferred
      securities
    
    
    —
    
    
    (98
    )
    
    ─Common
      stock
    
    
    —
    
    
    (463
    )
    
    ─Increase
      (decrease) in notes payable to bank
    
    
    210
    
    
    (1,804
    )
    
    1,804Net
      change in advances from affiliates
    
    
    (1,755
    )
    
    (59
    )
    
    (799
    )Dividends
      paid to parent
    
    
    (775
    )
    
    (588
    )
    
    (927
    )Preferred
      stock dividends paid
    
    
    (2
    )
    
    (5
    )
    
    (9
    )Restricted
      cash activity related to debt
    
    
    —
    
    
    210
    
    
    (210
    )Debt
      premium, discount, financing and reacquisition expenses
    
    
    (37
    )
    
    (66
    )
    
    (174
    )Cash
      provided by (used in) financing activities
    
    
    (2,049
    )
    
    (1,944
    )
    
    774Cash
      flows — investing activitiesCapital
      expenditures
    
    
    (881
    )
    
    (706
    )
    
    (797
    )Dispositions
      of businesses
    
    
    500
    
    
    14
    
    
    ─Proceeds
      from sale of assets
    
    
    30
    
    
    10
    
    
    447Nuclear
      fuel
    
    
    (87
    )
    
    (44
    )
    
    (51
    )Other
    
    
    (61
    )
    
    14
    
    
    (171
    )Cash
      used in investing activities
    
    
    (499
    )
    
    (712
    )
    
    (572
    )Cash
      used by discontinued operations
    
    
    (26
    )
    
    (5
    )
    
    (40
    )Net
      change in cash and cash equivalents
    
    
    (736
    )
    
    (702
    )
    
    1,453Cash
      and cash equivalents — beginning balance
    
    
    806
    
    
    1,508
    
    
    55Cash
      and cash equivalents — ending balance
    
    $
    70
    
    $
    806
    
    $
    1,508See
      Notes to Financial Statements.








**A-52**





**TXU
US HOLDINGS COMPANY AND SUBSIDIARIES**


**CONSOLIDATED
BALANCE SHEETS**


**December
      31,****2004**
    
    **2003****(millions
      of dollars)****ASSETS**Current
      assets:Cash
      and cash equivalents
    
    $
    70
    
    $
    806Restricted
      cash
    
    
    49
    
    
    12Accounts
      receivable:Affiliates
    
    
    2
    
    
    —Trade
    
    
    1,212
    
    
    1,001Advances
      to affiliates
    
    
    1,277
    
    
    —Inventories
    
    
    317
    
    
    415Commodity
      contract assets
    
    
    546
    
    
    548Other
      current assets
    
    
    282
    
    
    258Total
      current assets
    
    
    3,755
    
    
    3,040Investments:Restricted
      cash
    
    
    28
    
    
    13Other
      investments
    
    
    588
    
    
    510Property,
      plant and equipment — net
    
    
    16,529
    
    
    16,677Goodwill
    
    
    542
    
    
    558Regulatory
      assets — net
    
    
    1,891
    
    
    1,872Commodity
      contract assets
    
    
    315
    
    
    109Cash
      flow hedges and other derivative assets
    
    
    8
    
    
    88Assets
      held for sale
    
    
    17
    
    
    60Other
      noncurrent assets
    
    
    290
    
    
    143Total
      assets
    
    $
    23,963
    
    $
    23,070**LIABILITIES,
      PREFERRED INTERESTS AND SHAREHOLDERS’ EQUITY**Current
      liabilities:Advances
      from affiliates
    
    $
    —
    
    $
    691Notes
      payable — banks
    
    
    210
    
    
    ─Long-term
      debt due currently
    
    
    218
    
    
    249Accounts
      payable — trade
    
    
    919
    
    
    775Commodity
      contract liabilities
    
    
    491
    
    
    502Accrued
      taxes
    
    
    581
    
    
    435Other
      current liabilities
    
    
    958
    
    
    864Total
      current liabilities
    
    
    3,377
    
    
    3,516Accumulated
      deferred income taxes
    
    
    3,309
    
    
    3,382Investment
      tax credits
    
    
    405
    
    
    428Commodity
      contract liabilities
    
    
    347
    
    
    47Cash
      flow hedges and other derivative liabilities
    
    
    178
    
    
    140Liabilities
      held for sale
    
    
    6
    
    
    11Other
      noncurrent liabilities and deferred credits
    
    
    1,848
    
    
    1,512Long-term
      debt, less amounts due currently
    
    
    7,571
    
    
    7,217Exchangeable
      preferred membership interests of TXU Energy Holdings, net of discount of
      $239 and $253 (Note 8)
    
    
    511
    
    
    497Total
      liabilities
    
    
    17,552
    
    
    16,750Contingencies
      (Note 17)Shareholders’
      equity and preferred interests (Notes 9 and 10)
    
    
    6,411
    
    
    6,320Total
      liabilities, preferred interests and shareholders’ equity
    
    $
    23,963
    
    $
    23,070See
      Notes to Financial Statements.








**A-53**


**TXU
US HOLDINGS COMPANY AND SUBSIDIARIES**


**STATEMENTS
OF CONSOLIDATED SHAREHOLDERS’ EQUITY**





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002****(millions
      of dollars)**Preferred
      stock — not subject to mandatory redemption:Balance
      at beginning of year
    
    $
    38
    
    $
    115
    
    $
    115Preferred
      stock repurchased and retired (2003 — 789,830 shares)
    
    
    —
    
    
    (77
    )
    
    —Balance
      at end of year (2004 and 2003 — 379,231 shares and2002
      — 1,169,061 shares)
    
    
    38
    
    
    38
    
    
    115Common
      stock without par value — authorized shares — 180,000,000:Balance
      at beginning of year
    
    
    —
    
    
    2,514
    
    
    2,248Common
      stock repurchased and retired (2003 — 11,562,500 shares)
    
    
    —
    
    
    (463
    )
    
    —Noncash
      capital contribution related to issuance ofexchangeable
      subordinated debt
    
    
    —
    
    
    —
    
    
    266Transfer
      of equity to new classes of common stock - 41,255,362 shares
    
    
    —
    
    
    (2,051
    )
    
    —Balance
      at end of year (2002 — 52,817,862 shares)
    
    
    —
    
    
    —
    
    
    2,514Class
      A common stock without par value — authorized shares —
      9,000,000Balance
      at beginning of year
    
    
    102
    
    
    —
    
    
    —Transfer
      of equity from old class of common stock — 2,062,768 shares
    
    
    —
    
    
    102
    
    
    —Noncash contributions related to share-based compensation
    
    
    38
    
    
    —
    
    
    —Balance
      at end of year (2004 and 2003 — 2,062,768 shares)
    
    
    140
    
    
    102
    
    
    —Class
      B common stock without par value — authorized shares —
      171,000,000Balance
      at beginning of year
    
    
    1,949
    
    
    —
    
    
    —Transfer
      of equity from old class of common stock - 39,192,594 shares
    
    
    —
    
    
    1,949
    
    
    —Balance
      at end of year (2004 and 2003 — 39,192,594 shares
    
    
    1,949
    
    
    1,949
    
    
    —Retained
      earnings:Balance
      at beginning of year
    
    
    4,366
    
    
    4,261
    
    
    5,086Net
      income
    
    
    660
    
    
    660
    
    
    361Common
      stock dividends declared
    
    
    (562
    )
    
    (550
    )
    
    (1,177
    )Dividends
      declared on preferred stock
    
    
    (2
    )
    
    (5
    )
    
    (9
    )Balance
      at end of year
    
    
    4,462
    
    
    4,366
    
    
    4,261Accumulated
      other comprehensive income (loss), net of tax effects:Minimum
      pension liability adjustment:Balance
      at beginning of year
    
    
    (15
    )
    
    (38
    )
    
    (1
    )Change
      during the year
    
    
    3
    
    
    23
    
    
    (37
    )Balance
      at end of year
    
    
    (12
    )
    
    (15
    )
    
    (38
    )Cash
      flow hedges (SFAS 133):Balance
      at beginning of year
    
    
    (120
    )
    
    (150
    )
    
    16Change
      during the year
    
    
    (46
    )
    
    30
    
    
    (166
    )Balance
      at end of year
    
    
    (166
    )
    
    (120
    )
    
    (150
    )Total
      accumulated other comprehensive loss
    
    
    (178
    )
    
    (135
    )
    
    (188
    )Total
      common stock equity
    
    
    6,373
    
    
    6,282
    
    
    6,587Shareholder's
      equity
    
    $
    6,411
    
    $
    6,320
    
    $
    6,702





See Notes
to Financial Statements.





**A-54**











**TXU
US HOLDINGS COMPANY AND SUBSIDIARIES**


**NOTES
TO FINANCIAL STATEMENTS**








**1.**
    **TXU
      CORP. BUSINESS RESTRUCTURING AND OTHER
ACTIONS**





US
Holdings is a subsidiary of TXU Corp. and is a holding company conducting its
operations principally through its TXU Energy Holdings and TXU Electric Delivery
subsidiaries. TXU Energy Holdings is engaged in electricity generation and
retail and wholesale energy sales. TXU Electric Delivery engages in regulated
electricity transmission and distribution operations.





US
Holdings has two reportable segments: TXU Energy Holdings and TXU Electric
Delivery. (See Note 18 for further information concerning reportable business
segments.)







Mr. C.
John Wilder, who was named president and chief executive of TXU Corp. in
February 2004, and senior management reviewed TXU Corp.’s operations during 2004
to identify and implement strategic initiatives designed to improve operational
and financial performance. Areas reviewed included:





·
    Noncore
      business activities;


·
    Cost
      effectiveness of generation operations;


·
    Administrative
      cost structure, including organizational alignments and headcount;
      and


·
    Opportunities
      to improve retail customer service.





Management
believes that its actions in 2004 have resulted in sustainable profitability
improvements, principally through streamlining of the organization, optimization
of energy supply costs and improved customer retention. In addition, increased
focus on contingencies has resulted in significant progress in resolving certain
regulatory matters. Certain of the actions have resulted in unusual charges and
credits impacting 2004 net income, summarized as follows and discussed below in
more detail:





****
    
    **Charge/(Credit)
      to Earnings******Income
      Statement****
      **Classification**
    
    **Pretax**
    
    **After-tax**TXU
      Energy Holdings segment:Charges
      related to leased equipment
    
    
    
    
    
    Other
      deductions
    
    $
    180
    
    $
    117Software
      write-off
    
    
    
    
    
    Other
      deductions
    
    
    107
    
    
    70Employee
      severance costs
    
    
    
    
    
    Other
      deductions
    
    
    107
    
    
    69Power
      purchase contract termination
    
    
    
    
    
    Other
      deductions
    
    
    101
    
    
    66Spare
      parts inventory write-down
    
    
    
    
    
    Other
      deductions
    
    
    79
    
    
    51Outsourcing
      transition costs
    
    
    
    
    
    Other
      deductions
    
    
    10
    
    
    6Other
      asset impairments
    
    
    
    
    
    Other
      deductions
    
    
    6
    
    
    4Other
      charges
    
    
    
    
    
    Operating
      costs/SG&A
    
    
    8
    
    
    6Recognition
      of deferred gain on plant sales
    
    
    
    
    
    Other
      income
    
    
    (58
    )
    
    (38
    )Gain
      on sale of undeveloped properties
    
    
    
    
    
    Other
      income
    
    
    (19
    )
    
    (12
    )TXU
      Electric Delivery segment:Employee
      severance costs
    
    
    
    
    
    Other
      deductions
    
    
    20
    
    
    13Rate
      case settlement reserve
    
    
    
    
    
    Other
      deductions
    
    
    21
    
    
    14Outsourcing
      transition costs
    
    
    
    
    
    Other
      deductions
    
    
    4
    
    
    3Software
      write-off and asset impairment
    
    
    
    
    
    Other
      deductions
    
    
    4
    
    
    2Other
      charges
    
    
    
    
    
    Operating
      costs/SG&A
    
    
    2
    
    
    1Total
    
    
    
    
    
    
    
    $
    572
    
    $
    372








**A-55**





Following
is a discussion of the major activities associated with the restructuring plan:





*Sale
of TXU Fuel*





In April
2004, TXU Energy Holdings distributed the assets of TXU Fuel, its gas
transportation subsidiary, to US Holdings at book value, including $16 million
of allocated goodwill. In June 2004, US Holdings’ completed the sale of the
assets of TXU Fuel to Energy Transfer Partners, L.P. for $500 million in cash.
TXU Fuel had 2003 revenues of approximately $65 million, the majority of which
represented gas transportation fees from TXU Energy Holdings. As part of the
transaction, TXU Energy Holdings entered into a transportation agreement,
intended to be market-price based, with the new owner to transport gas to TXU
Energy Holdings’ generation plants. Because of the continuing involvement in the
business through the transportation agreement, the pretax gain related to the
sale of $375 million will be recognized over the eight-year life of the
transportation agreement, and the sale of TXU Fuel assets has not been accounted
for as a discontinued operation. The pretax gain is net of $16 million of TXU
Energy Holdings’ goodwill allocated to TXU Fuel.





*Capgemini
Energy Outsourcing Agreement*





In May
2004, as part of an overall arrangement initiated by TXU Corp., TXU Energy
Holdings and TXU Electric Delivery entered into services agreements with
Capgemini Energy LP (Capgemini), a new company initially providing business
process support services to TXU Corp. only, but immediately implementing a plan
to offer similar services to other utility companies. Under the ten-year
agreement, over 2,500 employees (including approximately 1,300 from US Holdings)
transferred from subsidiaries of TXU Corp. to Capgemini effective July 1, 2004.
Outsourced base support services performed by Capgemini for a fixed fee, subject
to adjustment for volumes or other factors, include information technology,
customer call center, billing, human resources, supply chain and certain
accounting activities.





As part
of the agreement, Capgemini was provided a royalty-free right, under an asset
license arrangement, to use TXU Corp.’s information technology assets,
consisting primarily of capitalized software. A portion of the software was in
development and had not yet been placed in service. As a result of outsourcing
its information technology activities, TXU Corp. no longer intends to develop
the software and from TXU Corp.’s perspective the software is abandoned. The
agreement with Capgemini does not require that any software in development be
completed and placed in service. Consequently, the carrying value of these
software projects was written off, resulting in a charge of $109 million ($71
million after-tax), reported in other deductions. The remaining assets were
transferred to a subsidiary of TXU Corp. at book value in exchange for an
interest in that subsidiary. Such interest is accounted for by US Holdings on
the equity method, and US Holdings recorded equity losses (representing
depreciation expense) of $7 million, reported in other deductions.





TXU Corp.
(through the subsidiary) obtained a 2.9% limited partnership interest in
Capgemini in exchange for the asset license described above. TXU Corp. has the
right to sell (the “put option”) its interest and the licensed software to Cap
Gemini North America Inc. for $200 million, plus its share of Capgemini’s
undistributed earnings, upon expiration of the services agreement or earlier
upon the occurrence of certain unexpected events. Cap Gemini North America Inc.
has the right to purchase these interests under the same terms and conditions.
The partnership interest has been recorded at an initial value of $2.9 million
and is being accounted for on the cost method.





US
Holdings has recorded its share of the fair value of the put option, estimated
at $154 million, as a noncurrent asset. Of this amount, $147 million was
recorded as a reduction to the carrying value of the investment. This accounting
is in accordance with guidance related to sales and licensing of internally
developed software described in AICPA Statement of Position 98-1, “Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use.” The
difference of $7 million, which represented the fair value of the assumed cash
distributions and gains while holding the partnership interest for the period
prior to exercise of the put, was recorded as a noncurrent deferred credit. The
remaining balance of the software is being amortized over the estimated
remaining useful lives.





Also as
part of the agreement, TXU Corp. agreed to indemnify Capgemini for severance
costs incurred by Capgemini for former TXU Corp. employees terminated within 18
months of their transfer to Capgemini. Accordingly, in the second quarter of
2004, US Holdings recorded a $38 million ($25 million after-tax) charge for its
share of severance liabilities. In addition, TXU Corp. committed to pay up to
$25 million for costs associated with transitioning the outsourced activities to
Capgemini. During 2004, US Holdings recorded transition expenses of $14 million
($9 million after-tax), and the remainder are expected to be expensed as
incurred in 2005.





**A-56**


*Generation
Facility Closures and Sales*





In
December 2004, TXU Energy Holdings committed to immediately cease operating for
its own benefit nine leased gas-fired combustion turbines, and recorded a charge
of $157 million ($102 million after-tax). The charge represents the present
value of the future lease payments related to the turbines, net of estimated
sublease proceeds. The leases expire in 2017 and 2018. US Holdings is currently
evaluating opportunities with respect to the turbines, including subleasing the
turbines to third parties or decommissioning the turbines. During this
evaluation period, the turbines will be available to ERCOT only for system
reliability purposes.





In
November 2004, US Holdings announced plans to deactivate, or mothball, eight
gas-fired operating units due to electric industry market conditions in Texas.
The units were more than 30 years old and had operated only sparingly during the
last two years. The facility closures resulted in employee severance costs of $7
million ($5 million after-tax).





In the
second quarter of 2004, US Holdings initiated a plan to sell the Pedricktown,
New Jersey 122 MW power production facility and exit the related power supply
and gas transportation agreements. Accordingly, US Holdings recorded an
impairment charge of $26 million ($17 million after-tax) to write down the
facility to estimated fair market value. The results of the business and the
impairment charge are reported in discontinued operations, as discussed in Note
4 to Financial Statements.





In March
2004, US Holdings announced the planned permanent retirement, completed in the
second quarter of 2004, of eight gas-fired operating units. US Holdings also
temporarily closed four other gas-fired units and placed them under evaluation
for retirement. A majority of the 12 units were designated as “peaking units”
and operated only during the summer for many years and had operated only
sparingly during the last two years. US Holdings also closed its Winfield North
Monticello lignite mine in Texas, as it was no longer economical to operate when
compared to the cost of purchasing coal to fuel the adjacent generation
facility. A total charge of $8 million ($5 million after-tax) was recorded for
employee severance costs and impairments related to the various facility
closures.





As a
result of the various actions in 2004, US Holdings will permanently or
temporarily deactivate over 40% of its gas-fired generating capacity in Texas,
representing 4,572 MW of capacity.





*Other
Actions Related to Generation Operations*





In
December 2004, US Holdings executed an agreement to terminate, for a payment of
$172 million, an existing power purchase and tolling agreement that would have
expired in 2006. The agreement was entered into in connection with the sale of
two generation plants to the counterparty in 2001. As a result of the
transaction, US Holdings recorded a charge of $101 million ($66 million
after-tax). The charge represents the payment amount less the remaining
out-of-the-money liability related to the agreement originally recorded at its
inception. US Holdings also recorded a gain of $58 million ($38 million
after-tax), representing the remaining deferred gains from the sale of the two
plants.





In
October 2004, US Holdings entered into an agreement to terminate the operating
lease for certain mining equipment for approximately $28 million in cash,
effective November 1, 2004. The lease termination resulted in a charge of $21
million ($14 million after-tax). US Holdings entered into a short-term lease
with an unrelated third party for the equipment, which is expected to be taken
out of service at the expiration of the lease.





As part
of a review of its generation asset portfolio in the second quarter of 2004, US
Holdings completed a review of its spare parts and equipment inventory to
determine the appropriate level of such inventory. The review included nuclear,
coal and gas-fired generation-related facilities. As a result of this review, US
Holdings recorded a charge of $79 million ($51 million after-tax), to reflect
excess inventory on hand and to write down carrying values to scrap values.





**A-57**


*Organizational
Realignment and Headcount Reductions*





During
2004, management completed a comprehensive organizational review, including an
analysis of staffing requirements. As a result, US Holdings completed a
self-nomination severance program and other involuntary severance actions, and
recorded severance charges totaling $74 million ($47 million after-tax). This
amount includes $33 million in allocated TXU Corp. severance charges.





*Rate
Case Settlement*





In the
fourth quarter of 2004, TXU Electric Delivery recorded a $21 million ($14
million after-tax) charge for estimated settlement payments. The settlement,
which was finalized February 22, 2005, is the result of a number of
municipalities initiating an inquiry regarding distribution rates. The agreement
avoids any immediate rate actions, but would require TXU Electric Delivery to
file a rate case in 2006, based on a 2005 test year, unless the municipalities
and TXU Electric Delivery mutually agree that such a filing is unnecessary. The
final settlement amounts are being determined; however, TXU Electric Delivery
believes the total will closely approximate the amount accrued.





***Discontinued
Businesses*** **** — Note 4
presents detailed information regarding the discontinued New Jersey generation
operations and the strategic retail services business. The consolidated
financial statements for all periods presented reflect the reclassification of
the results of these businesses as discontinued operations.





**2.**
    **SIGNIFICANT
      ACCOUNTING POLICIES AND CHANGES IN ACCOUNTING
      STANDARDS**





***Basis
of Presentation*** — The
consolidated financial statements of US Holdings have been prepared in
accordance with US GAAP and on the same basis as the audited financial
statements included in its 2003 Form 10-K, except for the change in estimates of
depreciable lives of assets, the presentation of certain operations as
discontinued and the adoption of SFAS 123R as discussed below. In the opinion of
management, all other adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the results of operations and financial
position have been included therein. All intercompany items and transactions
have been eliminated in consolidation.





Certain
reclassifications have been made to conform prior period data to the current
period presentation. All dollar amounts in the financial statements and tables
in the notes are states in millions of dollars unless otherwise indicated.





***Use
of Estimates*** — The
preparation of US Holdings’ financial statements requires management to make
estimates and assumptions about future events that affect the reporting of
assets and liabilities at the balance sheet dates and the reported amounts of
revenue and expense, including mark-to-market valuation adjustments. In the
event estimates and/or assumptions prove to be different from actual amounts,
adjustments are made in subsequent periods to reflect more current information.
No material adjustments, other than those disclosed elsewhere herein, were made
to previous estimates or assumptions during the current year.





***Financial
Instruments and Mark-to-Market Accounting*** ** — ** US
Holdings enters into financial instruments, including options, swaps, futures,
forwards and other contractual commitments primarily to manage commodity price
and interest rate risks. In accordance with SFAS 133, the fair value of each
derivative is recognized on the balance sheet and changes in the fair value
recognized in earnings. This recognition is referred to as “mark-to-market”
accounting. However, if certain criteria are met, US Holdings may elect the
normal purchase and sale exception or may designate the derivative as a cash
flow or fair value hedge. As these elections can reduce the volatility in
earnings resulting from fluctuations in fair value, results of operations could
be materially affected by such elections. A cash flow hedge mitigates the risk
associated with variable future cash flows (e.g., a future sale at market
prices), while a fair value hedge mitigates risk associated with fixed future
cash flows (e.g., debt with fixed interest rate payments).





In
accounting for cash flow hedges, derivative assets and liabilities are recorded
on the balance sheet at fair value with an offset in other comprehensive income.
Amounts remain in other comprehensive income, provided the underlying
transactions remain probable of occurring, and are reclassified into earnings as
the underlying transactions occur. Fair value hedges are recorded as derivative
assets or liabilities with an offset to the carrying value of the related asset
or liability. Any ineffectiveness associated with the hedges is recorded in
earnings. US Holdings did not recognize any ineffectiveness related to fair
value hedges in 2004.





**A-58**


***Revenue
Recognition*** ** — US
Holdings records revenue from electricity sales and delivery service under the
accrual method. R evenues
are recognized when power or delivery is provided to customers on the basis of
periodic cycle meter readings and include an estimated accrual for the value
provided from the meter reading date to the end of the period. The unbilled
revenue is calculated at the end of the period based on estimated daily
consumption after the meter read date to the end of the period. For retail
electric sales, estimated daily consumption is derived using historical customer
profiles adjusted for weather and other measurable factors affecting
consumption .





Realized
and unrealized gains and losses from transacting in energy-related contracts,
principally for the purpose of hedging margins on sales of energy, are reported
as a component of revenues.





***Accounting
for Contingencies*** *—* The
financial results of US Holdings may be affected by judgments and estimates
related to loss contingencies. Accruals for loss contingencies are recorded when
management determines that it is probable that an asset has been impaired or a
liability has been incurred and that such economic loss can be reasonably
estimated. Such determinations are subject to interpretations of current facts
and circumstances, forecasts of future events and estimates of the financial
impacts of such events.





***Regulatory
Assets and Liabilities —*** The
financial statements of US Holdings’ regulated electricity delivery operations
reflect regulatory assets and liabilities under cost-based rate regulation in
accordance with SFAS 71. The assumptions and judgments used by regulatory
authorities continue to have an impact on the recovery of costs, the rate earned
on invested capital and the timing and amount of assets to be recovered by
rates. (See discussion in Note 19).





See Note
5 for a discussion of the extraordinary gain recorded in 2004 and the
extraordinary loss recorded in 2002 related to the adjustments in the carrying
value of US Holdings’ regulatory asset subject to securitization.





***Investments
—*** Deposits
in a nuclear decommissioning trust fund are accounted for as trading securities
and are therefore carried at fair value in the balance sheet. Investments in
unconsolidated business entities over which US Holdings has significant
influence but does not maintain effective control, generally representing
ownership of at least 20% and not more than 50% of common equity, are accounted
for under the equity method. Assets related to employee benefit plans are held
to satisfy deferred compensation liabilities and are recorded at market value.
(See Note 6 - *Investments).*





***Property,
Plant and Equipment*** —
Properties are stated at original cost. The cost of property additions includes
direct labor and materials and applicable overhead, including payroll-related
costs.





Depreciation
of US Holdings’ property, plant and equipment is calculated on a straight-line
basis over the estimated service lives of the properties. Depreciation includes
the effect of asset retirement obligations as prescribed by SFAS 143 (see Note
3). As is common in the industry, US Holdings records depreciation expense using
composite depreciation rates that reflect blended estimates of the lives of
major asset components as compared to depreciation expense calculated on an
asset-by-asset basis. Consolidated depreciation expense as a percent of average
depreciable property approximated 2.3% in 2004, 2.5% in 2003 and 2.8% in 2002.





Effective
January 1, 2004, the estimates of depreciable lives of lignite-fired generation
facilities were extended an average of nine years to better reflect the useful
lives of the assets, and depreciation rates for the Comanche Peak nuclear
generating plant were decreased as a result of an increase in the estimated
lives of boiler and turbine generator components of the plant by an average of
five years. The net impact of these changes was a reduction in depreciation
expense of $44 million ($29 million after-tax) in 2004.





Effective
April 1, 2003, the estimates of the depreciable lives of the Comanche Peak
nuclear generating plant and several gas generation plants were extended to
better reflect the useful lives of the assets. At the same time, depreciation
rates were increased on lignite and gas generation facilities to reflect
investments in emissions control equipment. The net impact of these changes was
a reduction in depreciation expense of an additional $12 million ($8 million
after-tax) in 2004 and $37 million ($24 million after-tax) in 2003.





**A-59**


***Allowance
For Funds Used During Construction (AFUDC) and Interest Capitalized
—*** AFUDC is
a regulatory cost accounting procedure whereby amounts based upon interest
charges on borrowed funds and a return on equity capital used to finance
construction are added to utility plant and equipment being constructed. As a
result of the 1999 Restructuring Legislation, only interest has been capitalized
related to generation construction since 1999. AFUDC for the regulated business
is capitalized as a component of projects under construction. Interest on
qualifying projects for businesses that are not regulated is capitalized in
accordance with SFAS 34. The equity portion of capitalized AFUDC is accounted
for as other income. See Note 19 for details of amounts.





***Impairment
of Long-Lived Assets*** — US
Holdings evaluates long-lived assets for impairment whenever indications of
impairment exist, in accordance with the requirement of SFAS 144. The
determination of the existence of indications of impairment involves judgments
that are subjective in nature and may require the use of estimates in
forecasting future results and cash flows related to an asset or group of
assets.





In 2002,
US Holdings recorded an impairment charge of $237 million ($154 million
after-tax), reported in other deductions, for the write-down of two generation
plant construction projects as a result of weaker wholesale electricity market
conditions and reduced planned developmental capital spending. Fair value was
determined based on appraisals of property and equipment.





***Major
Maintenance*** — Major
maintenance outage costs related to nuclear fuel reloads, as well as the costs
of other major maintenance programs, are charged to expense as incurred.





***Amortization
of Nuclear Fuel*** — The
amortization of nuclear fuel in the reactors is calculated on the
units-of-production method and is included in cost of energy sold.





***Pension
and Other Postretirement Benefit Plans*** — US
Holdings is a participating employer in the defined benefit and cash balance
pension plan sponsored by TXU Corp. US Holdings also participates with TXU Corp.
to offer certain health care and life insurance benefits to eligible employees
and their eligible dependents upon the retirement of such employees. Reported
costs of providing pension and other postretirement benefits are dependent upon
numerous factors, assumptions and estimates. (See Note 13 for information
regarding pension and other postretirement benefit plans).





***Franchise
and Revenue-Based Taxes*** —
Franchise and revenue-based taxes such as gross receipt taxes are not a “pass
through” item such as sales and excise taxes. Gross receipts taxes are assessed
to US Holdings by state and local governmental bodies, primarily based on
revenues, as a cost of doing business. US Holdings records gross receipts tax as
an expense. Rates charged to customers by US Holdings are intended to recover
the taxes, but US Holdings is not acting as an agent to collect the taxes from
customers.





***Income
Taxes*** — ****** TXU Corp.
files a consolidated federal income tax return, and federal income taxes are
allocated to subsidiaries based upon their respective taxable income or loss.
Investment tax credits are amortized to income over the estimated service lives
of properties. Deferred income taxes are provided for temporary differences
between the book and tax basis of assets and liabilities. Certain provisions of
SFAS 109 provide that regulated enterprises are permitted to recognize deferred
taxes as regulatory tax assets or tax liabilities if it is probable that such
amounts will be recovered from, or returned to, customers in future rates.





***Cash
Equivalents —*** For
purposes of reporting cash and cash equivalents, temporary cash investments
purchased with a remaining maturity of three months or less are considered to be
cash equivalents.





***Changes
in Accounting Standards —*** SFAS 123R
was issued in December 2004. SFAS 123R is a revision of SFAS 123 and supersedes
APB 25. US Holdings participates in TXU Corp.’s Long-Term Incentive Compensation
Plan. Under this plan, TXU Corp. grants awards of restricted stock and
performance units paid in stock and early adopted SFAS 123R in determining
reported expenses for these awards in 2004. See Note 11 for additional
discussion.





FIN 46R
was issued in December 2003 and was effective January 1, 2004, and replaced FIN
46, which was issued in January 2003. FIN 46R expands and clarifies the guidance
originally contained in FIN 46, regarding consolidation of variable interest
entities. FIN 46R did not impact results of operations or financial position for
2004.


**A-60**





In
October 2002, the EITF, through EITF 02-3, rescinded EITF 98-10, which required
mark-to-market accounting for all trading activities. SFAS 143, regarding asset
retirement obligations, became effective on January 1, 2003. As a result of the
implementation of these two accounting standards, US Holdings recorded a
cumulative effect of changes in accounting principles as of January 1, 2003. See
Note 3 for additional discussion.





As a
result of guidance provided in EITF 02-3, in 2003 US Holdings discontinued
recognizing origination gains on energy contracts. For 2002, US Holdings
recognized $40 million in origination gains on retail sales contracts. Because
of the short-term nature of these contracts, a portion of these gains would have
been recognized on a settlement basis in 2002.





**3.**
    **CUMULATIVE
      EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES**





SFAS 123R
was issued in December 2004. TXU Corp. early adopted SFAS 123R effective October
1, 2004 in determining reported expenses for these awards in 2004. US Holdings
recorded a cumulative effect of change in accounting principle of a $6 million
after-tax credit. See Note 11 for additional discussion.





The
following summarizes the effect on results for 2003 for changes in accounting
principles effective January 1, 2003:





Charge
      from rescission of EITF 98-10, net of tax effect of $34
      million
    
    $
    (63
    )Credit
      from adoption of SFAS 143, net of tax effect of $3 million
    
    
    5Total
      net charge
    
    $
    (58
    )





On
October 25, 2002, the EITF, through EITF 02-3, rescinded EITF 98-10, which
required mark-to-market accounting for all trading activities. Pursuant to this
rescission, only financial instruments that are derivatives under SFAS 133 are
subject to mark-to-market accounting. Financial instruments that may not be
derivatives under SFAS 133, but were marked-to-market under EITF 98-10, consist
primarily of gas transportation and storage agreements, power tolling, full
requirements and capacity contracts. This new accounting rule was effective for
new contracts entered into after October 25, 2002. Nonderivative contracts
entered into prior to October 26, 2002, continued to be accounted for at fair
value through December 31, 2002; however, effective January 1, 2003, such
contracts were required to be accounted for on a settlement basis. Accordingly,
a charge of $97 million ($63 million after-tax) was reported as a cumulative
effect of a change in accounting principles in the first quarter of 2003. Of the
total, $75 million reduced net commodity contract assets and liabilities and $22
million reduced inventory that had previously been marked-to-market as a trading
position. The cumulative effect adjustment represents the net gains previously
recognized for these contracts under mark-to-market accounting.





SFAS 143
became effective on January 1, 2003. SFAS 143 requires entities to record the
fair value of a legal liability for an asset retirement obligation in the period
of its inception. For US Holdings, such liabilities primarily relate to nuclear
generation plant decommissioning, land reclamation related to lignite mining and
removal of lignite plant ash treatment facilities. The liability is recorded at
its net present value with a corresponding increase in the carrying value of the
related long-lived asset. The liability is accreted each period, representing
the time value of money, and the capitalized cost is depreciated over the
remaining useful life of the related asset.





As the
new accounting rule required retrospective application to the inception of the
liability, the effects of the adoption reflect the accretion and depreciation
from the liability inception date through December 31, 2002. Further, the
effects of adoption take into consideration liabilities of $215 million
(previously reflected in accumulated depreciation) US Holdings had previously
recorded as depreciation expense and $26 million (reflected in other noncurrent
liabilities) of unrealized net gains associated with the decommissioning trusts.








**A-61**





The
following table summarizes the impact as of January 1, 2003 of adopting SFAS
143:





Increase
      in property, plant and equipment - net
    
    $
    488Increase
      in other noncurrent liabilities and deferred credits
    
    
    (528
    )Increase
      in accumulated deferred income taxes
    
    
    (3
    )Increase
      in regulatory assets - net
    
    
    48Cumulative
      effect of change in accounting principles
    
    $
    5





The asset
retirement liability at December 31, 2004 was $631 million, comprised of a $599
million liability as of December 31, 2003, $39 million of accretion during the
twelve months of 2004, reduced by $26 million in reclamation payments. The asset
retirement obligations were adjusted upward by $19 million due to revisions in
estimated cash flows.





With
respect to nuclear decommissioning costs, US Holdings believes that the adoption
of SFAS 143 results primarily in timing differences in the recognition of asset
retirement costs that US Holdings is currently recovering through the regulatory
process.





On a pro
forma basis, assuming SFAS 143 had been adopted at the beginning of the year,
earnings for 2002 would have increased by $6.5 million after-tax, and the
liability for asset retirement obligations as of December 31, 2002 would have
been $554 million.





**4.**  **DISCONTINUED
OPERATIONS**





The
following summarizes the historical consolidated financial information of the
businesses reported as discontinued operations:





**Strategic
      Retail Services**
    
    **Pedricktown**
    
    **Total****2004**Operating
      revenues
    
    $
    17
    
    $
    32
    
    $
    49Operating
      costs and expenses
    
    
    20
    
    
    37
    
    
    57Other
      deductions (income) - net
    
    
    10
    
    
    —
    
    
    10Interest
      income
    
    
    (1
    )
    
    —
    
    
    (1
    )Operating
      loss before income taxes
    
    
    (12
    )
    
    (5
    )
    
    (17
    )Income
      tax expense (benefit)
    
    
    (4
    )
    
    (2
    )
    
    (6
    )Charges
      related to exit (after-tax)
    
    
    6
    
    
    17
    
    
    23Loss
      from discontinued operations
    
    $
    (14
    )
    $
    (20
    )
    $
    (34
    )**2003**Operating
      revenues
    
    $
    60
    
    $
    22
    
    $
    82Operating
      costs and expenses
    
    
    60
    
    
    28
    
    
    88Other
      deductions (income) - net
    
    
    11
    
    
    —
    
    
    11Interest
      income
    
    
    (1
    )
    
    —
    
    
    (1
    )Interest
      expenses and related charges
    
    
    1
    
    
    —
    
    
    1Operating
      loss before income taxes
    
    
    (11
    )
    
    (6
    )
    
    (17
    )Income
      tax expense (benefit)
    
    
    (4
    )
    
    (2
    )
    
    (6
    )Charges
      related to exit (after-tax)
    
    
    7
    
    
    —
    
    
    7Loss
      from discontinued operations
    
    $
    (14
    )
    $
    (4
    )
    $
    (18
    )**2002**Operating
      revenues
    
    $
    47
    
    $
    18
    
    $
    65Operating
      costs and expenses
    
    
    122
    
    
    22
    
    
    144Interest
      expenses and related charges
    
    
    1
    
    
    —
    
    
    1Operating
      loss before income taxes
    
    
    (76
    )
    
    (4
    )
    
    (80
    )Income
      tax expense (benefit)
    
    
    (27
    )
    
    (1
    )
    
    (28
    )Loss
      from discontinued operations
    
    $
    (49
    )
    $
    (3
    )
    $
    (52
    )





***Pedricktown
—*** In the
second quarter of 2004, TXU Energy Holdings finalized a plan to sell the
Pedricktown, New Jersey 122 MW power production facility and exit the related
power supply and gas transportation agreements. Accordingly, results for the
second quarter of 2004 included a $17 million after-tax charge to write down the
facility to estimated fair market value.





**A-62**


***Strategic
Retail Services*** — In
December 2003, TXU Energy Holdings finalized a plan to sell its strategic retail
services business, which was engaged principally in providing energy management
services. Results in 2004 reflect a $6 million after-tax charge recorded in the
second quarter to settle a contract dispute. Substantially all disposition
activities have been completed.





***Balance
sheet*** **-** The
following details the assets and liabilities of the Pedricktown operations held
for sale:





**December
      31, 2004**Current
      assets
    
    $
    2Property,
      plant and equipment
    
    
    15Total
    
    $
    17Current
      liabilities
    
    $
    3Noncurrent
      liabilities
    
    
    3Total
    
    $
    6





**5.**  **EXTRAORDINARY
ITEMS**





The
Settlement Plan addressed the issuance of securitization bonds to recover
regulatory asset stranded costs and other qualified costs. A financing order
finalized in January 2003 authorized the issuance of securitization bonds by TXU
Electric Delivery with a principal amount of $1.3 billion. An extraordinary gain
of $16 million (net of tax of $9 million) recorded by TXU Electric Delivery in
the second quarter of 2004 represents an increase in the carrying value of the
regulatory asset subject to securitization. The second and final tranche of the
securitization bonds was issued in June 2004. The increase in the related
regulatory asset is due to the effect of higher interest rates than previously
estimated on the bonds and therefore increased amounts to be recovered from REPs
through revenues as a transition charge to service the principal and interest on
the bonds. In the fourth quarter of 2002, US Holdings recorded an extraordinary
loss of $134 million (net of income tax benefit of $72 million) principally to
write-down the regulatory assets to reflect lower interest rates than originally
assumed. The balance of the regulatory asset was $1.6 billion at December 31,
2004.





**6****.**
    **INVESTMENTS**





The
following information is a summary of the investment balance as of December 31,
2004 and 2003:





**December
      31,****2004**
    
    **2003**Nuclear
      decommissioning trust
    
    $
    361
    
    $
    323Investment
      in affiliate holding Capgemini-related assets
    
    
    42
    
    
    —Land
    
    
    84
    
    
    89Assets
      related to employee benefit plans
    
    
    77
    
    
    69Miscellaneous
      other
    
    
    24
    
    
    29Total
      investments
    
    $
    588
    
    $
    510





***Nuclear
Decommissioning Trust*** ** —
Deposits in a trust fund for costs to decommission the Comanche Peak
nuclear-powered generation plant are carried at fair value. (Also see Note 17 -
under *Nuclear
Decommissioning* ).
Decommissioning costs are being recovered from TXU Electric Delivery’s customers
as a transmission and distribution charge over the life of the plant and
deposited in the trust fund. Gains and losses on investments in the trust fund
are offset by corresponding adjustments to regulatory assets or liabilities. A
summary of investments in the fund as of December 31, 2004 and 2003 follows:





**December
      31, 2004****Cost**
    
    **Unrealized
      gain**
    
    **Unrealized
      (loss)**
    
    **Fair
      market value**Debt
      securities
    
    $
    142
    
    $
    7
    
    $
    (1
    )
    $
    148Equity
      securities
    
    
    143
    
    
    82
    
    
    (12
    )
    
    213$
    285
    
    $
    89
    
    $
    (13
    )
    $
    361








**December
      31, 2003****Cost**
    
    **Unrealized
      gain**
    
    **Unrealized
      (loss)**
    
    **Fair
      market value**Debt
      securities
    
    $
    139
    
    $
    6
    
    $
    (2
    )
    $
    143Equity
      securities
    
    
    126
    
    
    66
    
    
    (12
    )
    
    180$
    265
    
    $
    72
    
    $
    (14
    )
    $
    323







**A-63**


Debt
securities held at December 31, 2004 mature as follows: $62 million in one to
five years, $52 million in five to ten years and $34 million after ten
years.





**7.**  **SHORT-TERM
FINANCING**





***Short-term
Borrowings —*** At
December 31, 2004, US Holdings had outstanding short-term borrowings consisting
of bank borrowings of $210 million at a weighted average interest rate of
5.25%. **** At
December 31, 2003, US Holdings had outstanding short-term advances from
affiliates of $691 million at a weighted average interest rate of 2.92%.





***Credit
Facilities***  ***—*** **** At
December 31, 2004, TXU Corp. had access to credit facilities (some of which
provide for long-term borrowings) as follows:





**At
      December 31, 2004****Maturity**
    
    **Authorized**
    
    **Facility**
    
    **Letters
      of**
    
    **Cash****Facility**
    
    **Date**
    
    **Borrowers**
    
    **Limit**
    
    **Credit**
    
    **Borrowings**
    
    **Availability**364-day
      Credit Facility
    
    
    June
      2005
    
    
    TXU
      Energy Holdings, TXU Electric Delivery
    
    $
    600
    
    $
    75
    
    $
    ─
    
    $
    525Three-Year
      Revolving Credit Facility
    
    
    June
      2007
    
    
    TXU
      Energy Holdings, TXU Electric Delivery
    
    
    1,400
    
    
    18
    
    
    210
    
    
    1,172Five-Year
      Revolving Credit Facility
    
    
    December
      2005
    
    
    TXU
      Corp.
    
    
    425
    
    
    419
    
    
    ─
    
    
    6Five-Year
      Revolving Credit Facility
    
    
    June
      2009
    
    
    TXU
      Energy Holdings, TXU Electric Delivery
    
    
    500
    
    
    ─
    
    
    ─
    
    
    500Five-Year
      Revolving Credit Facility
    
    
    December
      2009
    
    
    TXU
      Energy Holdings
    
    
    500
    
    
    ─
    
    
    ─
    
    
    500Total
    
    
    
    
    
    
    
    $
    3,425
    
    $
    512
    
    $
    210
    
    $
    2,703





TXU
Corp.’s $500 million five-year revolving credit facility that provided for up to
$500 million in letters of credit and/or up to $250 million of loans ($500
million in the aggregate) was amended to reduce the credit facility to $425
million in December 2004. To the extent capacity was available under this
facility, it was made available to US Holdings, TXU Energy Holdings and TXU
Electric Delivery.





In
November 2004, TXU Energy Holdings entered into a five-year revolving credit
facility that allows for revolving loans and letters of credit. Letters of
credit may total up to $500 million. Revolving loans may total up to $250
million. The aggregate amount of borrowings outstanding at any one time may not
exceed $500 million. TXU Energy Holdings intends to use this facility for
general and corporate purposes, including, in the case of letters of credit,
support for pollution control revenue bonds.





In June
2004, US Holdings, TXU Energy Holdings and TXU Electric Delivery replaced $2.25
billion of credit facilities scheduled to mature in 2005 with $2.5 billion of
credit facilities for TXU Energy Holdings and TXU Electric Delivery maturing in
June 2005, 2007 and 2009. These facilities are used for working capital and
general corporate purposes and provide back-up for any future issuances of
commercial paper by TXU Energy Holdings or TXU Electric Delivery. At December
31, 2004, there was no such commercial paper outstanding.





***Sale
of Receivables*** — TXU
Corp. has established an accounts receivable securitization program. The
activity under this program is accounted for as a sale of accounts receivable in
accordance with SFAS 140. Under the program, subsidiaries of TXU Corp.
(originators) sell trade accounts receivable to TXU Receivables Company, a
consolidated wholly-owned bankruptcy remote direct subsidiary of TXU Corp.,
which sells undivided interests in the purchased accounts receivable for cash to
special purpose entities established by financial institutions (the funding
entities). Funding under the program as of December 31, 2004 was $474
million.





**A-64**


Effective
June 30, 2004, the program was extended through June 28, 2005. As part of the
extension, the maximum amount available to TXU Corp. under the program was
increased from $600 million to $700 million in recognition of seasonal power
sales. Additionally, the extension allows for increased availability of funding
through a credit ratings-based reduction (based on each originator’s credit
rating) of customer deposits previously used to reduce the amount of undivided
interests that could be sold. Undivided interests will now be reduced by 100% of
the customer deposits for a Baa3/BBB- rating; 50% for a Baa2/BBB rating; and
zero % for a Baa1/BBB+ and above rating.





All new
trade receivables under the program generated by the originators are
continuously purchased by TXU Receivables Company with the proceeds from
collections of receivables previously purchased. Changes in the amount of
funding under the program, through changes in the amount of undivided interests
sold by TXU Receivables Company, are generally due to seasonal variations in the
level of accounts receivable and changes in collection trends. TXU Receivables
Company has issued subordinated notes payable to the originators for the
difference between the face amount of the uncollected accounts receivable
purchased, less a discount, and cash paid to the originators that was funded by
the sale of the undivided interests. The balance of the subordinated notes
receivable, which is reported in accounts receivable, was $338 million at
December 31, 2004 and $467 million at December 31, 2003.





The
discount from face amount on the purchase of receivables principally funds
program fees paid by TXU Receivables Company to the funding entities, as well as
a servicing fee paid by TXU Receivables Company to TXU Business Services, a
direct subsidiary of TXU Corp. The program fees (losses on sale), which consist
primarily of interest costs on the underlying financing, were approximately $12
million, $11 million and $21 million in 2004, 2003 and 2002, respectively, and
approximated 2.1%, 2.4% and 3.7% for 2004, 2003 and 2002, respectively, of the
average funding under the program on an annualized basis; these fees represent
the net incremental costs of the program to US Holdings and are reported in
SG&A expenses. The servicing fee, which totaled approximately $6 million in
2004 and 2003 and $8 million in 2002, compensates TXU Business Services for its
services as collection agent, including maintaining the detailed accounts
receivable collection records.





The
December 31, 2004 balance sheet reflects $811 million face amount of trade
accounts receivable of TXU Energy Holdings and TXU Electric Delivery, reduced by
$474 million of undivided interests sold by TXU Receivables Company. Funding
under the program decreased $73 million in 2004, increased $100 million in 2003
and decreased $15 million in 2002. Funding increases or decreases under the
program are reflected as operating cash flow activity in the statement of cash
flows. The carrying amount of the retained interests in the accounts receivable
approximated fair value due to the short-term nature of the collection period.





Activities
of TXU Receivables Company related to US Holdings for 2004, 2003 and 2002 were
as follows:





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**Cash
      collections on accounts receivable
    
    $
    7,420
    
    $
    7,194
    
    $
    5,836Face
      amount of new receivables purchased
    
    
    (7,217
    )
    
    (6,777
    )
    
    (6,534
    )Discount
      from face amount of purchased receivables
    
    
    17
    
    
    17
    
    
    29Program
      fees paid
    
    
    (12
    )
    
    (11
    )
    
    (21
    )Servicing
      fees paid
    
    
    (5
    )
    
    (6
    )
    
    (8
    )Increase
      (decrease) in subordinated notes payable
    
    
    (130
    )
    
    (517
    )
    
    713Operating
      cash flows used by (provided to) US Holdings under the program
    
    $
    73
    
    $
    (100
    )
    $
    15





Upon
termination of the program, cash flows to US Holdings would be delayed as
collections of sold receivables would be used by TXU Receivables Company to
repurchase the undivided interests sold instead of purchasing new receivables.
The level of cash flows would normalize in approximately 16 to 31 days.





**A-65**


***Contingencies
Related to Sale of Receivables Program*** —
Although TXU Receivables Company expects to be able to pay its subordinated
notes from the collections of purchased receivables, these notes are
subordinated to the undivided interests of the financial institutions in those
receivables, and collections might not be sufficient to pay the subordinated
notes. The program may be terminated if either of the following events occurs:





1)  all of
the originators cease to maintain their required fixed charge coverage ratio and
debt to capital (leverage) ratio;


2)  the
delinquency ratio (delinquent for 31 days) for the sold receivables, the default
ratio (delinquent for 91 days or deemed uncollectible), the dilution ratio
(reductions for discounts, disputes and other allowances) or the days collection
outstanding ratio exceed stated thresholds and the financial institutions do not
waive such event of termination. The thresholds apply to the entire portfolio of
sold receivables, not separately to the receivables of each originator.





The
delinquency and dilution ratios exceeded the relevant thresholds during the
first four months of 2003, but waivers were granted. These ratios were affected
by issues related to the transition to competition. Certain billing and
collection delays arose due to implementation of new systems and processes
within TXU Corp. and ERCOT for clearing customers’ switching and billing data.
Also, strengthened credit and collection policies and practices have brought the
ratios into consistent compliance with the program requirements.





Under
terms of the receivables sale program, all the originators are required to
maintain specified fixed charge coverage and leverage ratios (or supply a parent
guarantor that meets the ratio requirements). The failure, by an originator or
its parent guarantor, if any, to maintain the specified financial ratios would
prevent that originator from selling its accounts receivable under the program.
If all the originators and the parent guarantor, if any, fail to maintain the
specified financial ratios so that there are no eligible originators, the
facility would terminate.





**A-66**





**8.**  **LONG-TERM
DEBT**





**December
      31,**
    
    **December
      31,****2004**
    
    **2003**TXU
      Energy HoldingsPollution
      Control Revenue Bonds:Brazos
      River Authority3.000%
      Fixed Series 1994A due May 1, 2029, remarketing date May 1,
      2005(a)
    
    
    
    
    $
    39
    
    $
    395.400%
      Fixed Series 1994B due May 1, 2029, remarketing date May 1,
      2006(a)
    
    
    
    
    
    39
    
    
    395.400%
      Fixed Series 1995A due April 1, 2030, remarketing date May 1,
      2006(a)
    
    
    
    
    
    50
    
    
    505.050%
      Fixed Series 1995B due June 1, 2030, remarketing date June 19,
      2006(a)
    
    
    
    
    
    114
    
    
    1187.700%
      Fixed Series 1999A due April 1, 2033
    
    
    
    
    
    111
    
    
    1116.750%
      Fixed Series 1999B due September 1, 2034, remarketing date April 1,
      2013(a)
    
    
    
    
    
    16
    
    
    167.700%
      Fixed Series 1999C due March 1, 2032
    
    
    
    
    
    50
    
    
    504.950%
      Fixed Series 2001A due October 1, 2030, remarketing date April 1,
      2004(a)
    
    
    
    
    
    —
    
    
    1214.750%
      Fixed Series 2001B due May 1, 2029, remarketing date November 1,
      2006(a)
    
    
    
    
    
    19
    
    
    195.750%
      Fixed Series 2001C due May 1, 2036, remarketing date November 1,
      2011(a)
    
    
    
    
    
    217
    
    
    2742.030%
      Floating Series 2001D due May 1, 2033(b)
    
    
    
    
    
    268
    
    
    2712.450%
      Floating Taxable Series 2001I due December 1, 2036(b)
    
    
    
    
    
    62
    
    
    632.030%
      Floating Series 2002A due May 1, 2037(b)
    
    
    
    
    
    45
    
    
    616.750%
      Fixed Series 2003A due April 1, 2038, remarketing date April 1,
      2013(a)
    
    
    
    
    
    44
    
    
    446.300%
      Fixed Series 2003B due July 1, 2032
    
    
    
    
    
    39
    
    
    396.750%
      Fixed Series 2003C due October 1, 2038
    
    
    
    
    
    52
    
    
    725.400%
      Fixed Series 2003D due October 1, 2029, remarketing date October 1,
      2014(a)
    
    
    
    
    
    31
    
    
    31Sabine
      River Authority of Texas:6.450%
      Fixed Series 2000A due June 1, 2021
    
    
    
    
    
    51
    
    
    515.500%
      Fixed Series 2001A due May 1, 2022, remarketing date November 1,
      2011(a)
    
    
    
    
    
    91
    
    
    915.750%
      Fixed Series 2001B due May 1, 2030, remarketing date November 1,
      2011(a)
    
    
    
    
    
    107
    
    
    1075.800%
      Fixed Series 2003A due July 1, 2022
    
    
    
    
    
    12
    
    
    126.150%
      Fixed Series 2003B due August 1, 2022
    
    
    
    
    
    45
    
    
    45Trinity
      River Authority of Texas:6.250%
      Fixed Series 2000A due May 1, 2028
    
    
    
    
    
    14
    
    
    145.000%
      Fixed Series 2001A due May 1, 2027, remarketing date November 1,
      2006(a)
    
    
    
    
    
    37
    
    
    37Other:6.875%
      TXU Mining Fixed Senior Notes due August 1, 2005
    
    
    
    
    
    30
    
    
    306.125%
      Fixed Senior Notes due March 15, 2008(c)
    
    
    
    
    
    250
    
    
    2507.000%
      Fixed Senior Notes due March 15, 2013
    
    
    
    
    
    1,000
    
    
    1,0002.838%
      Floating Rate Senior Notes due January 17, 2006 (d)
    
    
    
    
    
    400
    
    
    —Capital
      lease obligations
    
    
    
    
    
    9
    
    
    13Other
    
    
    
    
    
    —
    
    
    8Fair
      value adjustments related to interest rate swaps
    
    
    
    
    
    15
    
    
    11Unamortized
      discount
    
    
    
    
    
    —
    
    
    (2
    )Total
      TXU Energy Holdings
    
    
    
    
    
    3,257
    
    
    3,085TXU
      Electric Delivery8.250%
      Fixed First Mortgage Bonds due April 1, 2004
    
    
    
    
    
    —
    
    
    1006.250%
      Fixed First Mortgage Bonds due October 1, 2004
    
    
    
    
    
    —
    
    
    1216.750%
      Fixed First Mortgage Bonds due July 1, 2005
    
    
    
    
    
    92
    
    
    927.625%
      Fixed First Mortgage Bonds due July 1, 2025
    
    
    
    
    
    —
    
    
    2157.375%
      Fixed First Mortgage Bonds due October 1, 2025
    
    
    
    
    
    —
    
    
    1786.375%
      Fixed Senior Secured Notes due May 1, 2012
    
    
    
    
    
    700
    
    
    7007.000%
      Fixed Senior Secured Notes due May 1, 2032
    
    
    
    
    
    500
    
    
    5006.375%
      Fixed Senior Secured Notes due January 15, 2015
    
    
    
    
    
    500
    
    
    5007.250%
      Fixed Senior Secured Notes due January 15, 2033
    
    
    
    
    
    350
    
    
    3505.000%
      Fixed Debentures due September 1, 2007
    
    
    
    
    
    200
    
    
    2007.000%
      Fixed Debentures due September 1, 2022
    
    
    
    
    
    800
    
    
    800Unamortized
      discount
    
    
    
    
    
    (19
    )
    
    (30
    )Sub-total
    
    3,123
    
    
    3,726TXU
      Electric Delivery Transition Bond Company LLC (e)2.260%
      Fixed Series 2003 Bonds due in semi-annual installments through February
      15, 2007
    
    
    
    
    
    80
    
    
    1034.030%
      Fixed Series 2003 Bonds due in semi-annual installments through February
      15, 2010
    
    
    
    
    
    122
    
    
    1224.950%
      Fixed Series 2003 Bonds due in semi-annual installments through February
      15, 2013
    
    
    
    
    
    130
    
    
    1305.420%
      Fixed Series 2003 Bonds due in semi-annual installments through August 15,
      2015
    
    
    
    
    
    145
    
    
    1453.520%
      Fixed Series 2004 Bonds due in semi-annual installments through November
      15, 2009
    
    
    
    
    
    270
    
    
    —4.810%
      Fixed Series 2004 Bonds due in semi-annual installments through November
      15, 2012
    
    
    
    
    
    221
    
    
    —5.290%
      Fixed Series 2004 Bonds due in semi-annual installments through May 15,
      2016
    
    
    
    
    
    290
    
    
    —Total
      TXU Electric Delivery Transition Bond Company LLC
    
    1,258
    
    
    500Total
      TXU Electric Delivery
    
    4,381
    
    
    4,226
   **A-67**
  ****
    
    
    
    
    
    **December
      31,**
    
    
    **December
      31,****2004**
    
    
    **2003**US
      Holdings7.170%
      Fixed Senior Debentures due August 1, 2007
    
    
    
    
    
    10
    
    
    109.580%
      Fixed Notes due in semi-annual installments through December 4,
      2019
    
    
    
    
    
    68
    
    
    708.254%
      Fixed Notes due in quarterly installments through December 31,
      2021
    
    
    
    
    
    64
    
    
    662.494%
      Floating Rate Junior Subordinated Debentures, Series D due January 30,
      2037(d)
    
    
    
    
    
    1
    
    
    18.175%
      Fixed Junior Subordinated Debentures, Series E due January 30,
      2037
    
    
    
    
    
    8
    
    
    8Total
      US Holdings
    
    
    
    
    
    151
    
    
    155Total
      US Holdings consolidated
    
    7,789
    
    
    7,466Less
      amount due currently
    
    218
    
    
    249Total
      long-term debt
    $
    7,571
    
    $
    7,217


_________


(a)  These
series are in the multiannual mode and are subject to mandatory tender prior to
maturity on the mandatory remarketing date.


On such
date, the interest rate and interest rate period will be reset for the
bonds.


(b)  Interest
rates in effect at December 31, 2004. These series are in a flexible or weekly
rate mode and are classified as long-term as


they are
supported by long-term irrevocable letters of credit. Series in the flexible
mode will be remarketed for periods of less than


270
days.


(c)  Interest
rates swapped to floating on an aggregate $250 million principal
amount.


(d)  Interest
rates in effect at December 31, 2004.


(e)  These
bonds are nonrecourse to TXU Electric Delivery.





*Debt
Issuances and Retirement in 2004*





In
December 2004, TXU Energy Holdings repurchased $400 million of its floating rate
senior notes at par value. TXU Energy Holdings originally issued $800 million of
the senior notes in a private placement offering with registration rights in
July 2004. The notes bear interest at an annual rate equal to 3-month LIBOR,
reset quarterly, plus 0.78% and will mature on January 17, 2006.





On
September 28, 2004, portions of the Brazos River Authority Pollution Control
Revenue Refunding Bonds were redeemed at par as follows: $57 million of Series
2001C; $20 million of Series 2003C; $16 million of Series 2002A; $4 million of
series 1995B; and $3 million of Series 2001D.





In June
2004, TXU Electric Delivery’s wholly-owned, special purpose bankruptcy-remote
subsidiary, TXU Electric Delivery Transition Bond Company LLC, issued $790
million aggregate principal amount of transition (securitization) bonds in
accordance with the Settlement Plan and a financing order related to the
transition to competition. The bonds were issued in three classes that require
semi-annual interest and principal installment payments beginning in November
2004 through specified dates in 2009 through 2016. The transition bonds bear
interest at fixed annual rates ranging from 3.52% to 5.29%. TXU Electric
Delivery used the proceeds to retire two series of mortgage bonds with an
aggregate principal amount of $393 million due in 2025 and repurchase shares of
common stock from US Holdings for $375 million. US Holdings used the proceeds it
received to repay short-term borrowings. As a result of the retirement of these
two series of mortgage bonds, TXU Electric Delivery has the ability to release
the liens on its outstanding senior secured notes, making them rank equally with
TXU Electric Delivery’s other senior unsecured debt. No decision has been made
regarding the release of liens.





In April
2004, the Brazos River Authority Series 2001A pollution control revenue bonds,
with an aggregate principal amount of $121 million, were purchased upon
mandatory tender. TXU Energy Holdings intends to remarket these bonds at a later
date.





Other
retirements of long-term debt in 2004 totaling $261 million represent payments
at scheduled maturity dates.








**A-68**




US
Holdings uses fair value hedging strategies to manage its exposure to fixed
interest rates on long-term debt. At December 31, 2004, $250 million of fixed
rate debt had been effectively converted to variable rates through interest rate
swap transactions, expiring through 2008. These swaps qualified for and have
been designated as fair value hedges using the short-cut method of hedge
accounting provided by SFAS 133. As such, US Holdings assumes that changes in
the value of the derivative are exactly offset by changes in the value of the
debt; therefore, there is no hedge ineffectiveness recognized.
 
 In 2004,
fixed-to-variable swaps related to $1 billion debt were settled for a gain of
$22 million, which will be amortized to offset interest expense over the
remaining life of the related debt.


***Maturities
—*** Sinking
fund and maturity requirements **** for all
long-term debt instruments, excluding capital lease obligations, in effect at
December 31, 2004, were as follows:





**Year**2005
    
    $
    2172006
    
    
    4992007
    
    
    3132008
    
    
    3562009
    
    
    111Thereafter
    
    
    6,288Unamortized
      premium and discount and fair value adjustments
    
    
    (4
    )Capital
      lease obligations
    
    
    9Total
    
    $
    7,789


**


*Debt
Issuances and Retirements in 2003*





In 2003,
US Holdings and its consolidated subsidiaries issued $1.3 billion of fixed rate
senior notes, 567 million of pollution control revenue bonds, and $500 million
of transition (securitization) bonds and redeemed $663 of first mortgage bonds,
$637 of pollution control bonds, and $72 million of fixed rate senior notes.





***Preferred
Membership Interests*** ** — **** In July
2003, TXU Energy Holdings exercised its right to exchange its $750 million 9%
Exchangeable Subordinated Notes issued in November 2002 and due November 2012
for exchangeable preferred membership interests with identical economic and
other terms. The
preferred membership interests bear distributions at the annual rate of 9% and
permit the deferral of such distributions. The holders of the preferred
membership interests had the option to exchange these interests at any time,
subject to certain restrictions, for up to approximately 57 million shares of
TXU Corp. common stock at an exchange price of $13.1242 per share. At issuance
of the notes that were subsequently exchanged for the preferred membership
interests, TXU Energy Holdings recognized a capital contribution from TXU Corp.
and a corresponding discount on the securities of $266 million, which
represented the value of the exchange right as TXU Corp. granted an irrevocable
right to exchange the securities for TXU Corp. common stock. This discount is
being amortized to interest expense and related charges over the term of the
securities. As a result, the effective distribution rate on the preferred
membership interests is 16.2%. In April 2004, TXU Corp. purchased these
mandatorily redeemable securities from the holders, and as a result the
securities effectively represent TXU Energy Holdings debt held by TXU Corp.





**9.**  **PREFERRED
SECURITIES**





***Preferred
Stock of US Holdings ─*** At
December 31, 2004, US Holdings had 379,231 shares of cumulative, preferred stock
without par value outstanding with a total stated value of $38 million. Dividend
rates range from $4.00 to $5.08 per share. The preferred stock can be redeemed
at prices ranging from $101.79 per share to $112.00 per share.





The
holders of preferred stock of US Holdings have no voting rights except for
changes to the articles of incorporation that would change the rights or
preferences of such stock, authorize additional shares of stock or create an
equal or superior class of stock. They have the right to vote for the election
of directors only if certain dividend arrearages exist.





**10** **.**  **SHAREHOLDERS’
EQUITY**





For the
2004 reporting period, TXU Corp. early adopted SFAS 123R. Under SFAS 123R,
compensation expense related to share-based awards to US Holdings’ employees is
accounted for as a noncash capital contribution from the parent. Accordingly, US
Holdings recorded a $38 million credit to its common stock account in 2004. See
Note 11.





US
Holdings paid cash dividends to TXU Corp. of $775 million in 2004, $588 million
in 2003 and $927 million in 2002. In February 2005, US Holdings declared a
dividend of $175 million payable on April 1, 2005.





**A-69**


The legal
form of cash distributions to TXU Corp. has been both common stock repurchases
and the payment of dividends. For accounting purposes, the cash distributions in
the form of share repurchases are recorded as a return of capital.





Certain
debt instruments and preferred securities of US Holdings and its subsidiaries
contain provisions that restrict payment of dividends during any interest or
distribution payment deferral period or while any payment default exists. The
TXU Electric Delivery mortgage restricts the payment of dividends to the amount
of TXU Electric Delivery’s retained earnings. At December 31, 2004, US Holdings
and its subsidiaries were in compliance with these provisions.





**11** **.**  **STOCK
BASED COMPENSATION PLANS**





US
Holdings participates in TXU Corp.’s Long-Term Incentive Compensation Plan
(LTIP). LTIP is a stock-based compensation plan providing discretionary awards
(LTIP awards) of restricted stock and performance units payable in TXU Corp.
common stock for qualified management employees. During 2004, 2003, and 2002,
the Board of Directors granted LTIP awards that were issued subject to share
price performance and vesting requirements over two and three year periods. The
number of common shares to be ultimately distributed varies from 0% to 200% of
the initial number of LTIP awards, based on TXU Corp.’s total return to
shareholders over the applicable period compared to the total returns provided
by the companies comprising the Standard & Poor’s 500 Electric Utilities
Index. TXU Corp. has established restrictions that limit employees’
opportunities to liquidate vested stock awards. For both restricted stock and
performance unit awards, dividends over the vesting period are converted to
equivalent shares of TXU Corp. common stock to be distributed upon vesting.





Historically,
US Holdings has accounted for stock-based compensation plans using the intrinsic
value method under APB 25. Compensation expense over the vesting period was
remeasured each reporting period based on the market price of the stock and the
assumed number of shares distributable given the share price performance to
date. Reported compensation expense related to LTIP awards totaled $13 million
in 2003 and a credit of $1 million in 2002.





For the
2004 reporting period, TXU Corp early adopted SFAS 123R, which eliminates the
alternative of applying the intrinsic value measurement provisions of APB 25 to
stock compensation awards and requires the measurement of the cost of such
awards over the vesting period based on the grant-date fair value of the award.
US Holdings adopted SFAS 123R using the modified retrospective method, which
allows for application to only prior interim periods in the year of initial
adoption and resulted in the recognition of a $9 million ($6 million after-tax)
cumulative effect of change in accounting principle. For a portion of the 2004
period, the performance unit awards were payable in cash, but the awards were
modified in December of 2004 and will be payable in stock.





TXU Corp.
determined the fair value of its LTIP awards utilizing a valuation model that
takes into account three principal factors: the probability weighted expected
number of shares to be distributed upon vesting, the risk of uncertainty during
the vesting period, and the restrictions limiting liquidation of vested stock
awards. Based on the fair values determined under this model, US Holdings’
reported expense in 2004 related to LTIP awards totaled $33 million ($21 million
after-tax). As of December 31, 2004, unrecognized expense related to nonvested
LTIP awards totaled $26 million, which is expected to be recognized over a
weighted average period of two years.





Had
compensation expense for LTIP awards been determined based upon the fair value
methodology prescribed under SFAS 123, US Holdings’ net income would not have
been materially different for the years ended December 31, 2003 and 2002.








**A-70**








**12.**  **INCOME
TAXES**





T he
components of US Holdings' provision for income taxes for continuing operations
are as follows:





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**Current:US
      Federal
    
    $
    384
    
    $
    220
    
    $
    184State
    
    
    25
    
    
    9
    
    
    3Non-US
    
    
    —
    
    
    —
    
    
    1Total
    
    
    409
    
    
    229
    
    
    188Deferred:US
      Federal
    
    
    (86
    )
    
    141
    
    
    58State
    
    
    (18
    )
    
    —
    
    
    4Non-US
    
    
    —
    
    
    —
    
    
    —Total
    
    
    (104
    )
    
    141
    
    
    62Investment
      tax credits
    
    
    (23
    )
    
    (22
    )
    
    (26
    )Total
    
    $
    282
    
    $
    348
    
    $
    224





Reconciliation
of income taxes computed at the US federal statutory rate to provision for
income taxes:





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**Income
      from continuing operations before income taxes, extraordinary items and
      cumulativeeffect
      of changes in accounting principles
    
    $
    954
    
    $
    1,084
    
    $
    771Income
      taxes at the federal statutory rate of 35%
    
    $
    334
    
    $
    379
    
    $
    270Depletion
      allowance
    
    
    (25
    )
    
    (25
    )
    
    (25
    )Amortization
      of investment tax credits
    
    
    (23
    )
    
    (22
    )
    
    (26
    )Medicare
      subsidy
    
    
    (8
    )
    
    —
    
    
    —Amortization
      (under regulatory accounting) of statutory rate changes
    
    
    (8
    )
    
    (8
    )
    
    (8
    )Investment
      tax credits, deferred tax
    
    
    6
    
    
    6
    
    
    7Preferred
      securities costs
    
    
    6
    
    
    6
    
    
    —State
      income taxes, net of federal tax benefit
    
    
    5
    
    
    6
    
    
    5Other
    
    
    (5
    )
    
    6
    
    
    1Provision
      for income taxes
    
    $
    282
    
    $
    348
    
    $
    224Effective
      tax rate (on income before preferred stock dividends)
    
    
    29.6
    %
    
    32.1
    %
    
    29.1
    %








**A-71**





Deferred
income taxes for significant temporary differences based on tax laws in effect
at December 31, 2004 and 2003 balance sheet dates are as follows:

**December
      31,****2004**
    
    **2003****Total**
    
    **Current**
    
    **Noncurrent**
    
    **Total**
    
    **Current**
    
    **Noncurrent****Deferred
      Tax Assets**Unamortized
      investment tax credits
    
    $
    154
    
    $
    —
    
    $
    154
    
    $
    163
    
    $
    —
    
    $
    163Impairment
      of assets
    
    
    68
    
    
    —
    
    
    68
    
    
    168
    
    
    —
    
    
    168Nuclear
      asset retirement obligation
    
    
    151
    
    
    —
    
    
    151
    
    
    150
    
    
    —
    
    
    150Retail
      clawback liability
    
    
    33
    
    
    —
    
    
    33
    
    
    61
    
    
    —
    
    
    61Alternative
      minimum tax
    
    
    447
    
    
    —
    
    
    447
    
    
    452
    
    
    —
    
    
    452Net
      operating loss (NOL) carryforwards
    
    
    12
    
    
    —
    
    
    12
    
    
    24
    
    
    —
    
    
    24Employee
      benefit liabilities
    
    
    219
    
    
    —
    
    
    219
    
    
    182
    
    
    —
    
    
    182State
      income taxes
    
    
    7
    
    
    —
    
    
    7
    
    
    4
    
    
    —
    
    
    4Combustion
      turbine leases
    
    
    69
    
    
    —
    
    
    69
    
    
    13
    
    
    —
    
    
    13Other
    
    
    358
    
    
    122
    
    
    236
    
    
    266
    
    
    91
    
    
    175Total
    
    
    1,518
    
    
    122
    
    
    1,396
    
    
    1,483
    
    
    91
    
    
    1,392**Deferred
      Tax Liabilities**Depreciation
      differences and capitalizedconstruction
      costs
    
    
    3,919
    
    
    —
    
    
    3,919
    
    
    3,947
    
    
    —
    
    
    3,947Regulatory
      assets
    
    
    606
    
    
    —
    
    
    606
    
    
    623
    
    
    —
    
    
    623State
      income taxes
    
    
    48
    
    
    —
    
    
    48
    
    
    43
    
    
    —
    
    
    43Other
    
    
    147
    
    
    15
    
    
    132
    
    
    179
    
    
    18
    
    
    161Total
    
    
    4,720
    
    
    15
    
    
    4,705
    
    
    4,792
    
    
    18
    
    
    4,774**Net
      Deferred Tax (Asset) Liability**
    
    $
    3,202
    
    $
    (107
    )
    $
    3,309
    
    $
    3,309
    
    $
    (73
    )
    $
    3,382





At
December 31, 2004, US Holdings had approximately $447 million of alternative
minimum tax credit carryforwards available to offset future tax payments. These
tax credit carryforwards do not have expiration dates. At December 31, 2004, US
Holdings had net operating loss (NOL) carryforwards for federal income tax
purposes of $33 million that expire as follows: $17 million in 2022, $7 million
in 2023 and $9 million in 2024. The NOL carryforwards can be used to offset
future taxable income and it is expected that all NOL carryforwards will be
utilized prior to their expiration dates. US Holdings utilized $38 million of
NOL carryforwards in 2004.





US
Holdings’ income tax returns are subject to examination by applicable tax
authorities. The IRS is currently examining the returns of TXU Corp. and its
subsidiaries for the tax years ended 1993 through 2002. In management’s opinion,
an adequate provision has been made for any future taxes that may be owed as a
result of any examination.





**13.**  **PENSION
AND OTHER POSTRETIREMENT BENEFITS PLANS**





TXU
Energy Holdings and TXU Electric Delivery are participating employers in the TXU
Retirement Plan (Retirement Plan), a defined benefit pension plan sponsored by
TXU Corp. The Retirement Plan is a qualified pension plan under Section 401(a)
of the Internal Revenue Code of 1986, as amended (Code) and is subject to the
provisions of ERISA. Employees are eligible to participate in the Retirement
Plan upon their completion of one year of service and the attainment of age 21.
All benefits are funded by the participating employers. The Retirement Plan
provides benefits to participants under one of two formulas: (i) a cash balance
formula under which participants earn monthly contribution credits based on
their compensation and a combination of their age and years of service, plus
monthly interest credits, or (ii) a traditional defined benefit formula based on
years of service and the average earnings of the three years of highest
earnings. The cash balance interest component of the cash balance plan is
variable and is determined using the yield on 30-year Treasury bonds.





**A-72**


All
eligible employees hired after January 1, 2001 participate under the cash
balance formula. Certain employees who, prior to January 1, 2002, participated
under the traditional defined benefit formula, continue their participation
under that formula. Under the cash balance formula, future increases in earnings
will not apply to prior service costs. It is TXU Corp.’s policy to fund the
plans on a current basis to the extent deductible under existing federal tax
regulations. Such contributions, when made, are intended to provide not only for
benefits attributed to service to date, but also those expected to be earned in
the future.





TXU Corp.
also has supplemental retirement plans for management employees, the information
for which is included in the data below.





Pension
cost (benefit) applicable to TXU Energy Holdings and TXU Electric Delivery was
$44 million in 2004, $29 million in 2003 and ($4) million in 2002. Cash
contributions were $27 million, $17 million and $9 million in 2004, 2003 and
2002, respectively.





TXU
Energy Holdings and TXU Electric Delivery also participate with TXU Corp. and
certain other affiliated subsidiaries of TXU Corp. to offer certain health care
and life insurance benefits to eligible employees and their eligible dependents
upon the retirement of such employees. For employees retiring on or after
January 1, 2002, the retiree contributions required for such coverage vary based
on a formula depending on the retiree’s age and years of service. Postretirement
benefits cost other than pensions applicable to US Holdings was $63 million in
2004, $77 million in 2003, and $62 million in 2002. Cash contributions were $40
million, $41 million and $39 million in 2004, 2003 and 2002,
respectively.





The
pension and other postretirement benefits amounts provided represent allocations
of amounts related to TXU Corp.’s plans to TXU Energy Holdings and TXU Electric
Delivery.





In
addition, TXU Energy Holdings and TXU Electric Delivery employees are eligible
to participate in a qualified savings plan, the TXU Thrift Plan (Thrift Plan).
This plan is a participant-directed defined contribution profit sharing plan
qualified under Section 401(a) of the Code, and is subject to the provisions of
ERISA. The Thrift Plan includes an employee stock ownership component. Under the
terms of the Thrift Plan, as amended effective in 2002, employees who do not
earn more than the IRS threshold compensation limit used to determine highly
compensated employees may contribute, through pretax salary deferrals and/or
after-tax payroll, deductions, the maximum amount of their regular salary or
wages permitted under law. Employees who earn more than such threshold may
contribute from 1% to 16% of their regular salary or wages. Employee matching
contributions are also made in an amount equal to 100% of the first 6% of
employee contributions for employees who are covered under the cash balance
formula of the Retirement Plan, and 75% of the first 6% of employee
contributions for employees who are covered under the traditional defined
benefit formula of the Retirement Plan. Employer matching contributions are
invested in TXU Corp. common stock. TXU Energy Holdings’ and TXU Electric
Delivery’s contributions to the Thrift Plan, aggregated $20 million in 2004, $21
million in 2003, and $22 million in 2002.








**A-73**





**14** .  **FAIR
VALUE OF FINANCIAL INSTRUMENTS**





The
carrying amounts and related estimated fair values of US Holdings’ significant
financial instruments were as follows:


**December
      31, 2004**
    
    **December
      31, 2003****Carrying**
    
    **Fair**
    
    **Carrying**
    
    **Fair****Amount**
    
    **Value**
    
    **Amount**
    
    **Value****On
      balance sheet liabilities**:Long-term
      debt (including current maturities) (a)
    
    $
    7,780
    
    $
    8,356
    
    $
    7,453
    
    $
    8,122Exchangeable
      preferred membership interests of subsidiary,net
      of discount (b)
    
    
    511
    
    
    750
    
    
    497
    
    
    1,580Financial
      guarantees
    
    
    —
    
    
    —
    
    
    2
    
    
    1**Off
      balance sheet liabilities:**Financial
      guarantees
    
    $
    —
    
    $
    8
    
    $
    —
    
    $
    13


____________


(a)
Excludes capital leases.
 (b)
Exchanged for preferred membership interests (from subordinated notes) in 2003
and purchased by TXU Corp. in April 2004.
 Carrying
amount is net of discount. Fair value is assumed to be principal amount on the
preferred membership interests.


In
accordance with SFAS 133, financial instruments that are derivatives are
recorded on the balance sheet at fair value.





The fair
values of on balance sheet instruments are estimated at the lesser of either the
call price or the market value as determined by quoted market prices, where
available, or, where not available, at the present value of future cash flows
discounted at rates consistent with comparable maturities with similar credit
risk.





The fair
value of each financial guarantee is based on the difference between the credit
spread of the entity responsible for the underlying obligation and a financial
counterparty applied, on a net present value basis, to the notional amount of
the guarantee.





The
carrying amounts for financial assets classified as current assets and the
carrying amounts for financial liabilities classified as current liabilities
approximate fair value due to the short maturity of such instruments. The fair
values of other financial instruments, including the Capgemini put option, for
which carrying amounts and fair values have not been presented are not
materially different than their related carrying amounts.





**15.
DERIVATIVE FINANCIAL INSTRUMENTS**





For
derivative instruments designated as cash flow hedges, **** US
Holdings recognized a net unrealized ineffectiveness loss of $21 million ($14
million after-tax) in 2004, a net gain of $6 million ($4 million after-tax) in
2003 and a net loss of $41 million ($27 million after-tax) in 2002. The
ineffectiveness gains and losses related to commodity hedges and were reported
as a component of revenues.





The net
effect of unrealized mark-to-market ineffectiveness accounting, which includes
the above amounts as well as the effect of reversing unrealized gains and losses
recorded in previous periods to offset realized gains and losses in the current
period, totaled $19 million in net losses in 2004, $36 million in net gains in
2003 and $41 million in net losses in 2002.





The
maximum length of time US Holdings hedges its exposure to the variability of
future cash flows for forecasted energy-related transactions is approximately
four years.





In 2002,
US Holdings entered into certain cash flow hedges related to future forecasted
interest payments. These hedges were terminated later in 2002, and $133 million
($86 million after-tax) was recorded as a charge to other comprehensive income.
These losses are being amortized to earnings over a period of up to thirty
years, as the forecasted transactions remain probable of occurring.





**A-74**


Cash flow
hedge amounts reported in accumulated other comprehensive income will be
recognized in earnings as the related forecasted transactions are settled or are
deemed to be no longer probable of occurring. No amounts were reclassified into
earnings in 2004, 2003, or 2002 as a result of the discontinuance of cash flow
hedges because of the probability a hedged forecasted transaction would not
occur.





As of
December 31, 2004, US Holdings expects that $109 million ($71 million after-tax)
in accumulated other comprehensive loss will be recognized in earnings over the
next twelve months. This amount primarily represents amortization of
dedesignated hedge losses as the related hedged transactions are settled. The
following table summarized balances currently recognized in accumulated other
comprehensive income:





**Accumulated****Other
      Comprehensive Loss****at
      December 31, 2004****Treasury**
    
    **Commodity****Related**
    
    **Related**
    
    **Total**Dedesignated
      hedges (amounts fixed)
    
    $
    72
    
    $
    90
    
    $
    162Hedges
      subject to market price fluctuations
    
    
    —
    
    
    4
    
    
    4Total
    
    $
    72
    
    $
    94
    
    $
    166





**16.**  **RATES
AND REGULATION**





***Restructuring
Legislation***





As a
result of the 1999 Restructuring Legislation, on January 1, 2002, TXU Corp.
disaggregated (unbundled) its Texas electric utility business into a power
generation company, a retail electric provider and an electricity transmission
and distribution (delivery) utility. Unbundled electricity delivery utilities
within ERCOT, such as TXU Electric Delivery, remain regulated by the Public
Utility Commission of Texas (the Commission).





Effective
January 1, 2002, REPs affiliated with electricity delivery utilities were
required to charge price-to-beat rates, established by the Commission, to
residential and small business customers located in their historical service
territories. TXU Energy Holdings, whose REP is affiliated with an electricity
delivery utility, was required to charge the price-to-beat rate, adjusted for
fuel factor changes, to such classes of customers until the earlier of January
1, 2005 or the date on which 40% of the electricity consumed by customers in
that class is supplied by competing REPs. Currently, TXU Energy Holdings may
offer rates different from the price-to-beat rate to customers in that class,
but it must also continue to make the price-to-beat rate available for
residential and small business customers until January 1, 2007. In December
2003, the Commission found that TXU Energy Holdings had met the 40% requirement
to be allowed to offer alternatives to the price-to-beat rate for small business
customers in its historical service territory.





Under
amended Commission rules, effective in April 2003, affiliated REPs of utilities
are allowed to petition the Commission twice a year for a change in the fuel
factor component of their price-to-beat rates if the average price of natural
gas futures increases or decreases more than 5% (10% if the petition is filed
after November 15 of any year) from the level used to set the existing
price-to-beat fuel factor rate. TXU Energy Holdings implemented two
price-to-beat increases in both 2003 and 2004. ****





Also,
effective January 1, 2002, power generation companies affiliated with
electricity delivery utilities may charge unregulated prices in connection with
ERCOT wholesale power transactions. Estimated costs associated with TXU Energy
Holdings’ nuclear power plant decommissioning obligations continue to be
recovered by TXU Electric Delivery as an electricity distribution fee surcharge
over the life of the plant.





***Regulatory
Settlement Plan***





On
December 31, 2001, US Holdings filed a Settlement Plan with the Commission. It
resolved all major pending issues related to US Holdings’ transition to
competition pursuant to the 1999 Restructuring Legislation. The Settlement Plan,
which became final and nonappealable in January 2003, does not remove regulatory
oversight of TXU Electric Delivery’s business nor does it eliminate TXU Energy
Holdings’ price-to-beat rates and related fuel adjustments.





**A-75**


The major
elements of the Settlement Plan are:





***Excess
Mitigation Credit*** ** — Over
the two-year period ended December 31, 2003, TXU Electric Delivery implemented a
stranded cost excess mitigation credit in the amount of $389 million (originally
estimated to be $350 million), plus $26 million in interest, applied as a
reduction to distribution fees charged to all REPs, including TXU Energy
Holdings. The credit was funded through payments on a note receivable from TXU
Energy Holdings.





***Regulatory
Asset Securitization*** — US
Holdings received a financing order authorizing the issuance of securitization
(transition) bonds in the aggregate principal amount of up to $1.3 billion to
recover regulatory asset stranded costs and other qualified costs. Accordingly,
TXU Electric Delivery Transition Bond Company LLC, a bankruptcy remote financing
subsidiary of TXU Electric Delivery, issued an initial $500 million of
securitization bonds in 2003 and the remaining $790 million in the first half of
2004. The principal and interest on the bonds are recoverable through revenues
as a transition charge to all REPs, including TXU Energy Holdings. There is no
remaining issuance authorization under the financing order.





***Retail
Clawback***  ***Credit*** — The
Settlement Plan provides that a retail clawback credit will be implemented
unless 40% of the electricity consumed by residential and small business
customers in a REP’s historical service territory is supplied by competing REPs
after the first two years of competition. This threshold was reached for small
business customers, as discussed above, but not for residential customers. The
amount of the credit is equal to the number of residential customers retained by
TXU Energy Holdings in the historical service territory as of January 1, 2004,
less the number of new customers TXU Energy Holdings had added outside of the
historical service territory as of January 1, 2004, multiplied by $90. The
credit, which is being funded by TXU Energy Holdings, is being applied to
delivery fees charged by TXU Electric Delivery to REPs, including TXU Energy
Holdings, over a two-year period beginning January 1, 2004. In 2002, TXU Energy
Holdings recorded a charge to cost of energy sold of $185 million ($120 million
after-tax) to accrue an estimated retail clawback liability. In 2003, TXU Energy
Holdings reduced the liability to $173 million, with an offsetting credit to
earnings of $12 million ($8 million after-tax) to reflect the calculation of the
estimated liability applicable only to residential customers in accordance with
the Settlement Plan. In 2004, TXU Energy Holdings further reduced the estimated
liability by $12 million ($8 million after-tax) to reflect revised estimates of
customer counts, with an offsetting credit to earnings. As of December 31, 2004,
the balance of the retail clawback liability accrual was $82 million. As the
amount of the credit is based on numbers of customers over the related two-year
period, the liability is subject to further adjustments.





***Stranded
Costs and Fuel Cost Recovery*** — TXU
Energy Holdings’ stranded costs, not including regulatory assets, are fixed at
zero. US Holdings will not seek to recover its unrecovered fuel costs which
existed at December 31, 2001. Also, it will not conduct a final fuel cost
reconciliation, which would have covered the period from July 1998 until the
beginning of competition in January 2002.





See Note
5 for a discussion of extraordinary items recorded in 2004 and 2002 in
connection with the Settlement Plan.





***Summary***  —
Although US Holdings cannot predict future regulatory or legislative actions or
any changes in economic and securities market conditions, no changes are
expected in trends or commitments, other than those discussed in this report,
which might significantly alter its basic financial position, results of
operations or cash flows.








**A-76**





**17.**  **COMMITMENTS
AND CONTINGENCIES**





***Clean
Air Act*** — The
federal Clean Air Act, as amended (Clean Air Act) includes provisions which,
among other things, place limits on SO 2 and
NO x emissions produced by electricity generation plants. TXU Energy Holdings’
capital requirements have not been significantly affected by the requirements of
the Clean Air Act. In addition, all permits required for the air pollution
control provisions of the 1999 Restructuring Legislation have been applied for
and TXU Energy Holdings has initiated a construction program to install control
equipment to achieve the required reductions.





***Power
Purchase Contracts*** ** — Certain
contracts to purchase electricity provide for capacity payments to ensure
availability and provide for adjustments based on the actual power taken under
the contracts. Capacity payments under these contracts totaled $230 million in
both 2004 and 2003 and $296 million in 2002.





Expected
future capacity payments under existing agreements are estimated as follows:





2005
    
    $
    1082006
    
    
    562007
    
    
    182008
    
    
    ─2009
    
    
    ─Thereafter
    
    
    ─Total
      capacity payments
    
    $
    182





At
December 31, 2004, US Holdings had commitments for pipeline transportation and
storage reservation fees as follows:





2005
    
    $
    742006
    
    
    452007
    
    
    442008
    
    
    412009
    
    
    43Thereafter
    
    
    107Total
      pipeline transportation and storage reservation fees
    
    $
    354





On the
basis of US Holdings’ current expectations of demand from its electricity
customers as compared with its capacity and take-or-pay payments, management
does not consider it likely that any material payments will become due for
electricity not taken beyond capacity payments.





***Coal
Contracts*** — US
Holdings has commitments under coal purchase agreements and coal transportation
agreements as follows:





2005
    
    $
    962006
    
    
    1092007
    
    
    952008
    
    
    982009
    
    
    102Thereafter
    
    
    ─Total
    
    $
    500





***Leases*** — TXU
Energy Holdings and TXU Electric Delivery have entered into operating leases
covering various facilities and properties including generation plant
facilities, combustion turbines, transportation equipment, mining equipment,
data processing equipment and office space. Certain of these leases contain
renewal and purchase options and residual value guarantees. Lease costs charged
to operating expense totaled $147 million, $143 million and $152 million for
2004, 2003 and 2002, respectively.





**A-77**


As of
December 31, 2004, future minimum lease payments under both capital leases and
operating leases (with initial or remaining noncancelable lease terms in excess
of one year) were as follows:





**Capital**
    
    **Operating****Year**
    
    **Lease**
    
    **Lease**2005
    
    $
    2
    
    $
    772006
    
    
    2
    
    
    772007
    
    
    2
    
    
    802008
    
    
    2
    
    
    762009
    
    
    1
    
    
    73Thereafter
    
    
    2
    
    
    408Total
      future minimum lease payments
    
    
    11
    
    $
    791Less
      amounts representing interest
    
    
    2Present
      value of future minimum lease payments
    
    
    9Less
      current portion
    
    
    1Long-term
      capital lease obligations
    
    $
    8





***Guarantees*** — US
Holdings has entered into contracts that contain guarantees to outside parties
that could require performance or payment under certain conditions. These
guarantees have been grouped based on similar characteristics and are described
in detail below.





*Project
development guarantees* ****** — ****** In 1990,
US Holdings repurchased an electric co-op’s minority ownership interest in the
Comanche Peak nuclear generation plant and assumed the co-op’s indebtedness to
the US government for the facilities. US Holdings is making principal and
interest payments to the co-op in an amount sufficient for the co-op to make
payments on its indebtedness. US Holdings guaranteed the co-op’s payments, and
in the event that the co-op fails to make its payments on the indebtedness, the
US government would assume the co-op’s rights under the agreement, and such
payments would then be owed directly by US Holdings. At December 31, 2004, the
balance of the indebtedness was $131 million with maturities of principal and
interest extending to December 2021. The indebtedness is secured by a lien on
the purchased facilities.





*Residual
value guarantees in operating leases* ****** — ****** US
Holdings is the lessee under various operating leases that obligate it to
guarantee the residual values of the leased facilities. Accounting rules require
the recording of a liability for all guarantees entered into subsequent to
December 31, 2002. At December 31, 2004, the aggregate maximum amount of
residual values guaranteed was approximately $192 million with an estimated
residual recovery of approximately $129 million. The substantial majority of the
maximum guarantee amount relates to leases entered into prior to December 31,
2002. The average life of the lease portfolio is approximately six years.





*Debt
obligations of the parent —* TXU
Energy Holdings has provided a guarantee of the obligations under TXU Corp.’s
financing lease (approximately $120 million at December 31, 2004) for its
headquarters building.





*Letters
of credit* ****** — ****** TXU
Energy Holdings has entered into various agreements that require letters of
credit for financial assurance purposes. Approximately $383 million of letters
of credit were outstanding at December 31, 2004 to support existing floating
rate pollution control revenue bond debt of approximately $375 million. The
letters of credit are available to fund the payment of such debt obligations.
These letters of credit have expiration dates in 2008.





TXU
Energy Holdings has outstanding letters of credit in the amount of $9 million
for miscellaneous credit support requirements. Although the average life of the
letters of credit is approximately one year, the obligation to provide
guarantees is ongoing.





TXU
Energy Holdings has outstanding letters of credit in the amount of $99 million
to support hedging and risk management margin requirements in the normal course
of business. As of December 31, 2004, approximately 27% of the obligations
supported by these letters of credit mature within one year, and substantially
all of the remainder mature in the next three years.





**A-78**


*Surety
bonds* ****** — ****** US
Holdings has outstanding surety bonds of approximately $30 million to support
performance under various subsidiary contracts and legal obligations in the
normal course of business. The term of the surety bond obligations is
approximately one year.





*Other* — US
Holdings has entered into contracts with public agencies to purchase cooling
water for use in the generation of electric energy and has agreed, in effect, to
guarantee the principal, $6 million at December 31, 2004, and interest on bonds
issued by the agencies to finance the reservoirs from which the water is
supplied. The bonds mature in 2011 and have an interest rate of 5.50%. US
Holdings is required to make periodic payments equal to such principal and
interest, including amounts assumed by a third party and reimbursed to US
Holdings. In addition, US Holdings is obligated to pay certain variable costs of
operating and maintaining the reservoirs. US Holdings has assigned to a
municipality all its contract rights and obligations in connection with $1
million remaining principal amount of bonds at December 31, 2004, issued for
similar purposes, which had previously been guaranteed by US Holdings. US
Holdings is, however, contingently liable in the event of default by the
municipality.





***Labor
Contracts*** **** — Approximately
1,750 TXU Energy Holdings employees and 175 TXU Electric Delivery employees are
represented by labor unions and covered by collective bargaining agreements with
varying expiration dates. These agreements generally cover two to three year
periods; however, as is normal practice in the industry, wages and benefits are
established annually. Negotiations are currently underway with respect to the
collective bargaining agreement covering employees at the Comanche Peak plant
and discussions are expected to begin in the fall of 2005 regarding the
agreements with employees in TXU Energy Holdings’ other power production and
mining operations. The TXU Electric Delivery bargaining agreement will expire in
2007 and wages and benefits will be negotiated in the fall of 2005. Management
does not anticipate that any changes in collective bargaining agreements will
have a material affect on TXU Corp.’s financial position, results of operations
or cash flows; however, TXU Corp. is unable to predict the ultimate outcome of
these labor negotiations.





***Nuclear
Insurance*** — With
regard to liability coverage, the Price-Anderson Act (Act) provides financial
protection for the public in the event of a significant nuclear power plant
incident. The Act sets the statutory limit of public liability for a single
nuclear incident at $10.8 billion currently and requires nuclear power plant
operators to provide financial protection for this amount. The Act is being
considered by the United States Congress for modification and extension. The
terms of a modification, if any, are not presently known and therefore TXU Corp.
is unable, at this time, to determine any impact it may have on nuclear
liability coverage. As required, TXU Corp. provides this financial protection
for a nuclear incident at Comanche Peak resulting in public bodily injury and
property damage through a combination of private insurance and industry-wide
retrospective payment plans. As the first layer of financial protection, TXU
Corp. has $300 million of liability insurance from American Nuclear Insurers
(ANI), which provides such insurance on behalf of a major stock insurance
company pool, Nuclear Energy Liability Insurance Association. The second layer
of financial protection is provided under an industry-wide retrospective payment
program called Secondary Financial Protection (SFP).





Under the
SFP, each operating licensed reactor in the US is subject to an assessment of up
to $100.6 million, subject to increases for inflation every five years, in the
event of a nuclear incident at any nuclear plant in the US. Assessments are
limited to $10 million per operating licensed reactor per year per incident. All
assessments under the SFP are subject to a 3% insurance premium tax, which is
not included in the above amounts.





With
respect to nuclear decontamination and property damage insurance, NRC
regulations require that nuclear plant license-holders maintain not less than
$1.1 billion of such insurance and require the proceeds thereof to be used to
place a plant in a safe and stable condition, to decontaminate it pursuant to a
plan submitted to and approved by the NRC before the proceeds can be used for
plant repair or restoration or to provide for premature decommissioning. TXU
Corp. maintains nuclear decontamination and property damage insurance for
Comanche Peak in the amount of $3.4 billion, above which TXU Corp. is
self-insured. The primary layer of coverage of $500 million is provided by
Nuclear Electric Insurance Limited (NEIL), a nuclear electric utility industry
mutual insurance company. The remaining coverage includes premature
decommissioning coverage provided by NEIL in the amount of $2.25 billion and
$661 million from other insurance markets and foreign nuclear insurance pools.
TXU Corp. is subject to a maximum annual assessment from NEIL of $31.5 million.





**A-79**


TXU Corp.
maintains Accidental Outage Insurance through NEIL to cover the additional costs
of obtaining replacement power from another source if one or both of the units
at Comanche Peak are out of service for more than twelve weeks as a result of
covered direct physical damage. The coverage provides for weekly payments of
$3.5 million for the first fifty-two weeks and $2.8 million for the next 110
weeks for each outage, respectively, after the initial twelve-week period. The
total maximum coverage is $490 million per unit. The coverage amounts applicable
to each unit will be reduced to 80% if both units are out of service at the same
time as a result of the same accident. Under this coverage, TXU Corp. is subject
to a maximum annual assessment of $8.8 million.





There
have been some revisions made to the nuclear property and nuclear liability
insurance policies regarding the maximum recoveries available for multiple
terrorism occurrences. Under the NEIL policies, if there were multiple terrorism
losses occurring within a one-year time frame, NEIL would make available one
industry aggregate limit of $3.24 billion plus any amounts it recovers from
other sources up to the limits for each claimant. If terrorism losses occurred
beyond the one-year period, a new set of limits and resources would apply. Under
the ANI liability policy, the liability arising out of terrorist acts will be
subject to one industry aggregate limit of $300 million that could be reinstated
at ANI’s option depending on prevailing risk circumstances and the balance in
the Industry Credit Rating Plan reserve fund. Under the US Terrorism Risk
Insurance Act of 2002, the US government provides reinsurance with respect to
acts of terrorism in the US for losses caused by an individual or individuals
acting on behalf of foreign parties. In such circumstances, the NEIL and ANI
terrorism aggregates would not apply.





***Nuclear
Decommissioning*** ** — Through
December 31, 2001, decommissioning costs were recovered from consumers based
upon a 1992 site-specific study through rates placed in effect under US
Holdings’ January 1993 rate increase request. Effective January 1, 2002,
decommissioning costs are recovered through a tariff charged to REPs by TXU
Electric Delivery based upon a 1997 site-specific study, adjusted for trust fund
assets, as a component of delivery fees effective under TXU Corp.’s 2001
Unbundled Cost of Service filing. Amounts recovered through regulated rates are
deposited in external trust funds (see Note 6 under *Investments* ). An
updated decommissioning study is in the process of being completed. It is
anticipated that no material change in the decommissioning funding will be
required.





See Note
3 for a discussion of the impact of SFAS 143 on accounting for nuclear
decommissioning costs.





***Legal
Proceedings —*** On
February 18, 2005, a lawsuit was filed by Utility Choice, L.P. and Cirro Group,
Inc. in the United States District Court for the Southern District of Texas,
Houston Division, against TXU Corp. and certain of its subsidiaries, as well as
various other wholesale market participants doing business in ERCOT, claiming
generally that defendants engaged in a variety of anticompetitive conduct,
including market manipulation in violation of antitrust and other laws. TXU
Corp. believes that claims against it and its subsidiary companies are without
merit, and TXU Corp. and its subsidiaries intend to vigorously defend the
lawsuit. TXU Corp. is, however, unable to estimate any possible loss or predict
the outcome of this action.





Between
October 19 and December 30, 2004, ten lawsuits were filed by purported customers
in various California superior courts against TXU Corp., TXU Energy Trading Co.
and TXU Energy Services and other marketers, traders, transporters and sellers
of natural gas. Plaintiffs allege that beginning at least by the summer of 2000,
defendants manipulated and fixed at artificially high levels natural gas prices
in California in violation of the Cartwright Act and other California state
laws. These lawsuits have been coordinated in the San Diego Superior Court with
numerous other natural gas actions as "In re Natural Gas Anti-Trust Cases I, II,
III, IV and V." TXU Corp. believes the claims against TXU Corp. and its
subsidiaries are without merit, and intends to vigorously defend the lawsuits.
TXU Corp. is, however, unable to estimate any possible loss or predict the
outcome of these actions.





On July
7, 2003, a lawsuit was filed by Texas Commercial Energy (TCE) in the United
States District Court for the Southern District of Texas, Corpus Christi
Division, against TXU Energy Holdings and certain of its subsidiaries, as well
as various other wholesale market participants doing business in ERCOT, claiming
generally that defendants engaged in market manipulation, in violation of
antitrust and other laws, primarily during the period of extreme weather
conditions in late February 2003. An amended complaint was filed in February
2004 that joined additional, unaffiliated defendants. Three retail electric
providers filed motions for leave to intervene in the action alleging claims
substantially identical to TCE’s. In addition, approximately 25 purported former
customers of TCE filed a motion to intervene in the action alleging claims
substantially identical to TCE’s, both on their own behalf and on behalf of a
putative class of all former customers of TCE. An order granting TXU Energy
Holdings’ Motion to Dismiss based on the filed rate doctrine was entered on June
24, 2004. TCE has appealed the dismissal; however, US Holdings believes the
dismissal of the antitrust claims was proper and that it has not committed any
violation of the antitrust laws. The appeal remains pending before the Fifth
Circuit Court of Appeals. Further, the Commission’s investigation of the market
conditions in late February 2003 has not resulted in any finding adverse to US
Holdings. Accordingly, US Holdings believes that TCE’s and the intervenors’
claims are without merit, and intends to vigorously defend the lawsuit on
appeal. US Holdings is, however, unable to estimate any possible loss or predict
the outcome of this action.





**A-80**


On April
28, 2003, a lawsuit was filed by a former employee of TXU Portfolio Management
in the United States District Court for the Northern District of Texas, Dallas
Division, against TXU Corp., TXU Energy Holdings and TXU Portfolio Management.
The case is set for trial on June 6, 2005 and discovery in the case is
substantially complete. In the case, the plaintiff asserts claims under Section
806 of Sarbanes-Oxley arising from the termination of plaintiff’s employment and
claims for breach of contract relating to payment of certain bonuses. Plaintiff
seeks back pay, payment of bonuses and alternatively, reinstatement or future
compensation, including bonuses. US Holdings believes the plaintiff’s claims are
without merit. The plaintiff was terminated as the result of a reduction in
force, not as a reaction to any concerns the plaintiff had expressed, and
plaintiff was not in a position to evaluate TXU Corp.’s financial statements or
assess the adequacy of TXU Corp.’s financial disclosures. Thus, US Holdings does
not believe that there is any merit to the plaintiff’s claims under
Sarbanes-Oxley. TXU Corp. disputes the plaintiff’s claims and intends to
vigorously defend the litigation. US Holdings is, however, unable to estimate
any possible loss or predict the outcome of this action.





On March
10, 2003, a lawsuit was filed by Kimberly P. Killebrew in the United States
District Court for the Eastern District of Texas, Lufkin Division, against TXU
Corp. and TXU Portfolio Management, asserting generally that defendants engaged
in manipulation of the wholesale electric market, in violation of antitrust and
other laws. This case was transferred to the Beaumont Division of the Eastern
District of Texas and on March 24, 2004 was transferred to the Northern District
of Texas, Dallas Division. This action is brought by an individual, alleging to
be a retail consumer of electricity, on behalf of herself and as a proposed
representative of a putative class of retail purchasers of electricity that are
similarly situated. Defendants have filed a motion to dismiss the lawsuit which
is pending before the court; however, as a result of the dismissal of the
antitrust claims in the litigation described above brought by TCE, the parties
have agreed to stay this litigation until the appeal in the TCE case has been
decided. US Holdings believes that the plaintiff lacks standing to assert any
antitrust claims and that defendants have not violated antitrust laws or other
laws as claimed by plaintiff. Therefore, US Holdings believes that plaintiff’s
claims are without merit and plans to vigorously defend the lawsuit. US Holdings
is however, unable to estimate any possible loss or predict the outcome of this
action.





On March
18, 2005, TXU Corp. received a subpoena from the SEC. The subpoena requires TXU
Corp. to produce documents and other information for the period from January 1,
2001 to March 31, 2003 relating to, among other things, the financial distress
at TXU Europe during 2002 and the resulting financial condition of TXU Corp.,
TXU Corp.’s reduction of its quarterly dividend in October 2002, and the
following two previously disclosed claims against TXU Corp. and certain other
persons named in such claims: (i) a lawsuit brought in April 2003 by a former
employee of TXU Portfolio Management, William J. Murray (Murray Litigation) and
(ii) various consolidated lawsuits brought by various shareholders of TXU Corp.
during late 2002 and January 2003 (Shareholders’ Litigation). The documents
accompanying the subpoena state that (i) the SEC is conducting a fact-finding
inquiry for purposes of allowing it to determine whether there have been any
violations of the federal securities laws and (ii) the request does not mean the
SEC has concluded that TXU Corp. or any other person has violated the law.





Although
TXU Corp. cannot predict the outcome of the SEC inquiry, as previously
disclosed, TXU Corp. does not believe that there is any merit to the claims made
in the Murray Litigation and it intends to vigorously defend such litigation. In
addition, TXU Corp. has executed a memorandum of understanding regarding the
settlement of the Shareholders’ Litigation. TXU Corp. expects to execute a final
agreement containing the terms of such settlement during the second quarter of
2005.





TXU Corp.
intends to cooperate with the SEC and is in the process of responding to the
subpoena.





**A-81**


***General*** — In
addition to the above, US Holdings is involved in various other legal and
administrative proceedings in the normal course of business the ultimate
resolution of which, in the opinion of management, should not have a material
effect upon its financial position, results of operations or cash flows.





**18.**  **SEGMENT
INFORMATION**





US
Holdings has two reportable business segments: TXU Energy Holdings and TXU
Electric Delivery. The segments are managed separately because they are
strategic business units that offer different products or services and involve
different risks.





**TXU
Energy Holdings** -
consists of operations,
principally in the competitive Texas market, involving power production
(electricity generation) and retail and wholesale energy. The chief executive
officer of TXU Corp. manages these operations as an integrated business,
principally because of natural gas price and other risks associated with
balancing owned generation supply with sales demand.





**TXU
Electric Delivery**  -
consists of regulated operations
involving the transmission and distribution of electricity in Texas.





The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. US Holdings evaluates performance
based on income from continuing operations before extraordinary items and
cumulative effect of changes in accounting principles. US Holdings accounts for
intersegment sales and transfers as if the sales or transfers were to third
parties, that is, at current market prices.





No
customer provided more than 10% of consolidated revenues.





**A-82**











**TXU
      Energy**
    
    **TXU
      Electric****Holdings**
    
    **Delivery**
    
    **Other**
    
    **Eliminations**
    
    **Consolidated**Operating
      Revenues2004
    
    
    8,495
    
    
    2,226
    
    
    5
    
    
    (1,432
    )
    
    9,2942003
    
    
    7,986
    
    
    2,087
    
    
    —
    
    
    (1,500
    )
    
    8,5732002
    
    
    7,678
    
    
    1,994
    
    
    —
    
    
    (1,592
    )
    
    8,080Regulated
      Revenues - Included in Operating Revenues2004
    
    
    —
    
    
    2,226
    
    
    —
    
    
    (1,420
    )
    
    8062003
    
    
    —
    
    
    2,087
    
    
    —
    
    
    (1,488
    )
    
    5992002
    
    
    —
    
    
    1,994
    
    
    —
    
    
    (1,582
    )
    
    412Affiliated
      Revenues - Included in Operating Revenues2004
    
    
    10
    
    
    1,420
    
    
    2
    
    
    (1,432
    )
    
    —2003
    
    
    11
    
    
    1,489
    
    
    —
    
    
    (1,500
    )
    
    —2002
    
    
    6
    
    
    1,586
    
    
    —
    
    
    (1,592
    )
    
    —Depreciation
      and Amortization2004
    
    
    350
    
    
    389
    
    
    —
    
    
    —
    
    
    7392003
    
    
    407
    
    
    297
    
    
    —
    
    
    —
    
    
    7042002
    
    
    450
    
    
    264
    
    
    —
    
    
    —
    
    
    714Equity
      in Earnings (Losses) ofSubsidiaries
      -Unconsolidated
      Subsidiaries2004
    
    
    (5
    )
    
    (2
    )
    
    —
    
    
    —
    
    
    (7
    )2003
    
    
    (1
    )
    
    —
    
    
    —
    
    
    —
    
    
    (1
    )2002
    
    
    (2
    )
    
    —
    
    
    —
    
    
    —
    
    
    (2
    )Interest
      Income2004
    
    
    31
    
    
    56
    
    
    36
    
    
    (85
    )
    
    382003
    
    
    8
    
    
    52
    
    
    20
    
    
    (61
    )
    
    192002
    
    
    10
    
    
    49
    
    
    44
    
    
    (97
    )
    
    6Interest
      Expense and Related Charges2004
    
    
    353
    
    
    280
    
    
    47
    
    
    (85
    )
    
    5952003
    
    
    323
    
    
    300
    
    
    43
    
    
    (61
    )
    
    6052002
    
    
    215
    
    
    265
    
    
    57
    
    
    (97
    )
    
    440Income
      Tax Expense (Benefit)2004
    
    
    162
    
    
    116
    
    
    4
    
    
    —
    
    
    2822003
    
    
    231
    
    
    126
    
    
    (9
    )
    
    —
    
    
    3482002
    
    
    117
    
    
    117
    
    
    (11
    )
    
    1
    
    
    224Income
      from continuing operations beforeextraordinary
      items and cumulative effect ofchanges
      in accounting principles2004
    
    
    408
    
    
    255
    
    
    9
    
    
    —
    
    
    6722003
    
    
    497
    
    
    258
    
    
    (19
    )
    
    —
    
    
    7362002
    
    
    322
    
    
    245
    
    
    (20
    )
    
    —
    
    
    547Investment
      in Equity Investees2004
    
    
    31
    
    
    11
    
    
    —
    
    
    —
    
    
    422003
    
    
    1
    
    
    —
    
    
    —
    
    
    —
    
    
    12002
    
    
    3
    
    
    —
    
    
    —
    
    
    —
    
    
    3Total
      Assets2004
    
    
    14,515
    
    
    9,493
    
    
    1,357
    
    
    (1,402
    )
    
    23,963*2003
    
    
    14,148
    
    
    9,316
    
    
    593
    
    
    (987
    )
    
    23,070*2002
    
    
    15,789
    
    
    9,015
    
    
    967
    
    
    (894
    )
    
    24,877*Capital
      Expenditures2004
    
    
    281
    
    
    600
    
    
    —
    
    
    —
    
    
    8812003
    
    
    163
    
    
    543
    
    
    —
    
    
    —
    
    
    7062002
    
    
    284
    
    
    513
    
    
    —
    
    
    —
    
    
    797










* Assets by segment exclude investments in
affiliates.





**A-83**








**19.**  **SUPPLEMENTARY
FINANCIAL INFORMATION**





***Regulated
Versus Unregulated Operations*** — ****





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**Operating
      revenuesRegulated
    
    $
    2,226
    
    $
    2,087
    
    $
    1,994Unregulated
    
    
    8,500
    
    
    7,986
    
    
    7,678Intercompany
      sales eliminations - regulated
    
    
    (1,420
    )
    
    (1,488
    )
    
    (1,582
    )Intercompany
      sales eliminations - unregulated
    
    
    (12
    )
    
    (12
    )
    
    (10
    )Total
      operating revenues
    
    
    9,294
    
    
    8,573
    
    
    8,080Costs
      and operating expensesCost
      of energy sold and delivery fees - unregulated*
    
    
    3,836
    
    
    3,620
    
    
    3,181Operating
      costs - regulated
    
    
    730
    
    
    709
    
    
    676Operating
      costs - unregulated
    
    
    703
    
    
    682
    
    
    696Depreciation
      and amortization- regulated
    
    
    389
    
    
    297
    
    
    264Depreciation
      and amortization- unregulated
    
    
    350
    
    
    407
    
    
    450Selling,
      general and administrative expenses - regulated
    
    
    219
    
    
    207
    
    
    213Selling,
      general and administrative expenses - unregulated
    
    
    667
    
    
    637
    
    
    773Franchise
      and revenue-based taxes - regulated
    
    
    248
    
    
    250
    
    
    272Franchise
      and revenue-based taxes - unregulated
    
    
    118
    
    
    125
    
    
    138Other
      income
    
    
    (142
    )
    
    (52
    )
    
    (38
    )Other
      deductions
    
    
    665
    
    
    21
    
    
    250Interest
      income
    
    
    (38
    )
    
    (19
    )
    
    (6
    )Interest
      expense and other charges
    
    
    595
    
    
    605
    
    
    440Total
      costs and expenses
    
    
    8,340
    
    
    7,489
    
    
    7,309Income
      from continuing operations before income taxes,extraordinary
      (gain) / loss and cumulative effect of changesin
      accounting principles
    
    $
    954
    
    $
    1,084
    
    $
    771








_______________


*Includes
unregulated cost of fuel consumed of $971 million in 2004, $1,467 million in
2003 and $1,325 million 2002. The balance represents energy purchased for resale
and delivery fees.





The
operations of the TXU Energy Holdings segment are included above as unregulated,
as the Texas market is now open to competition. However, retail pricing to
residential customers in the historical service territory continues to be
subject to certain price controls as discussed in Note 16.





**A-84**








***Other
Income and Deductions*** — ****





**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**Other
      income:Net
      gain on sale of properties and businesses
    
    $
    135
    
    $
    45
    
    $
    32Equity
      portion of allowance for funds used during construction
    
    
    4
    
    
    4
    
    
    3Other
    
    
    3
    
    
    3
    
    
    3Total
      other income
    
    $
    142
    
    $
    52
    
    $
    38Other
      deductions:Asset
      write-down and lease termination charges
    
    $
    375
    
    $
    2
    
    $
    237Employee
      severance charges
    
    
    127
    
    
    ─
    
    
    ─Power
      purchase contract settlement
    
    
    101
    
    
    ─
    
    
    ─Rate
      case settlement
    
    
    21
    
    
    ─
    
    
    ─Capgemini
      transition costs
    
    
    14
    
    
    ─
    
    
    ─Equity
      losses of unconsolidated entities
    
    
    7
    
    
    ─
    
    
    ─Expenses
      related to cancelled construction projects
    
    
    6
    
    
    6
    
    
    7Debt
      extinguishment losses
    
    
    1
    
    
    3
    
    
    ─Premium
      on redemption of preferred stock
    
    
    ─
    
    
    3
    
    
    ─Loss
      on sale of properties
    
    
    ─
    
    
    ─
    
    
    2Transaction-related
      fees
    
    
    2
    
    
    ─
    
    
    ─Other
    
    
    11
    
    
    7
    
    
    4Total
      interest expense and related charges
    
    $
    665
    
    $
    21
    
    $
    250





***Severance
Liability Related to Restructuring Activities —***


**TXU
      Electric Delivery**
    
    **TXU
      Energy Holdings**
    
    **Total**Liability
      for severance costs as of December 31, 2003
    
    $
    ─
    
    $
    2
    
    $
    2Additions
      to liability
    
    
    14
    
    
    81
    
    
    95Payments
      charged against liability
    
    
    (2
    )
    
    (37
    )
    
    (39
    )Other
      adjustments to the liability
    
    
    ─
    
    
    (4
    )
    
    (4
    )Liability
      for severance costs as of December 31, 2004
    
    $
    12
    
    $
    42
    
    $
    54





The above
table excludes severance capitalized as a regulatory asset, included in
discontinued operations and allocations from TXU Corp .





**A-85**








***Interest
Expense and Related Charges*** ** —


**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**Interest
      (a)
    
    $504
    
    $551
    
    $434Distributions
      on preferred membership interests (b)
    
    68
    
    34
    
    ─Amortization
      of debt discounts and issuance costs
    
    35
    
    31
    
    17Capitalized
      interest, including debt portion of allowance for borrowedfunds
      used during construction
    
    (12)
    
    (11)
    
    (11)Total
      interest expense and related charges
    
    $595
    
    $605
    
    $440


(a)  Included
in interest for the period ended December 31, 2003 is $34 million related to the
exchangeable subordinated notes that were exchanged
for preferred membership interest in July 2003.
 
 (b)  In April
2004, TXU Corp. purchased from the holders TXU Energy Holdings’ preferred
membership interest, and subsequent to this purchase,
TXU Energy Holdings has paid distributions
 on
 the preferred
membership interests to TXU Corp.


FIN 46
and SFAS 150 have affected the balance sheet presentation of mandatorily
redeemable securities. However, there has been no effect on the presentation of
related interest charges on the income statement.





***Regulatory
Assets and Liabilities*** ** —


**December
      31,****2004**
    
    **2003****Regulatory
      Assets**Generation-related
      regulatory assets securitized by transition bonds
    
    $
    1,607
    
    $
    1,654Securities
      reacquisition costs
    
    
    125
    
    
    121Recoverable
      deferred income taxes — net
    
    
    109
    
    
    96Other
      regulatory assets
    
    
    153
    
    
    95Total
      regulatory assets
    
    
    1,994
    
    
    1,966**Regulatory
      Liabilities**Investment
      tax credit and protected excess deferred taxes
    
    
    79
    
    
    88Over-collection
      of transition bond (securitization) revenues
    
    
    23
    
    
    6Other
      regulatory liabilities
    
    
    1
    
    
    —Total
      regulatory liabilities
    
    
    103
    
    
    94**Net
      regulatory assets**
    
    $
    1,891
    
    $
    1,872





Included
in net regulatory assets are assets of $121 million at both December 31, 2004
and 2003 that are earning a return. The regulatory assets, other than those
subject to securitization, have a remaining recovery period of 15 to 46
years.





Included
in other regulatory assets as of December 31, 2004 was $30 million related to
nuclear decommissioning liabilities.





**A-86**








***Restricted
Cash*** —


**Balance
      Sheet Classification**
      **at
      December 31, 2004****Current
      Assets**
    
    **Investments**Customer
      collections related to securitization bonds used only toservice
      debt and pay expenses
    
    $
    43
    
    $
    —Payment
      of fees associated with securitization bonds
    
    
    —
    
    
    10Reserve
      for shortfalls of transition charges
    
    
    —
    
    
    3Demolition
      and relocation work to be performed by US Holdingsrelated
      to the sale of land
    
    
    6
    
    
    15Total
    
    $
    49
    
    $
    28





***Affiliate
Transactions*** — The
following represent significant affiliate transactions of US
Holdings:





·
    The
      average daily balance of short-term advances to affiliates during the year
      ended December 31, 2004 was $900 million and the average daily balance of
      short-term advances from affiliates during the years ended December 31,
      2003 and 2002 were $658 million and $821 million, respectively. Interest
      income earned on the advances for the year ended December 31, 2004 was $26
      million and the interest expense incurred on the advances for the years
      ended December 31, 2003 and 2002 were $18 million and $23 million,
      respectively. The weighted average interest rate was 2.9%, 2.8% and 2.6%
      for the years ended December 31, 2004, 2003 and 2002,
      respectively.


·
    TXU
      Corp. charges US Holdings for certain financial, accounting, information
      technology, environmental, procurement and personnel services and other
      administrative services at cost. For the years ended December 31, 2004,
      2003 and 2002, these costs totaled $286 million, $331 million and $428
      million, respectively, and are primarily included in SG&A expenses.
      Effective July 1, 2004, under the ten year service agreement with
      Capgemini, several of the functions previously performed by TXU Corp. are
      now provided by Capgemini. (see Note 1 for further
      discussion).


·
    US
      Holdings charged TXU Gas for meter reading and certain customer and
      administrative support services. For the years ended December 31, 2004,
      2003, and 2002, these charges totaled $29 million, $56 million and $57
      million, respectively, and are largely reported as a reduction in
      operation and maintenance expenses. On October 1, 2004, TXU Gas and Atmos
      Energy Corporation completed a merger by division in which Atmos Energy
      Corporation acquired TXU Gas’ operations. US Holdings will continue to
      provide meter reading services and shared facility services to Atmos
      Energy Corporation under a transition service agreement, but customer and
      administrative support services are now provided by
    Capgemini.


·
    In
      April 2004, TXU Corp. purchased from holders TXU Energy Holdings’
      exchangeable preferred membership interest, and as a result TXU Energy
      Holdings has paid distributions to TXU Corp. on these securities, which
      remain outstanding, since the purchase. Interest expense and related
      charges associated with these securities, including amortization of the
      related discount, totaled $57 million for the year ended December 31, 2004
      since the date of TXU Corp.’s purchase of the
  securities.





***Accounts
Receivable*** — At
December 31, 2004 and 2003, accounts receivable of $1.2 billion and $1.0 billion
are stated net of allowance for uncollectible accounts of $16 million and $53
million, respectively. During 2004, bad debt expense was $90 million, account
write-offs were $121 million and other activity decreased the allowance for
uncollectible accounts by $6 million. During 2003, bad debt expense was $119
million, account write-offs were $125 million and other activity decreased the
allowance for uncollectible accounts by $13 million. Allowances related to
receivables sold are reported in current liabilities and totaled $47 million and
$40 million at December 31, 2004 and 2003, respectively.





Accounts
receivable included $422 million and $411 million of unbilled revenues at
December 31, 2003 and 2002, respectively.





**A-87**





***Intangible
Assets —*** SFAS 142
became effective on January 1, 2002. SFAS 142 requires, among other things, the
allocation of goodwill to reporting units based upon current fair value of the
reporting units, and the discontinuance of goodwill amortization. SFAS 142 also
requires the following disclosure regarding intangible assets (other than
goodwill) that are amortized or not amortized :
 
 **As
      of December 31, 2004**
    
    **As
      of December 31, 2003****Gross**
    
    
    
    
    
    **Gross****Carrying**
    
    **Accumulated**
    
    
    
    **Carrying**
    
    **Accumulated****Amount**
    
    **Amortization**
    
    **Net**
    
    **Amount**
    
    **Amortization**
    
    **Net**Intangible
      assets subject to amortization(included
      in property, plant and equipment):Capitalized
      software
    
    $
    61
    
    $
    28
    
    $
    33
    
    $
    400
    
    $
    184
    
    $
    216Land
      easements
    
    
    173
    
    
    61
    
    
    112
    
    
    176
    
    
    66
    
    
    110Mineral
      rights and other
    
    
    31
    
    
    23
    
    
    8
    
    
    31
    
    
    22
    
    
    9Total
    
    
    265
    
    
    112
    
    
    153
    
    
    607
    
    $
    272
    
    $
    335


Aggregate
amortization expense for intangible assets for the years ended December 31,
2004, 2003 and 2002 was $31 million, $55 million and $53 million,
respectively.  At
December 31, 2004, the weighted average useful lives of capitalized software,
land easements and mineral rights noted above were 9 years, 69 years and 40
years, respectively. Estimated amounts for the next five years are as
follows:





**Amortization****Year**
    
    **Expense**2005
    
    $
    72006
    
    
    72007
    
    
    72008
    
    
    62009
    
    
    4





Changes
in the carrying amount of goodwill (net of accumulated depreciation) for the
year ended December 31, 2004, are as follows:





**TXU****Energy**
    
    **TXU
      Electric****Holdings**
    
    **Delivery**
    
    **Total**Balance
      at December 31, 2003
    
    $
    533
    
    $
    25
    
    $
    558Disposal
      of TXU Fuel
    
    
    (16
    )
    
    ─
    
    
    (16
    )Balance
      at December 31, 2004
    
    $
    517
    
    $
    25
    
    $
    542





US
Holdings evaluates goodwill for impairment at least annually (as of October 1)
in accordance with SFAS 142. The impairment tests performed are based on
discounted cash flow analyses. No goodwill impairment has been recognized for
consolidated reporting units reflected in results from continuing
operations.





***Commodity
Contract Assets and Liabilities***  — At
December 31, 2004 and 2003, current and noncurrent commodity contract assets
totaling $861 million and $657 million, respectively are stated net of
applicable credit (collection) and performance reserves totaling $15 million and
$18 million, respectively. Performance reserves are provided for direct,
incremental costs to settle the contracts. Current and non-current contract
liabilities totaled $838 million and $549 million at December 31, 2004 and 2003,
respectively.





**A-88**








***Inventories
by Major Category*** —


**December
      31,****2004**
    
    **2003**Materials
      and supplies
    
    $
    166
    
    $
    254Fuel
      stock
    
    
    79
    
    
    79Gas
      stored underground
    
    
    72
    
    
    83Total
      inventories
    
    $
    317
    
    $
    416





Inventories
are carried at average cost and at December 31, 2003, reflect a $22 million
reduction as a result of the rescission of EITF 98-10 as discussed in Note
3.





***Property,
Plant and Equipment*** —


**December
      31,****2004**
    
    **2003**In
      serviceGeneration
    
    $
    15,590
    
    $
    15,861Transmission
    
    
    2,544
    
    
    2,349Distribution
    
    
    6,945
    
    
    6,676Other
      assets
    
    
    840
    
    
    1,194Total
    
    
    25,919
    
    
    26,080Less
      accumulated depreciation
    
    
    9,929
    
    
    9,935Net
      of accumulated depreciation
    
    
    15,990
    
    
    16,145Construction
      work in progress
    
    
    397
    
    
    379Nuclear
      fuel (net of accumulated amortization of: 2004 — $998 and 2003 —
      $934)
    
    
    118
    
    
    131Held
      for future use
    
    
    24
    
    
    22Net
      property, plant and equipment
    
    $
    16,529
    
    $
    16,677





Assets
related to capitalized leases included above totaled $8 million at December 31,
2004 and $9 million at December 31, 2003, net of accumulated depreciation.





As of
December 31, 2004, substantially all of TXU Electric Delivery’s electric utility
property, plant and equipment (with a net book value of $6.6 billion) is pledged
as collateral on TXU Electric Delivery’s first mortgage bonds and senior secured
notes.





***Supplemental
Cash Flow Information*** ** —


**Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**Cash
      payments related to continuing operations:Interest
    
    $
    586
    
    $
    523
    
    $
    401Income
      taxes
    
    $
    230
    
    $
    114
    
    $
    127Cash
      payments related to discontinued operations:Income
      taxes
    
    $
    (7
    )
    $
    (14
    )
    $
    —Noncash
      investing and financing activities:Discount
      related to exchangeable subordinated preferred membershipinterests
      recorded to paid-in-capital
    
    $
    —
    
    $
    —
    
    $
    266


See Note
3 for the affects of adopting SFAS 143, which were noncash in nature.





See Note
8 for discussion for the 2003 exchange of TXU Energy Holdings subordinated notes
for preferred membership interests, which was noncash in nature.





**A-89**








***Quarterly
Information (unaudited)*** ** — ** The
results of operations by quarter are summarized below.





In the
opinion of US Holdings, all other adjustments (consisting of normal recurring
accruals) necessary for a fair statement of such amounts have been made.
Quarterly results are not necessarily indicative of a full year’s operations
because of seasonal and other factors.





**Quarter
      Ended****March
      31**
    
    **June
      30**
    
    **Sept.
      30**
    
    **Dec.
      31****2004:**Operating
      revenues
    
    $
    2,128
    
    $
    2,297
    
    $
    2,746
    
    $
    2,123Income
      from continuing operations before extraordinary gain andcumulative
      effect of change in accounting principle
    
    $
    176
    
    $
    32
    
    $
    423
    
    $
    41Discontinued
      operations, net of tax effect
    
    $
    (3
    )
    $
    (27
    )
    $
    (3
    )
    $
    (1
    )Extraordinary
      gain, net of tax effect
    
    $
    —
    
    $
    16
    
    $
    —
    
    $
    —Cumulative
      effect of change in accounting principles, net of tax benefit
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    6Net
      income
    
    $
    173
    
    $
    21
    
    $
    420
    
    $
    46Net
      income available for common stock
    
    $
    173
    
    $
    21
    
    $
    420
    
    $
    44**2003:**Operating
      revenues
    
    $
    1,916
    
    $
    2,151
    
    $
    2,606
    
    $
    1,900Income
      from continuing operations before cumulative changes in
      accounting principles
    
    $
    90
    
    $
    201
    
    $
    372
    
    $
    73Discontinued
      operations, net of tax effect
    
    $
    (1
    )
    $
    —
    
    $
    (1
    )
    $
    (16
    )Cumulative
      effect of change in accounting principles, net of tax benefit
    
    $
    (58
    )
    $
    —
    
    $
    —
    
    $
    —Net
      income
    
    $
    31
    
    $
    201
    
    $
    371
    
    $
    57Net
      income available for common stock
    
    $
    29
    
    $
    199
    
    $
    370
    
    $
    57





Included
in fourth quarter 2004 income from continuing operations were lease termination
costs of $180 million ($117 million after-tax) and a net charge related to the
termination of power purchase contracts of $43 million ($28 million after-tax).





Included
in fourth quarter 2003 income from discontinued operations were impairment and
other exit charges totaling $10.3 million ($6.7 million after-tax).





***Reconciliation
of Previously Reported Quarterly Information***  — The
following table presents the changes to previously reported quarterly amounts to reflect
discontinued operations and the adoption of SFAS 123R.





**Quarter
      Ended****March
      31**
    
    **June
      30**
    
    **Sept.
      30**
    
    **Dec.
      31****Increase
      (Decrease) from Previously Reported****2004:**Revenues
      — from discontinued operations
    
    $
    (7
    )
    $
    —
    
    $
    —
    
    $
    —Income
      from continuing operations before extraordinary gain andcumulative
      effect of changes in accounting principles
    
    $
    (2
    )
    $
    2
    
    $
    1
    
    $
    —Discontinued
      operations, net of tax effect
    
    $
    (1
    )
    $
    —
    
    $
    —
    
    $
    —Net
      income
    
    $
    (3
    )
    $
    1
    
    $
    1
    
    $
    —Net
      income available for common stock
    
    $
    (3
    )
    $
    1
    
    $
    1
    
    $
    —**2003:**Revenues
      — from discontinued operations
    
    $
    (1
    )
    $
    —
    
    $
    —
    
    $
    (2
    )Income
      from continuing operations before extraordinary loss andcumulative
      effect of changes in accounting principles
    
    $
    2
    
    $
    —
    
    $
    —
    
    $
    1Discontinued
      operations, net of tax effect
    
    $
    (2
    )
    $
    —
    
    $
    —
    
    $
    (1
    )










**A-90**












**TXU
US HOLDINGS COMPANY EXHIBITS TO 2004 FORM 10-K**
  **APPENDIX
B**
 
 **Exhibits**
    **Previously
      Filed***
      **With
      File**
      **Number**
    **As**
      **Exhibit****(2)**
    **Plans
      of Acquisition, Reorganization, Arrangement, Liquidation or
      Succession.**2(a)
    1-12833
      Form
      8-K
      (filed
      January 16, 2002)
    2
    —
    Master
      Separation Agreement by and among TXU Electric Delivery, TXU Generation
      Holdings Company LLC, TXU Merger Energy Trading Company LP, TXU SESCO
      Company, TXU SESCO Energy Services Company, TXU Energy Retail Company LP
      and TXU US Holdings, dated as of December 14, 2001.**3(i)**
    **Articles
      of Incorporation.**3(a)
    1-11668
      Form
      10-Q (Quarter
      ended
      September 30, 2003)
      (filed
      November 13, 2003)
    3(i)
    —
    Amended
      and Restated Articles of Incorporation of TXU US Holdings Company
      effective as of August 31, 2003.**3(ii)**
    **By-laws**3(b)
    1-11668
      Form
      10-Q
      (Quarter
      ended March 31, 2002)
      (filed
      May 15, 2002)
    3(b)
    —
    Restated
      By-laws of TXU US Holdings Company, dated January 1,
      2002.**(4)**
    **Instruments
      Defining the Rights of Security Holders, Including
      Indentures.******TXU
      US Holdings**4(a)
    33-55408
    99(a)
    —
    Agreement,
      dated as of January 30, 1990, between TXU US Holdings Company and Tex-La
      Electric Cooperative of Texas, Inc.4(b)
    0-11442
      Form
      10-K (1995)
      (filed
      March 5, 1996)
    4(f)
    —
    Indenture
      (for Unsecured Subordinated Debt Securities relating to Trust Securities),
      dated as of December 1, 1995, between TU Electric and the Bank of New
      York, as Trustee.4(c)
    1-03591
      Form
      10-K (1996)
      (filed
      March 13, 1997)
    4(v)
    —
    Officer’s
      Certificate, dated as of January 30, 1997, establishing the terms of the
      Floating Rate Junior Subordinated Debentures, Series D.4(d)
    1-03591
      Form
      10-K (1996)
      (filed
      March 13, 1997)
    4(z)
    —
    Officer’s
      Certificate, dated as of January 30, 1997, establishing the terms of the
      8.175% Junior Subordinated Debentures, Series E.4(e)
    0-11442
      Form
      10-Q
      (Quarter
      ended Sept. 30, 1997)
      (filed
      November 14, 1997)
    4(a)
    —
    Indenture
      (For Unsecured Debt Securities), dated as of August 1, 1997, between TXU
      US Holdings and The Bank of New York, Trustee.
   **B-1**
  **Previously
      Filed*****With File**
    **As****Exhibits**
    **Number**
    **Exhibit**4(f)
    0-11442
      Form
      10-Q
      (Quarter
      ended Sept. 30, 1997)
      (filed
      November 14, 1997)
    4(b)
    —
    Officers’
      Certificate, dated August 18, 1997, establishing terms of TXU US Holdings
      7.17% Debentures due August 1, 2007.**TXU
      Electric Delivery Company**4(g)
    2-90185
      Form
      S-3 (filed
      March
      27, 1984)
    4(a)
    —
    Mortgage
      and Deed of Trust, dated as of December 1, 1983, between TXU Electric
      Delivery and The Bank of New York, as Trustee.4(g)(1)
    
    
    —
    Supplemental
      Indentures to Mortgage and Deed of Trust:**Number**
    **Dated
      as of**2-90185
      Form
      S-3 (filed
      March
      27, 1984)
    4(b)
    
    First
    April
      1, 198433-24089
      Form
      S-3 (filed
      August
      30, 1988)
    4(a)-1
    
    Fifteenth
    July
      1, 198733-30141
      Form
      S-3 (filed
      July
      26, 1989)
    4(a)-3
    
    Twenty-second
    January
      1, 198933-39493
      Form
      S-3 (filed
      March
      19, 1991)
    4(a)-2
    
    Twenty-eighth
    October
      1, 199033-57576
      Form
      S-3 (filed
      January
      29, 1993)
    4(a)-3
    
    Fortieth
    November
      1, 199233-60528
      Form
      S-3 (filed
      April
      2, 1993)
    4(a)-1
    
    Forty-second
    March
      1, 19931-12833
      Form
      10-K
      (2001)
      (filed March 14, 2002)
    4(2)(1)
    
    Sixty-third
    January
      1, 20021-12833
      Form
      10-Q
      (Quarter
      ended March 31, 2002)
      (filed
      May 15, 2002)
    4
    
    Sixty-fourth
    May
      1, 2002333-100240
      Form
      S-4 (filed
      January
      6, 2003)
    4(f)(2)
    
    Sixty-fifth
    December
      1, 2002
   **B-2**
  **Previously
      Filed*****With File**
    **As****Exhibits**
    **Number**
    **Exhibit**4(h)
    333-100240
      Form
      S-4
      (filed
      October 2, 2002)
    4(a)
    —
    Indenture
      and Deed of Trust, dated as of May 1, 2002, between TXU Electric Delivery
      and The Bank of New York, as Trustee.4(i)
    333-100240
      Form
      S-4
      (filed
      October 2, 2002)
    4(b)
    —
    Officer’s
      Certificate, dated May 6, 2002, establishing the terms of TXU Electric
      Delivery Company’s 6.375% Senior Secured Notes due 2012 and 7.000% Senior
      Secured Notes due 2032.4(j)
    333-106894
      Form
      S-4
      (filed
      July 9, 2003)
    4(c)
    —
    Officer’s
      Certificate, dated December 20, 2002, establishing the terms of TXU
      Electric Delivery Company’s 6.375% Senior Secured Notes due 2015 and
      7.250% Senior Secured Notes due 2033.4(k)
    333-100242
      Form
      S-4
      (filed
      October 2, 2002)
    4(a)
    —
    Indenture
      (for Unsecured Debt Securities), dated as of August 1, 2002, between TXU
      Electric Delivery Company and The Bank of New York, as
      Trustee.4(l)
    333-100242
      Form
      S-4
      (filed
      October 2, 2002)
    4(b)
    —
    Officer’s
      Certificate, dated August 30, 2002, establishing the terms of TXU Electric
      Delivery Company’s 5% Debentures due 2007 and 7% Debentures due
      2022.TXU
      Energy Company LLC
      ****4(m)
    333-108876
      Form
      S-4
      (filed
      September 17, 2003)
    4(a)
    —
    Indenture
      (for Unsecured Debt Securities), dated as of March 1, 2003, between TXU
      Energy Company LLC and The Bank of New York.4(n)
    333-108876
      Form
      S-4
      (filed
      September 17, 2003)
    4(b)
    —
    Officer’s
      Certificate, dated March 11, 2003, establishing the terms of TXU Energy
      Company’s 6.125% Senior Notes due 2008 and 7.000% Senior Notes due
      2013.4(o)
    333-122980
      Form
      S-4
      (filed
      February 24, 2004)
    4(a)
    —
    Officer’s
      Certificate, dated July 14, 2004, establishing the terms of TXU Energy
      Company’s Floating Rate Senior Notes.**(10)**
    **Material
      Contracts.****Credit
      Agreements.**10(a)
    1-2833
      Form
      8-K (filed July 1, 2004)
    10(a)
    —
    $2,500,000,000
      Revolving Credit Agreement dated as of June 24, 2004, among TXU Energy
      Company LLC and TXU Electric Delivery Company, the Lenders listed in
      Schedule 2.01 therto, JPMorgan Chase Bank as Adminstrative Agent and the
      other parties named therein.10(b)
    1-12833
      Form
      10-Q (filed November 5, 2004)
    10(c)
    —
    Credit
      agreement dated as November 4, 2004, by and between TXU Energy Company LLC
      and Wachovia Bank, National Association.**Other
      Material Contracts.**
   **B-3**
  **Previously
      Filed*****With File**
    **As****Exhibits**
    **Number**
    **Exhibit**10(c)
    333-100240
      Form
      S-4
      (filed
      October 2, 2002)
    10(c)
    —
    Generation
      Interconnection Agreement, dated December 14, 2001, between TXU Electric
      Delivery Company and TXU Generation Company LP.10(d)
    333-100240
      Form
      S-4
      (filed
      October 2, 2002)
    10(d)
    —
    Generation
      Interconnection Agreement, dated December 14, 2001, between TXU Electric
      Delivery and TXU Generation Company LP, for itself and as Agent for TXU
      Big Brown Company LP, TXU Mountain Creek Company LP, TXU Handley Company
      LP, TXU Tradinghouse Company LP and TXU DeCordova Company LP
      (Interconnection Agreement).10(e)
    333-100240
      Form
      S-4
      (filed
      October 2, 2002)
    10(e)
    —
    Amendment
      No. 1 to Interconnection Agreement, dated May 31, 2002.10(f)
    1-2833
      Form 10-Q
      (filed
      August 12, 2004)
    10(j)
    —
    Purchase
      and Sale Agreement between TXU Fuel Company and Energy Transfer Partners,
      L.P. dated April 25, 2004.10(g)
    1-2833
      Form 10-Q
      (filed
      August 12, 2004)
    10(l)
    —
    Master
      Framework Agreement dated May 17, 2004 by and between Oncor Electric
      Delivery Company (now TXU Electric Delivery Company) and CapGemini Energy
      LP.10(h)
    1-2833
      Form 10-Q
      (filed
      August 12, 2004)
    10(m)
    —
    Master
      Framework Agreement dated May 17, 2004 by and between TXU Energy Company
      LLC and CapGemini Energy LP.10(i)
    333-100240
      Form
      S-4
      (filed
      October 2, 2002)
    10(f)
    —
    Standard
      Form Agreement between TXU Electric Delivery Company and Competitive
      Retailer Regarding Terms and Conditions of Delivery of Electric Power and
      Energy.10(j)
    1-12833
      Form
      10-K (2002)
      (filed
      March 12, 2003)
    10(w)
    —
    Stipulation
      and Joint Application for Approval of Settlement as approved by the PUC in
      Docket Nos. 21527 and 24892.10(k)
    1-12833
      Form
      10-K (2003)
      (filed
      March 15, 2004)
    10(ss)
    —
    Additional
      Guaranty Agreement dated November 19, 2002 by TXU Energy Company LLC in
      favor of State Street Bank and Trust Company of Connecticut, National
      Association, as owner trustee of ZSF/Dallas Tower Trust, a Delaware
      grantor trust, as Lessor.**(12)**
    **Statement
      Regarding Computation of Ratios.**12
    
    
    —
    Computation
      of Ratio of Earnings to Fixed Charges, and Ratio of Earnings to Combined
      Fixed Charges and Preference Dividends.
  **B-4**
  
 **Exhibits**
    **Previously
      Filed***
      **With
      File**
      **Number**
    **As**
      **Exhibit****(21)**
    **Subsidiaries
      of the Registrant.**21
    
    
    —
    Subsidiaries
      of TXU US Holdings Company.**(23)**
    **Consents
      of Experts and Counsel.**23
    
    
    —
    Consent
      of Deloitte & Touche LLP, Independent Registered Public Accounting
      Firm for TXU US Holdings Company.**(31)**
    **Rule
      13a - 14(a)/15d - 14(a) Certifications.**31(a)
    
    
    —
    Certification
      of  T. L. Baker, principal executive officer of TXU US Holdings
      Company, pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.31(b)
    
    
    —
    Certification
      of  Kirk R. Oliver, principal financial officer of TXU US Holdings
      Company, pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.**(32)**
    **Section
      1350 Certifications.**32(a)
    
    
    —
    Certification
      of  T. L. Baker, principal executive officer of TXU US Holdings
      Company, pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32(b)
    
    
    —
    Certification
      of  Kirk R. Oliver, principal financial officer of TXU US Holdings
      Company, pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.**(99)**
    **Additional
      Exhibits.**99(a)
    33-55408
    99(a)
    —
    Agreement,
      dated as of January 30, 1990, between TXU US Holdings Company and Tex-La
      Electric Cooperative of Texas, Inc.
 
 
  *
    Incorporated
      herein by reference.
  **
    Certain
      instruments defining the rights of holders of long-term debt of the
      registrant’s subsidiaries included in the financial statements filed
      herewith have been omitted because the total amount of securities
      authorized thereunder does not exceed 10 percent of the total assets of
      the registrant and its subsidiaries on a consolidated basis. Registrant
      hereby agrees, upon request of the Securities and Exchange Commission, to
      furnish a copy of any such omitted
instrument.








**B-5**