UNITED
        STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
        D.C. 20549
 __________________________________________
  **FORM
        10-K**
  [ü]
        ANNUAL REPORT PURSUANT
        TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For
        the
        fiscal year ended December 31, 2006
 
 —
OR
        —
  [
        ]
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT
        OF 1934
 
 __________________________________________
  Commission
        File Number  333-91935
 
 **TXU
        Electric Delivery Transition Bond Company LLC**
 (Exact
        name of registrant as specified in its charter)
 
 Delaware
              75-2851358(State
                  of organization)
              (I.R.S.
                  Employer Identification No.)500
                  N. Akard Street, Dallas, Texas 75201
              (214)
                  486-2000(Address
                  of principal executive offices)(Zip Code)
              (Registrant’s
                  telephone number, including area
                  code)
 
 __________________________________________
 
 Securities
        registered pursuant to Section 12(b) of the Act:None
 
 Securities
        registered pursuant to Section 12(g) of the Act:None
 __________________________________________
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act. Yes___   
        No ü
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or 15(d) of the Act.  Yes ü No
        ___
 
 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 ü  No
        ___
 
 Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K (229.405 of this chapter) 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-10K
        or
        any amendment to this Form 10-K. ü
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer ad large accelerated filer” in Rule 12b-2 of the Exchange Act. Large
        Accelerated Filer __ Accelerated Filer ___ Non-accelerated
        filer ü
 
 Indicate
        by check mark if the registrant is a shell company (as defined in Rule 12b-2
        of
        the Exchange Act). Yes___   
        No ü
 
 As
        of
        March 19, 2007, all outstanding common membership interests in TXU Electric
        Delivery Transition Bond Company LLC were held by TXU Electric Delivery
        Company.
 
 **TXU
        Electric Delivery Transition Bond Company LLC meets the conditions set forth
        in
        General Instructions (I) (1) (a) and (b) of Form 10-K and is therefore filing
        this report with the reduced disclosure format.**




**TABLE
                  OF CONTENTS****Page****Glossary**
              ii**PART****I****Item
                  1.****BUSINESS**
              1LEGISLATIVE
                  BACKGROUND
              3REQUIRED
                  REPORTS
              4**Item
                  1A.****RISK
                  FACTORS**
              5**Item
                  1B.****UNRESOLVED
                  STAFF COMMENTS**
              23**Item
                  2.****PROPERTIES**
              23**Item
                  3.****LEGAL
                  PROCEEDINGS**
              23**Item
                  4.****SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS**
              23**PART
                  II****Item
                  5.****MARKET
                  FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS**
              24**Item
                  6.****SELECTED
                  FINANCIAL DATA**
              24**Item
                  7.****MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS**
              24**Item
                  7a.****QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
              24**Item
                  8.****FINANCIAL
                  STATEMENTS AND SUPPLEMENTARY DATA**
              24**Item
                  9.****CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE**
              24**Item
                  9a.****CONTROLS
                  AND PROCEDURES**
              24**Item
                  9b.****OTHER
                  INFORMATION**
              24**PART
                  III****Item
                  10.****DIRECTORS
                  AND EXECUTIVE OFFICERS OF THE REGISTRANT**
              25**Item
                  11.****EXECUTIVE
                  COMPENSATION**
              25**Item
                  12.****SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER MATTERS**
              25**Item
                  13.****CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS**
              25**Item
                  14.****PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES**
              26**PART
                  IV****Item
                  15.****EXHIBITS
                  AND FINANCIAL STATEMENT SCHEDULES**
              27**APPENDIX
                  A - Financial Information of TXU Electric Delivery Transition Bond
                  Company
                  LLC**
              A-1**APPENDIX
                  B - Exhibits to 2006 Form 10-K**
              B-1


**TXU
      Electric Delivery Transition Bond Company LLC’s annual reports on Form 10-K,
      quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments
      to those**


**reports
      are made available to the public, free of charge, on the TXU Electric Delivery
      Company website at http://www.txuelectricdelivery.com, as soon as reasonably
      practicable after**


**they
      have been filed with or furnished to the Securities and Exchange
      Commission.   Upon request, TXU Electric Delivery Transition Bond
      Company LLC will furnish copies of the**


**exhibits
      not included in this Form 10-K.  See Appendix B of this Form 10-K for
      a description of the exhibits.  TXU Electric Delivery Transition Bond
      Company LLC will provide**


**copies
      of current reports not posted on the website upon request.  The information
      on TXU Electric Delivery Company’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**2003
                  Bonds**
              refers
                  collectively to the four series of securitization (transition)
                  bonds
                  issued in August 2003**2004
                  Bonds**
              refers
                  collectively to the three series of securitization (transition)
                  bonds
                  issued in June 2004**Commission**
              Public
                  Utility Commission of Texas**Company**
              TXU
                  Electric Delivery Transition Bond Company LLC, a wholly-owned bankruptcy
                  remote financing subsidiary of TXU Electric Delivery
                  Company**ERCOT**
              Electric
                  Reliability Council of Texas, the Independent System Operator and
                  the
                  regional reliability coordinator of the various electricity systems
                  within
                  Texas**FASB**
              Financial
                  Accounting Standards Board, the designated organization in the
                  private
                  sector for establishing standards for financial accounting and
                  reporting**Financing
                  Order**
              the
                  financing order issued by the Commission on August 5, 2002 to TXU
                  Electric
                  Delivery Company, its successors and assignees that provide transmission
                  and distribution service**Indenture**
              the
                  agreement (dated as of August 21, 2003) between TXU Electric Delivery
                  Transition Bond Company, as issuer, and the Indenture Trustee,
                  which
                  describes the governing terms of, and secures payment of, the Transition
                  Bonds**Indenture
                  Trustee**
              The
                  Bank of New York, a New York banking corporation**Merger
                  Agreement**
              Agreement
                  and Plan of Merger, dated February 25, 2007, among TXU Corp., Merger
                  Sub
                  Parent and Merger Sub.**Merger
                  Sub**
              Texas
                  Energy Future Merger Sub Corp., a Texas corporation and a wholly-owned
                  subsidiary of Merger Sub Parent.**Merger
                  Sub Parent**
              Texas
                  Energy Future Holdings Limited Partnership, a Delaware limited
                  partnership.**Moody’s**
              Moody’s
                  Investors Services, Inc. (a credit rating agency)**REP**
              retail
                  electric provider**S&P**
              Standard
                  & Poor’s Rating Services, a division of The McGraw Hill Companies,
                  Inc. (a credit rating agency)**SEC**
              US
                  Securities and Exchange Commission**Settlement
                  Plan**
              regulatory
                  settlement plan that received final approval by the Commission
                  in January
                  2003**SFAS
                  71**
              Statement
                  of Financial Accounting Standards No. 71, “Accounting for the Effect of
                  Certain Types of Regulation”






ii


**Sponsors**
              The
                  private investment group, consisting of entities advised by or
                  affiliated
                  with Kohlberg Kravis Roberts & Co. and Texas Pacific Group, that
                  directly and indirectly owns Merger Sub Parent and Merger
                  Sub.**Transition
                  Bonds**
              refers
                  collectively to the 2003 Bonds and the 2004 Bonds**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, a subsidiary of TXU Corp., and/or
                  its
                  consolidated bankruptcy remote financing subsidiary, TXU Electric
                  Delivery
                  Transition Bond Company LLC, depending on context**TXU
                  Energy Company**
              refers
                  to TXU Energy Company LLC, a subsidiary of TXU Corp., and/or its
                  consolidated subsidiaries, depending on context**US**
              United
                  States of America**US
                  GAAP**
              accounting
                  principles generally accepted in the
                  US





iii





**PART
      I**





**Item
      1.**  **BUSINESS**





**BUSINESS**





TXU
      Electric Delivery Transition Bond Company (the Company) is a bankruptcy-remote,
      special-purpose Delaware limited liability company, wholly-owned by TXU Electric
      Delivery. TXU Electric Delivery is a wholly-owned subsidiary of TXU Corp. TXU
      Electric Delivery is a regulated electricity transmission and distribution
      company principally engaged in providing delivery services to REPs that sell
      power in the north-central, eastern and western parts of Texas. TXU Electric
      Delivery provides the essential service of delivering electricity safely,
      reliably and economically to end-use consumers through its distribution systems,
      as well as providing transmission grid connections to merchant power plants
      and
      interconnection to other transmission grids in Texas.





The
      Company was organized in November 1999 for the limited purposes of issuing
      Securitization (Transition) Bonds and purchasing and owning transition property
      (as defined in the 1999 Restructuring Legislation) acquired from TXU Electric
      Delivery. For legal purposes, the transition property has been sold to the
      Company by TXU Electric Delivery. The Company had no operations until August
      2003. In connection with the acquisition of the transition property, the
      Company:




·
            registered
                and issued the Transition Bonds;


·
            pledged
                its interest in the transition property and other Transition Bond
                collateral to secure the Transition Bonds;


·
            has
                agreed to make debt service payments on the Transition Bonds; and


·
            has
                agreed to perform other activities that are necessary, suitable or
                convenient to accomplish these
                purposes.





The
      Company is structured and operated in a manner such that in the event of
      bankruptcy proceedings against TXU Electric Delivery, the assets of the Company
      will not be consolidated into the bankruptcy estate of TXU Electric Delivery.
      TXU Electric Delivery is not the owner of the transition property described
      herein, and the assets of the Company are not available to pay creditors of
      TXU
      Electric Delivery or any of its affiliates.




1


**Proposed
        Merger**
 
 ***Summary
        Description of Merger Agreement and Proposed Merger***
 
 The
        following disclosure is included in TXU Corp.’s 2006 Annual Report on Form
        10-K.
 
 On
        February 25, 2007, TXU Corp. entered into the Merger Agreement with Merger
        Sub
        Parent and Merger Sub, whereby TXU Corp. would merge with Merger Sub and
        TXU
        Corp. would become a wholly-owned subsidiary of Merger Sub Parent. Merger
        Sub
        Parent and Merger Sub are entities directly and indirectly owned by a private
        investment group consisting of entities advised by or affiliated with Kohlberg
        Kravis Roberts and Co. and Texas Pacific Group (Sponsors).
  Under
        the
        terms of the Merger Agreement, the Sponsors will acquire all of the outstanding
        shares of TXU Corp. for $69.25 per share, representing a transaction value
        of
        approximately $32 billion in addition to the assumption by the Sponsors and
        the
        Merger Sub Parent of approximately $12 billion of debt. The Merger Agreement
        contemplates that upon the merger of Merger Sub with TXU Corp., each outstanding
        share of TXU Corp. common stock will be cancelled and converted into the
        right
        to receive $69.25 in cash, without interest, except for shares held by either
        TXU Corp. or the Sponsors or their affiliates, or by dissenting shareholders
        until their rights to dispute are satisfied.
  The
        Merger Agreement contains certain operating covenants with respect to TXU
        Corp.
        and its subsidiaries pending the consummation of the proposed merger. Generally,
        unless the parties have otherwise agreed with respect to specified business
        activities or TXU Corp. obtains the Merger Sub Parent’s prior written consent,
        which consent cannot be unreasonably withheld, conditioned or delayed by
        the
        Merger Sub Parent, TXU Corp. and its subsidiaries must carry on their businesses
        in a manner consistent with a business plan that was negotiated between TXU
        Corp. and Merger Sub Parent and otherwise in the ordinary course of business
        and
        use reasonable best efforts to preserve their present business organizations
        intact and maintain existing relationships and goodwill with governmental
        entities, customers, suppliers, employees and business organizations. In
        addition, the Merger Agreement contains certain specific restrictions or
        limitations on the activities of each of TXU Corp. and its subsidiaries,
        subject
        to the receipt of the Merger Sub Parent’s prior written consent, which consent
        cannot be unreasonably withheld, conditioned or delayed by the Merger Sub
        Parent, including the issuance or repurchase of capital stock, the amendment
        of
        its organization documents, acquisitions and dispositions of assets in excess
        of
        specified amounts, capital expenditures in excess of specified amounts,
        incurrence of certain indebtedness, modification of certain employee
        compensation and benefits arrangements, discharging of liabilities and changes
        to TXU Corp.’s trading policies, as well as executing specified trading
        transactions; however, TXU Corp. is permitted to declare and pay its regular
        quarterly dividend at the current rate of $0.4325 per quarter.
  Consummation
        of the proposed merger is subject to various conditions, including approval
        of
        the merger by a vote of two-thirds of the outstanding shares of TXU Corp.
        common
        stock, expiration or termination of applicable waiting periods under the
        Hart-Scott-Rodino Antitrust Improvements Act of 1976, approval of the Federal
        Energy Regulatory Commission (FERC) and the Nuclear Regulatory Commission
        (NRC)
        other customary closing conditions. TXU Corp. currently expects that the
        proposed merger will occur in the second half of 2007; however, there can
        be no
        assurance that the proposed merger will be consummated. TXU Corp. filed the
        Merger Agreement with the US Securities and Exchange Commission (SEC) on
        a Form
        8-K on February 26, 2007. The foregoing descriptions of the Merger Agreement
        and
        the proposed merger do not purport to be complete and are subject to, and
        qualified in their entirety by, the full text of the Merger Agreement.




2


**LEGISLATIVE
      BACKGROUND**




In
        September 1999, the Texas legislature passed the 1999 Restructuring Legislation
        to restructure the electric utility industry in Texas. The 1999 Restructuring
        Legislation provided for a transition to competition in the retail and
        generation markets for electricity beginning in January 2002, and provided
        for
        recovery of certain costs previously incurred by electric utilities. These
        costs
        consist of generation-related regulatory assets as well as stranded costs,
        which
        represent the excess of net book value over market value of generation assets
        (as such regulatory and generation assets are defined by the 1999 Restructuring
        Legislation). The 1999 Restructuring Legislation authorized the Commission
        to
        issue a financing order approving the issuance of Transition Bonds to facilitate
        the recovery of generation-related regulatory assets and stranded costs.
        The
        Commission issued a financing order to TXU Electric Delivery on August 5,
        2002.
        Recovery of the Transition Bonds’ principal, interest and other expenses is
        provided through irrevocable, nonbypassable charges (transition charges)
        assessed on substantially all existing and future retail electric customers
        within a utility’s certificated service territory as it existed on May 1, 1999.


***Transition
      Property*** -
      The
      1999 Restructuring Legislation and the Financing Order permitted TXU Electric
      Delivery to transfer its rights and interests in the Financing Order, including
      the right to collect transition charges pursuant to the 1999 Restructuring
      Legislation, to a special purpose entity (the Company) formed by TXU Electric
      Delivery to issue debt secured by the right to receive revenues arising from
      the
      transition charges. The electric utility’s right to receive the transition
      charges and its other rights and interests under the Financing Order constitute
      transition property transferred to the Company. The transition property
      represents the irrevocable right to impose, collect and receive transition
      charges in an amount sufficient to pay the interest, fees, and expenses
      associated with the Transition Bonds, and the aggregate principal amount of
      the
      Transition Bonds.





***Transition
      Charges*** - TXU
      Electric Delivery and the Company have entered into servicing agreements to
      support the Transition Bonds. Transition charges are assessed and collected
      by
      TXU Electric Delivery as the servicer. The servicer manages, services, bills
      and
      collects payments in respect of the transition property under the terms of
      the
      servicing agreements. Transition charges are collected by the servicer from
      REPs
      that in effect collect transition charges from retail customers as part of
      their
      normal collection activities. The REPs must pay these billings to TXU Electric
      Delivery whether or not the REPs collect them from the retail customers.
      Transition charges are billed based on a retail customer’s actual consumption of
      electricity, or for certain classes of commercial customers, on the historical
      demand for electricity by such customers. The Commission reviews and adjusts
      transition charges at least once a year. This review is used to adjust any
      over
      or under collections during the preceding 12 months and to provide for recovery
      of amounts sufficient to pay all debt service and other required amounts and
      charges in connection with the Transition Bonds during the following 12
      months.





***Servicing
      Fees -*** As
      long
      as TXU Electric Delivery or its affiliate or agent acts as servicer, the annual
      aggregate servicing fee will be the greater of $400,000 for all series of
      outstanding Transition Bonds or 0.05% per annum of the initial principal amount
      of all series of outstanding Transition Bonds. If a successor servicer that
      is
      not affiliated with TXU Electric Delivery is appointed, it will be entitled
      to
      receive a servicing fee not in excess of 0.60% per year of the initial principal
      amount of outstanding Transition Bonds. The servicing fee will be recovered
      by
      the Company through the transition charges. In
      addition, under the servicing agreements, TXU Electric Delivery, as servicer,
      must seek interim and nonstandard true-up adjustments when certain conditions
      are met.





***Administration
      Fees*** - TXU
      Electric Delivery and the Company have also entered into an administration
      agreement, whereby TXU Electric Delivery provides administrative services to
      the
      Company, such as accounting, clerical, secretarial and other administrative
      services, at a fixed fee per year. As long as TXU Electric Delivery or its
      affiliate or agent, act as administrator, the annual administration fee will
      be
      $50,000, payable in arrears on each payment date. TXU Electric Delivery, as
      administrator, is limited under the terms of the administration agreement to
      total compensation in the form of the annual administration fee of $50,000
      plus
      any fees paid to third parties on behalf of the Company.





***Operating
      Expenses*** - The
      Company can recover annual operating expenses, including the annual
      administration fee to TXU Electric Delivery, of $185,000 annually through the
      transition charges.


3





**REQUIRED
      REPORTS**





The
      Company has included in this annual report on Form 10-K or furnished on its
      website at **www.txuelectricdelivery.com** ,
      as
      indicated, the following information in respect of each series of outstanding
      Transition Bonds, as required by the terms of the Indenture relating to the
      Transition Bonds. Exhibits that are filed as a part of this Form 10-K are listed
      in Appendix B.


**Required
                  Item**
              
              **Filed
                  as Exhibit**
                **or
                  Furnished on**
                **Website**Monthly
                  servicer report (Series 2004-1 for October 2006)
              
              Exhibit
                  99 (a)(1)Monthly
                  servicer report (Series 2004-1 for November 2006)
              
              Exhibit
                  99 (a)(2)Monthly
                  servicer
                  report (Series 2004-1 for December 2006)
              
              Exhibit
                  99 (a)(3)Monthly
                  servicer report (Series 2003-1 for October 2006)
              
              Exhibit
                  99 (a)(4)Monthly
                  servicer report(Series 2003-1 for November 2006)
              
              Exhibit
                  99 (a)(5)Monthly
                  servicer report(Series 2003-1 for December 2006)
              
              Exhibit
                  99 (a)(6)Statement
                  of Balances as of December 31, 2006
              
              Exhibit
                  99 (b)A
                  quarterly statement affirming that, in all material respects, for
                  each
                  materially significant REP, (a) each REP has been billed in compliance
                  with the requirements outlined in the Financing Order,
                  (b) each REP has made payments in compliance with the requirements
                  outlined in the Financing Order, and (c) each REP satisfies the
                  creditworthiness requirements of the Financing Order.
              
              Exhibit
                  99 (c)Statement
                  ofOutstanding
                  Bond Balances Series 2003-1
              
              Exhibit
                  99 (e)(1)Statement
                  ofOutstanding
                  Bond Balances Series 2004-1
              
              Exhibit
                  99 (e)(2)Semi
                  Annual Servicer’s CertificateNovember
                  2006
              
              Exhibit
                  99 (f)


4


**Item
      1A. RISK FACTORS**





Some
      important factors that investors should consider carefully before deciding
      whether to purchase Transition Bonds of any series or class include:





**Material
      Payment Delays or Losses on Transition Bonds May be Experienced Due to the
      Limited Sources of Payment for the Transition Bonds and Limited Credit
      Enhancement**





Material
      payment delays or losses on Transition Bonds may be experienced if the assets
      securing Transition Bonds are insufficient to pay the principal amount of such
      Transition Bonds and accrued interest on those Transition Bonds in full. The
      only source of funds for payments of interest on and principal of the Transition
      Bonds of a particular series is the related collateral for that series. The
      collateral for a particular series of Transition Bonds is limited to:


•
              the
                  related transition property, including the irrevocable right to
                  impose,
                  collect and receive the related transition charges from customers
                  and to
                  adjust the transition charges at least annually;
 •
              available
                  funds on deposit in the applicable trust accounts held by the Indenture
                  Trustee;
 •
              contractual
                  rights under the applicable sale agreement, the applicable servicing
                  agreement and other applicable contracts for such series; and
 •
              any
                  other credit enhancements described in the applicable prospectus
                  supplement related to such series of Transition Bonds.




The
      Transition Bonds are not insured or guaranteed by TXU Electric Delivery,
      including in its capacity as servicer, or by its ultimate parent, TXU Corp.,
      any
      of its affiliates (other than the Company), the Indenture Trustee or any other
      person or entity. Thus, reliance for payment of the Transition Bonds must be
      based upon collections of the related transition charges, available funds on
      deposit in the applicable trust accounts held by the Indenture Trustee and
      any
      other credit enhancement described in the applicable prospectus supplement
      related to a series of Transition Bonds.  The 2003 Bonds and the 2004 Bonds
      are payable only from collateral that secures each such series and not from
      transition charges imposed and collected for any other series of Transition
      Bonds. The organizational documents of the Company restrict the right to acquire
      other assets unrelated to the transactions described therein.





**Judicial,
      Legislative or Regulatory Actions That May Adversely Affect an Investment in
      Transition Bonds**





*Legal
      Action May Reduce the Value of an Investment in Transition
      Bonds* .
      The
      transition property is created pursuant to the 1999 Restructuring Legislation
      and the Financing Order.  Investing in bonds payable from an asset that
      depends for its existence on legislation with limited history and judicial
      interpretation is risky.





Because
      the securitization financing is a creation of statute, any alteration affecting
      the validity of the relevant underlying legislative provisions could directly
      impact the Transition Bonds. For example, if the provisions that create
      transition property were invalidated, the validity of the principal assets
      securing the Transition Bonds could be eliminated. As another example, if the
      provisions that allow for the transition charge true-up adjustment process
      were
      invalidated, the servicer could be prevented from ensuring that sufficient
      funds
      are deposited with the Indenture Trustee for the scheduled payments on the
      Transition Bonds. If an invalidation of any relevant underlying legislative
      provision or Financing Order provision occurs, some or all of the investment
      in
      the Transition Bonds may be lost or delays may be experienced in recovering
      the
      investment. The 1999 Restructuring Legislation or any of its provisions,
      including the provisions relating to securitization, may be directly contested
      in courts or otherwise become the subject of litigation.





5


The
      constitutionality of the securitization provisions of the 1999 Restructuring
      Legislation under the Texas Constitution was challenged in connection with
      a
      securitization request made by Central Power and Light Company. The
      constitutionality of the challenged provisions of the 1999 Restructuring
      Legislation was affirmed by the Travis County, Texas District Court in July
      2000. This judgment was appealed directly to the Texas Supreme Court. On June
      6,
      2001, the Texas Supreme Court affirmed the judgment of the Travis County, Texas
      District Court denying this appeal and finding that the securitization
      provisions are constitutional. The Texas Supreme Court denied rehearing, with
      a
      corrected opinion that did not affect the substance of the original ruling,
      on
      August 30, 2001. No petition for writ of certiorari was filed with the United
      States Supreme Court prior to the deadline for such a filing.





If
      in the
      future a state or federal court were to determine that the relevant provisions
      of the 1999 Restructuring Legislation or the Financing Order are unlawful or
      invalid, that decision could adversely affect the validity of the Transition
      Bonds or the Company’s ability to make payments on the Transition Bonds. In that
      case, a loss on or delay in recovery of the investment in the Transition Bonds
      may be experienced. If the 1999 Restructuring Legislation is overturned, the
      limitation on appealing the Financing Order may also be overturned. The Company
      cannot assure that another lawsuit challenging the validity of the 1999
      Restructuring Legislation will not be filed in the future or that, if filed,
      such lawsuit would not be successful.





Other
      states have passed electric utility deregulation laws similar to the 1999
      Restructuring Legislation, and some of these laws have been challenged by
      judicial actions. To date, none of these challenges has succeeded, but future
      judicial challenges could be made in other states. An unfavorable decision
      regarding another state’s law would not automatically invalidate the 1999
      Restructuring Legislation or the Financing Order, but it might provoke a
      challenge to the 1999 Restructuring Legislation or the Financing Order. In
      addition, an unfavorable court decision with respect to another state’s statute
      may establish a legal precedent for a successful challenge to the 1999
      Restructuring Legislation depending on the similarity of the other statute
      and
      the applicability of the legal precedent to the 1999 Restructuring Legislation.
      Furthermore, legal action in other states could heighten awareness of the
      political and other risks of the Transition Bonds, and in that way may limit
      the
      liquidity and value of the Transition Bonds. Therefore, legal activity in other
      states may indirectly affect the value of an investment in Transition Bonds.





Neither
      the Company nor TXU Electric Delivery will indemnify an investor for any changes
      in the law, including any amendment or repeal of the 1999 Restructuring
      Legislation that may affect the value of the Transition Bonds. TXU Electric
      Delivery may have to indemnify the Company, however, if legal action based
      on
      law in effect at the time of the issuance of the Transition Bonds invalidates
      the transition property.





6


*Further
      Legislative Action May Reduce the Value of An Investment in Transition
      Bonds* .
      The
      value of an investment in Transition Bonds may decline due to legislative
      action. For example:




(a)  *Future
      Texas Legislative Action May Invalidate the Transition Bonds or the Transition
      Property which is the Primary Source of Payments on the Transition
      Bonds* .
      Unlike
      many other states (including California, Massachusetts and Michigan), the
      citizens of the State of Texas do not have the constitutional right to adopt
      or
      revise laws by initiative or referendum. Thus, absent any amendment of the
      constitution of the State of Texas, the 1999 Restructuring Legislation cannot
      be
      amended or repealed by direct action of the electorate. The Texas legislature
      may repeal the 1999 Restructuring Legislation, or amend the 1999 Restructuring
      Legislation in a way that limits or alters the transition property so as to
      reduce its value. However, under the 1999 Restructuring Legislation, the State
      of Texas has pledged for the benefit and protection of TXU Electric Delivery
      and
      all financing parties that it (including the Commission) will not take or permit
      any action to be taken that would impair the value of the transition property.




Hunton
      & Williams LLP has rendered its opinion to the Company and TXU Electric
      Delivery in connection with the issuance of the 2003 Bonds, and rendered a
      similar opinion to the Company and TXU Electric Delivery in connection with
      the
      2004 Bonds, that under the laws of the State of Texas and the United States,
      holders of the Transition Bonds could successfully challenge under the Federal
      Contracts Clause and the Texas Contracts Clause the constitutionality of any
      legislation passed by the State of Texas, including the Commission, which
      becomes law that repeals or amends the 1999 Restructuring Legislation in such
      a
      manner that substantially impairs the value of the rights of the holders of
      the
      Transition Bonds or the transition charges prior to the time that the Transition
      Bonds are fully paid and discharged, unless it was determined that such repeal
      or amendment was a legitimate and reasonable exercise of the State of Texas’
sovereign powers and reasonable and necessary to serve a significant and
      legitimate public purpose. Further, Hunton & Williams LLP rendered to the
      Company and TXU Electric Delivery its opinion that a court would conclude that
      adverse action by the Texas legislature or the Commission that repeals the
      State
      of Texas’ pledge to the holders of the Transition Bonds or otherwise adversely
      affects the transition property would constitute a compensable “taking” under
      the Takings Clauses of the United States and Texas Constitutions, if the court
      determines that any such action is an intentional action by the Texas
      legislature or the Commission, effects a regulatory taking of the transition
      property and is for public use. There is no assurance, however, that, even
      if a
      court were to award just compensation, it would be sufficient to pay the full
      amount of principal and interest on the Transition Bonds.





It
      may be
      possible for the Texas legislature to enact legislation that would impair the
      rights and remedies of bondholders without violating the State’s pledge, if the
      legislature acts in order to serve a significant and legitimate public purpose,
      such as protecting the public health and safety or otherwise acts in the valid
      exercise of the state’s police power. Even if the legislature provides an
      investor with an amount deemed to be just compensation, it may not be sufficient
      to fully recover the investment. The Company cannot assure an investor of the
      likelihood or legal validity of any action of this type by the Texas
      legislature, or whether the action would be considered a taking. As of the
      date
      of this report, the Company is not aware of any pending legislation in the
      Texas
      legislature that would affect any provisions of the 1999 Restructuring
      Legislation related to transition property or transition charges or the
      provisions of the Financing Order.





The
      Company cannot assure an investor that a repeal or amendment to the 1999
      Restructuring Legislation will not be sought or adopted or that any action
      by
      the State of Texas adverse to an investment in the Transition Bonds will not
      occur. In any such event, costly and time-consuming litigation might ensue.
      Any
      litigation of this type might adversely affect the price and liquidity of the
      Transition Bonds and delay the payment of interest and principal and,
      accordingly, the weighted average lives of the Transition Bonds.


7





(b)  *The
      1999 Restructuring Legislation May be Overturned by the Federal Government
      Without Full Compensation* .
      The
      United States Congress or a federal agency may decide that it can preempt the
      Texas legislature and pass a law or adopt a rule or regulation prohibiting
      or
      limiting the collection of transition charges, or otherwise affecting the energy
      industry. A prohibition of this nature could negate the existence of transition
      property. As of the date of this report, neither the House nor the Senate
      committees having primary relevant jurisdiction have considered, or indicated
      an
      intent to consider, the prohibition of the recovery of stranded costs or
      transition charges. The Company cannot predict whether any future bills that
      prohibit the recovery of stranded costs or regulatory assets, or securitized
      financing for the recovery of stranded costs, will become law or, if they become
      law, what their final form or effect will be. The Company can give no assurance
      that a court would consider the preemption by federal law of the Texas 1999
      Restructuring Legislation a taking of property from the Company or from the
      holders of Transition bonds. Moreover, even if this preemption of the 1999
      Restructuring Legislation and/or the Financing Order by the federal government
      were considered a taking under the U.S. Constitution for which the government
      had to pay the estimated market value of the taken transition property at the
      time of the taking, the Company can give no assurance that this compensation
      would be sufficient to pay the full amount of principal of and interest on
      the
      Transition Bonds or to pay such amounts on a timely basis.





The
      Company and TXU Electric Delivery have agreed to take legal or administrative
      action as may be reasonably necessary to block or overturn any attempts to
      cause
      a repeal, modification or amendment to the 1999 Restructuring Legislation,
      the
      Financing Order or the transition property.





Neither
      the Company, TXU Electric Delivery nor any successor seller or servicer will
      indemnify an investor for any changes in the law that may affect the value
      of
      the Transition Bonds. In addition, any action by the United States Congress
      or
      Texas legislature, even if the action is ultimately determined to be invalid,
      and even if full compensation is ultimately provided to the holders of
      Transition bonds, might result in costly and time-consuming litigation. Any
      litigation of this type might adversely affect the price and liquidity of the
      Transition Bonds and the dates of payment of interest and principal. Moreover,
      given the lack of judicial precedent directly on point, and the novelty in
      Texas
      of transition property as security for Transition Bonds, the Company cannot
      predict the outcome of any litigation with certainty. Accordingly, an investor
      may suffer a loss on or delay in recovery of an investment in the Transition
      Bonds.


8





(c)  *The
      Commission May Take Future Actions Which May Reduce the Value of an Investment
      in Transition Bonds* .
      The
      1999 Restructuring Legislation provides that the Financing Order is irrevocable
      upon issuance and is not subject to reduction, impairment or adjustment by
      further action of the Commission, except for the true-up adjustments. The State
      of Texas (including the Commission) has pledged that it will not take or permit
      any action to amend, alter or impair the value of transition property created
      under the Financing Order, except as permitted in true-up adjustments, until
      the
      principal, interest and premium, if any, and any other charges incurred and
      contracts to be performed in connection with the Transition Bonds have been
      paid
      and performed in full. The Commission guarantees that it will take specific
      actions pursuant to the Financing Order, as expressly authorized by the 1999
      Restructuring Legislation, to ensure that transition charge revenues are
      sufficient to pay principal and interest on the Transition Bonds. However,
      the
      Commission retains the power to adopt, revise or rescind rules or regulations
      affecting the seller or a successor utility. The Commission also retains the
      power to interpret the Financing Order. Any new or amended regulations or orders
      by the Commission, for example, could affect the ability of the servicer to
      collect the transition charges in full and on a timely basis. The seller has
      agreed to take legal or administrative action to resist any Commission rule,
      regulation or decision that would reduce the value of the transition property.
      The Company cannot assure an investor that the seller would be successful in
      its
      efforts. Thus, future Commission rules, regulations or decisions may adversely
      affect the rating of the Transition Bonds, their price or the rate of transition
      charge collections and, accordingly, the amortization of Transition Bonds and
      their weighted average lives. As a result, an investor could suffer a loss
      in
      connection with an investment in Transition Bonds.





The
      servicer is required to file with the Commission, on behalf of the Company,
      any
      requested adjustments of the transition charges. There is uncertainty associated
      with investing in Transition Bonds whose timely payment of principal and
      interest may depend on true-up adjustments because of the limited judicial
      or
      regulatory experience implementing and interpreting the provisions of the 1999
      Restructuring Legislation providing for true-up adjustments. The Company cannot
      assure that the foregoing adjustment procedures and adjustments will not be
      challenged. Such challenges could result in costly and time consuming
      litigation. A shortfall or material delay in transition charge collections
      due
      to inaccurate forecasts, delayed implementation of true-up adjustments or the
      failure to implement a true-up adjustment could result in payments of principal
      of and interest on the Transition Bonds not being paid according to the expected
      amortization schedule, lengthening the weighted average life of the Transition
      bonds, or in payments of principal and interest not being made at all. As a
      result, an investor could suffer a loss in connection with an investment.





On
      May
      20, 2003, various electric cooperatives and municipally-owned utilities in
      TXU
      Electric Delivery’s service territory filed a petition for rulemaking with the
      Commission requesting that the Commission adopt a rule regarding the billing
      and
      collection of transition charges from end-use customers in multi-certificated
      service areas who switched electricity providers after May 1, 1999.  
The number of such customers is less than four hundred. The rule proposed
      by the petitioners only involves the method of collecting transition charges,
      including the liability in connection therewith, and would require the
      transition charges to be billed directly to those customers by the servicer,
      rather than by the applicable electric cooperative or municipally-owned utility.
      TXU Electric Delivery filed a response to the petition stating that the
      proposed rule would violate the 1999 Restructuring Legislation and the Financing
      Order and filed a complaint with the Commission requesting that the
      Commission order the electric cooperatives and municipally-owned utilities
      to
      implement the current procedure. The Commission denied the rulemaking
      petition. On June 13, 2005, TXU Electric Delivery reached a settlement with
      the
      parties and withdrew its complaint without prejudice for refiling. The
      settlement agreement establishes a process by which the recovery of transition
      charges associated with switchover customers will be accomplished.


9





**Servicing
      Risks**


*Inaccurate
        Forecasting or Unanticipated Delinquencies Could Result in Insufficient Funds
        to
        Make Scheduled Payments on the Transition Bonds* .
        The
        transition charges are generally assessed based on customer usage, which
        includes kilowatts demanded and kilowatt-hours of electricity consumed by
        retail
        customers in TXU Electric Delivery’s service area. TXU Electric Delivery
        calculates the transition charges for each series of Transition Bonds according
        to the methodology approved by the Financing Order authorizing those transition
        charges. In addition, TXU Electric Delivery, as servicer, is required to
        file
        with the Commission periodic adjustment calculations for the transition charges.
        These adjustments are intended to provide, among other things, for timely
        payment of the Transition Bonds, but the frequency of these adjustments is
        limited to once per year for a standard true-up, no more than semi-annually
        for
        an interim true-up, but can be more frequently for a nonstandard true-up.
        TXU
        Electric Delivery generally bases its adjustment calculations on any shortfalls
        or excess in collections from customers during the prior adjustment period
        and
        on projections of future electricity use and customers’ ability to pay their
        electric bills. If the servicer inaccurately forecasts electricity consumption
        or demand or underestimates customer delinquencies or charge-offs when setting
        or adjusting the transition charges, or if the effectiveness of the adjustments
        is delayed for any reason, there could be a shortfall or material delay in
        transition charge collections. A shortfall or material delay in transition
        charge collections could result in payment of principal of and interest on
        the
        Transition Bonds not being made according to the expected amortization schedule,
        thus lengthening the weighted average life of the Transition Bonds, or in
        payments of principal and interest not being made at all.
  Inaccurate
      forecasting of electricity consumption by the servicer could result from, among
      other things:


·
                    warmer
                        winters or cooler summers, resulting in less electricity
                        consumption than
                        forecasted;
 ·
                    general
                        economic conditions being worse than expected, causing customers
                        to
                        migrate from TXU Electric Delivery’s service territory or reduce their
                        electricity consumption;
 ·
                    the
                        occurrence of a natural disaster, such as a tornado, or an
                        act of war or
                        terrorism or other catastrophic event unexpectedly disrupting
                        electrical
                        service and reducing usage;
 ·
                    problems
                        with energy generation, transmission or distribution resulting
                        from the
                        change in the market structure of the electric industry;
 ·
                    customers
                        ceasing business or departing TXU Electric Delivery’s service territory;
 ·
                    dramatic
                        changes in energy prices resulting in decreased consumption;
 ·
                    customers
                        consuming less electricity because of increased conservation
                        efforts or
                        increased electric usage efficiency; or
 ·
                    customers
                        switching to alternative sources of energy, including self-generation
                        of
                        electric power.
 10


Inaccurate
      forecasting of delinquencies or charge-offs by the servicer could result from,
      among other things:


·
                
                unexpected
                    deterioration of the economy or the occurrence of a natural disaster,
                    or
                    an act of war or terrorism or other catastrophic event or the
                    declaration
                    of a heat moratorium causing greater charge-offs than expected
                    or forcing
                    TXU Electric Delivery or a successor distribution company to
                    grant
                    additional payment relief to more customers;
 ·
                
                a
                    change in law that makes it more difficult for TXU Electric Delivery
                    or a
                    successor distribution company or a REP to terminate service
                    to nonpaying
                    customers, or that requires TXU Electric Delivery or a successor
                    distribution company or REP to apply more lenient credit standards
                    in
                    accepting customers;
 ·
                
                the
                    introduction into the energy markets of REPs who collect payments
                    arising
                    from the transition charges, but who may fail to remit retail
                    customer
                    charges to the servicer in a timely manner; or
 ·
                
                the
                    failure of REPs to submit accurate and timely information to
                    the servicer
                    regarding their collections and charge-offs. See “It May Be Difficult to
                    Collect the Transition Charges from REPs.”




*There
        are
        Uncertainties Associated with Collecting the Transition Charges, and There
        is
        Unpredictability Associated with a Deregulated Electricity
        Market* .
        The
        predictions associated with billing and collecting transition charges are
        based
        primarily on historical collection of payments and forecasted energy usage
        for
        which TXU Electric Delivery has records available. These usage and collection
        records, however, may not reflect customers’ payment patterns or energy usage in
        the competitive market, as full competition did not exist in the Texas
        marketplace until January 1, 2007. These records also reflect limited experience
        with consolidated billing to REPs. Because that kind of billing is relatively
        new in Texas, unforeseen factors may adversely affect collection of payments.
        Therefore, the records that TXU Electric Delivery has to date may have limited
        value in calculating the proposed true-up adjustments. Furthermore, TXU Electric
        Delivery, as servicer, has relatively limited experience administering
        transition charges. Risks are associated with TXU Electric Delivery’s
        inexperience in calculating, billing and collecting the transition charges
        and
        in managing customer payments on the Company’s behalf. A shortfall or material
        delay in collecting transition charges could result in payments of principal
        not
        being paid according to the expected amortization schedule, lengthening the
        weighted average life of the Transition Bonds, or in payments of principal
        and
        interest not being made at all. As a result, an investor could suffer a loss
        in
        connection with the investment.
  *An
      Investment
      in Transition Bonds Relies on TXU Electric Delivery or its Successor Acting
      as
      Servicer of the Transition Property* .
      TXU
      Electric Delivery, as servicer, is responsible for billing and collecting
      transition charges from REPs and for filing with the Commission to adjust these
      charges. If TXU Electric Delivery ceases servicing the transition property,
      it
      might be hard to find a successor servicer and any transfer of servicing to
      a
      successor servicer may adversely affect an investor. Any successor servicer
      may
      have less experience than TXU Electric Delivery and may have less capable
      billing and/or collection systems than TXU Electric Delivery and may experience
      difficulties in collecting transition charges and determining appropriate
      adjustments to transition charges. A successor servicer might charge fees that,
      while permitted under the Financing Order, are higher than the fees paid to
      TXU
      Electric Delivery as servicer. If TXU Electric Delivery were to be replaced
      as
      servicer, any of these factors and others could delay the timing of payments
      and
      may reduce the value of an investment in Transition Bonds. Also, a change in
      servicer may cause billing and/or payment arrangements to change, which may
      lead
      to a period of disruption in which customers continue to remit payments
      according to the former arrangement, resulting in delays in collection that
      could result in delays in payment on the Transition Bonds. Under the TXU
      Electric Delivery servicing agreements, no servicer default may be waived
      without the written consent of both the Commission and holders of a majority
      of
      the applicable series of outstanding Transition Bonds. The servicing agreements
      also grant the independent right to the Commission, in addition to the right
      of
      the Indenture Trustee on behalf of the transition bondholders, to require
      transfer of the servicing to a successor servicer in the event of any such
      servicer default.


11




Upon
      a
      default under a servicing agreement based upon the commencement of a case by
      or
      against the servicer under the United States Bankruptcy Code or similar laws,
      the Indenture Trustee and the Company may be prevented from effecting a transfer
      of servicing. The 1999 Restructuring Legislation provides that upon a default
      under the Transition Bonds, which may result from servicer’s failure to make
      required remittances, the Indenture Trustee would have the right to apply to
      the
      Commission for an order that amounts arising from transition charges be
      transferred to a separate account, and to apply to the district court of Travis
      County, Texas for an order for sequestration and payment of revenues arising
      from the transition charges. However, in the event that the servicer becomes
      subject to a bankruptcy proceeding, federal bankruptcy law may prevent the
      Commission or the Texas court from issuing or enforcing these orders. The
      Indenture requires the Indenture Trustee to request an order from the bankruptcy
      court to permit the Commission or the Texas court to issue and enforce these
      orders. However, the bankruptcy court may deny the request. The failure of
      the
      servicer to make required remittances would likely result in a default under
      the
      Indenture.





Under
      the
      intercreditor agreement among the Company, TXU Electric Delivery, the Transition
      Bond parties and the parties to TXU Corp.’s receivables financing program, a
      replacement servicer would require the agreement of both the Indenture Trustee
      and the other parties to the intercreditor agreement. If the Indenture Trustee
      and the other parties are unable to agree on a replacement servicer within
      10
      business days, TXU Electric Delivery’s independent registered public accounting
      firm (independent auditors) would appoint the replacement servicer.





*It
      May Be Difficult to Collect the Transition Charges from REPs* .
      As part
      of the restructuring of the Texas electric industry, retail customers in TXU
      Electric Delivery’s service territory began, as of January 1, 2002, or in
      limited circumstances by participating in a pilot project, sooner, purchasing
      electricity and related services from REPs rather than TXU Electric Delivery.
      TXU Electric Delivery is no longer permitted to sell electricity directly to
      retail customers. TXU Corp. currently has organized an affiliated REP to provide
      electricity and related services to retail customers in TXU Electric Delivery’s
      service territory. In the future, TXU Corp. may establish additional affiliated
      REPs or divest itself of one or more affiliated REPs. REPs, including TXU
      Corp.’s affiliated REP, issue a single bill to retail customers purchasing
      electricity from a REP. The 1999 Restructuring Legislation requires TXU Electric
      Delivery to allow each REP, including TXU Corp.’s affiliated REP, pursuant to a
      tariff to be filed by TXU Electric Delivery and approved by the Commission,
      to
      issue a single bill to customers purchasing electricity from that REP. This
      single bill includes all charges related to purchasing electricity from the
      REP,
      including delivery services from TXU Electric Delivery and the applicable
      transition charges. Retail customers will pay transition charges to REPs who
      supply them with electric power. The REPs will be obligated to remit payments
      of
      transition charges to the servicer less a specified percentage allowance for
      charge-offs or delinquent customer accounts whose service has been terminated,
      within 35 days of billing from the servicer, even if the REPs do not collect
      the
      charges from retail customers. The charge-off percentage will initially be
      based
      on the servicer’s system-wide charge-off percentage but will then be
      recalculated annually for each REP in conjunction with the true-up adjustment
      process. Each REP’s recourse for transition charge payments remitted to the
      servicer but not collected ultimately from customers will be limited to a credit
      against future transition charge payments unless the REP and the servicer agree
      to alternative arrangements, but in no event will the REP have recourse to
      the
      Company or the Company’s funds for such payments. In the event that the REP does
      not pay the transition charges to the servicer, the servicer will have the
      right
      to collect transition charges directly from those retail customers who receive
      their electricity bills from a REP and have not paid the REP. REPs will bill
      most retail customers for the transition charges, and as a result the Company
      will have to rely on a relatively small number of entities for the collection
      of
      the bulk of the transition charges. The servicer will not pay any shortfalls
      resulting from the failure of any REP to forward transition charge collections.
      This may adversely affect an investment in Transition Bonds because:





12









·
            REPs
                might use more permissive standards in bill collection and credit
                appraisal than TXU Electric Delivery’s affiliated REP uses, with respect
                to its customers, or might be less effective in billing and collecting.
                As
                a result, those REPs may not be as successful in collecting the transition
                charges as the servicer anticipated when setting the transition charge.





·
            If
                a REP defaults, the REP must either (i) allow the provider of last
                resort
                (“POLR”) or another certified REP of the customer’s choosing to assume
                responsibility for billing and collecting transition charges from
                the
                REP’s retail customers, (ii) implement other mutually agreeable
                arrangements with the servicer or (iii) arrange at the REP’s own expense
                for all amounts owed by its customers to be paid into a lock box
                controlled by the servicer. In no event may the servicer directly
                bill a
                retail customer for service that was previously billed by the REP
                and
                previously paid by that customer to the REP. In addition, if a replacement
                REP assumes the billing and collecting responsibility during the
                period of
                a REP default, billing and collections may be delayed due to the
                need to
                convert to such replacement provider’s systems or because such replacement
                provider may not have adequate or complete information.





·
            A
                default by a REP which collects from a large number of customers
                would
                have a greater impact than a default by a single customer.





·
            The
                bankruptcy of a REP may cause a delay in or prohibition of the enforcement
                of rights against the REP, including the right to payment to the
                servicer
                of transition charges previously collected by the REP, or to comply
                with
                financial provisions of the 1999 Restructuring Legislation or other
                state
                law.





·
            Any
                security deposit or other form of credit support made or deposited
                by a
                REP may not be sufficient to cover any shortfalls resulting from
                a failure
                of that REP to forward transition charges to TXU Electric Delivery
                as
                servicer.


Certain
        transmission and distribution utilities in Texas have tariffs in place to
        assure
        adequate credit worthiness of any REP to support the REP’s obligation to collect
        securitization bond-related charges (transition charges) on behalf of the
        utility. REPs who do not have a long-term unsecured credit rating of at least
        “BBB-” and “Baa3” (or the equivalent from S&P and Moody’s, respectively),
        will be required to provide (i) a cash deposit, (ii) an affiliate guarantee,
        surety bond or letter of credit or (iii) some combination of these forms
        of
        credit support to the Indenture Trustee. The amount of such credit support
        will
        equal two months’ maximum expected collections of transition charges, as
        determined by the servicer and agreed to by the REP, and any cash deposits
        will
        be deposited in a REP security deposit subaccount.
 
 Under
        these provisions, as a result of the downgrade of TXU Energy Company’s credit
        rating to below investment grade, TXU Electric Delivery’s affiliated REP, TXU
        Energy Company, will be required to post collateral support in an amount
        equal
        to estimated transition charges over specified time periods. Based on requests
        to post collateral support from utilities that have been received by TXU
        Energy
        Company and its subsidiaries as of March 7, 2007, and estimates of the amount
        of
        future requests, TXU Energy Company has announced in its 2006 Form 10-K that
        it
        expects to post collateral support in an aggregate amount equal to approximately
        $25 million, with approximately $16 million of this amount to be posted for
        the
        benefit of the Company.
 13
 
 Credit
        support other than cash must be provided by an investment grade entity.
        Documents representing any other form of credit support will be held by the
        Indenture Trustee. Although the Indenture Trustee will maintain the REP security
        deposit subaccounts, it will not have an ownership interest in such subaccounts.
        However, the Indenture Trustee will have a security interest in the Company’s
        rights with respect to such subaccounts and TXU Electric Delivery, as servicer,
        has agreed to use its reasonable best efforts to obtain a security agreement
        from each REP with respect to such REP’s security deposit subaccount. In the
        event that a REP defaults in remitting transition charges, the servicer may
        direct the Indenture Trustee to withdraw or seek recourse for the amount
        of the
        payment default or, if less, withdraw the full amount of that REP’s security
        deposit from the REP security deposit subaccount or seek full recourse against
        any other form of credit support provided for deposit into the general
        subaccount of the applicable series.
 
 In
        addition, the 1999 Restructuring Legislation provides for one or more REPs
        in
        each designated geographical area to be designated the POLR for such area
        or for
        specified classes of customers in such area. The 1999 Restructuring Legislation
        requires the POLR to offer a standard retail service package of basic electric
        service to retail customers in its designated area at a fixed, nondiscountable
        rate approved by the Commission, regardless of the creditworthiness of the
        customer. The REP serving as the POLR may face greater difficulty in bill
        collection than other REPs, and therefore the servicer may face greater
        difficulty in collecting transition charges from the REP serving as the POLR.


As
      noted
      above, REPs issue a single bill to retail customers purchasing electricity
      from
      a REP. This single bill includes all charges related to purchasing electricity
      from the REP, delivery services from the transmission and distribution utility
      and the applicable transition charges. This may increase the risk that customers
      who have claims against the REP will attempt to offset those claims against
      transition charges payable to the servicer or the Company. This also increases
      the risk that a bankruptcy court in the event of a bankruptcy of a REP would
      find that the REP has an interest in the transition property and may make it
      more difficult to terminate a bankrupt REP or collect transition charges from
      its customers.





Adjustments
      to transition charges and, in some cases, credit enhancements (other than swap
      agreements) will be available to compensate for a failure by a REP to pay
      transition charges over to the servicer. However, the amount of credit
      enhancement funds may not be sufficient to protect an investment.





*The
      Introduction of Competition to Metering Services in January 2004 May Produce
      Unexpected Problems.* Since
      January 2004, a commercial or industrial retail customer may choose to own
      its
      own meter or may choose to have its meter owned by a REP, the transmission
      and
      distribution utility, or another person authorized by the customer. Until other
      entities are authorized by the Commission, a transmission and distribution
      utility will continue to provide metering services relating to the installation
      and removal of meters, meter maintenance, meter testing and calibration, data
      collection, and data management, including the transfer of meter data to the
      settlement agent. ERCOT is required by the Commission’s substantive rules to
      file with the Commission quarterly updates on the operational readiness of
      the
      support systems necessary for the Commission to authorize an entity other than
      the transmission and distribution utility to provide the metering services
      described in the preceding sentence. Should the Commission allow third parties
      to perform those metering services in TXU Electric Delivery’s service territory,
      there may be unforeseen problems in converting to the third party’s metering
      system, in taking accurate meter readings and in collecting and processing
      accurate metering data. Inaccurate metering data may lead to inaccuracies in
      the
      calculation and imposition of transition charges and could give rise to disputes
      between the servicer and REPs regarding payments and payment shortfalls. A
      shortfall or material delay in collecting transition charges because of the
      foregoing could result in payments of principal of the Transition Bonds not
      being paid according to the expected amortization schedule, lengthening the
      weighted average life of the Transition Bonds or payments of principal and
      interest not being made at all.





14


*Changes
      to Billing and Collection Practices May Reduce the Value of An Investment in
      Transition Bonds* .
      The
      Financing Order issued to TXU Electric Delivery under the 1999 Restructuring
      Legislation sets forth the methodology for determining the amount of the
      transition charges the Company may impose on each customer. The servicer cannot
      change this methodology without approval from the Commission. However, TXU
      Electric Delivery, as servicer, may set its own billing and collection
      arrangements with REPs and with those customers from whom it collects the
      transition charges directly, provided that these arrangements comply with
      Commission customer safeguards. For example, to recover part of an outstanding
      bill, TXU Electric Delivery may agree to extend a REP’s or a customer’s payment
      schedule or to write-off the remaining portion of the bill including transition
      charges. Also, TXU Electric Delivery, or a successor to TXU Electric Delivery
      as
      servicer, may change billing and collection practices. Any change to billing
      and
      collection practices may have an adverse or unforeseen impact on the timing
      and
      amount of customer payments and may reduce the amount of transition charge
      collections and thereby limit the Company’s ability to make scheduled payments
      on the Transition Bonds. Separately, the Commission may require changes to
      these
      practices. Any changes in billing and collection regulation might adversely
      affect the billing terms and the terms of remittances by REPs to the servicer
      or
      make it more difficult for the servicer to collect the transition charges.
      These
      changes may adversely affect the value of the Transition Bonds and their
      amortization, and, accordingly, their weighted average lives.





*Limits
      on Rights to Terminate Service May Make it More Difficult to Collect Transition
      Charges* .
      An
      important element of an electric utility’s policies and procedures relating to
      credit and collections is the right to terminate or disconnect service on
      account of nonpayment. The Financing Order provides that the sale of transition
      property by TXU Electric Delivery includes all rights of TXU Electric Delivery
      to authorize disconnection of electric service for nonpayment of transition
      charges. The Financing Order provides that, if the servicer is billing customers
      for transition charges, the servicer shall have the right to terminate service
      for nonpayment of transition charges pursuant to the Commission rules.
      Nonetheless, Texas statutory requirements and the rules and regulations of
      the
      Commission, which may change from time to time, regulate and control the right
      to terminate service. In August 2002, the Commission adopted new rules that
      significantly changed POLR service. Under the new POLR rules, instead of being
      transferred to the POLR, nonpaying residential and small nonresidential
      customers served by affiliated REPs are subject to disconnection. Nonpaying
      residential and small nonresidential customers served by nonaffiliated REPs
      are
      transferred to the affiliated REP. Nonpaying large non-residential customers
      can
      be disconnected by any REP if the customer’s contract does not preclude it.
      Thus, within the new POLR framework, 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.
      Effective June 1, 2004, REPs that meet certain conditions will be permitted
      to
      request disconnection of nonpaying customers. TXU Electric Delivery’s affiliated
      REP and the other REPs may not terminate service to a customer on (1) a weekend
      day, (2) a day when the previous day’s high temperature did not exceed 32
      degrees Fahrenheit and is predicted to remain at or below that level for the
      next 24 hours or (3) a day for which the National Weather Service issues a
      heat
      advisory for any county in the service territory, or when a heat advisory has
      been issued for either of the two prior calendar days. As a result, REPs must
      provide service to these customers during this period without recouping
      transition charges from these customers. This could cause a REP to go out of
      business, which may reduce the amount of transition charge collections available
      for payments on the Transition Bonds, although any associated reduction in
      payments would be factored into the transition charge true-up adjustments.





15


*Future
        Adjustments to Transition Charges by Customer Class May Result in Insufficient
        Collections* .
        The
        customers who will be responsible for paying transition charges are divided
        into
        customer classes. Transition charges are allocated among customer classes
        and
        assessed in accordance with the formula required under the 1999 Restructuring
        Legislation and specified in the Financing Order. This allocation is based
        in
        part upon the existing rate structure of each customer class. Adjustments
        to the
        transition charges are also made separately to each customer class. A shortfall
        in collections of transition charges in one customer class may be corrected
        by
        making adjustments to the transition charges payable by that customer class
        and
        any other customer class. Some customer classes have a significantly smaller
        number of customers than other customer classes. If customers in a class
        fail to
        pay transition charges, the servicer may have to substantially increase the
        transition charges for the remaining customers in that customer class and
        for
        other customer classes. The servicer may also have to take this action if
        customers representing a significant percentage of a class cease to be
        customers. These increases could lead to further failures by the remaining
        customers to pay transition charges, thereby increasing the risk of a shortfall
        in funds to pay the Transition Bonds.





The
      large
      industrial and the interruptible customer classes consist of a small number
      of
      large customers. The failure of the customers in these customer classes to
      pay
      transition charges could lead to increases in transition charges to other
      members of this class as well as other customer classes. In addition, with
      the
      issuance of each additional series of Transition Bonds, the transition charges
      imposed on each customer class may increase. These increases could lead to
      failures by customers to pay transition charges. In either case, these increases
      could increase the risk of a shortfall in funds to pay the Transition Bonds.




**Risks
      Associated with the Unusual Nature of the Transition Property**





*TXU
      Electric Delivery May Not Recover Transition Charges More Than 15 Years from
      the
      Original Issue Date of the Series of Transition Bonds Relating to Those
      Transition Charges.* TXU
      Electric Delivery, or any successor servicer, is prohibited from recovering
      transition charges after the fifteenth anniversary of the date of issuance
      of
      the related Transition Bonds, but the Company may continue to recover transition
      charges incurred during the applicable 15-year period through the use of
      judicial process. Amounts collected from transition charges imposed for
      electricity consumed through the fifteenth anniversary of the date of issuance
      of the related Transition Bonds, or from credit enhancement funds, may not
      be
      sufficient to repay the Transition Bonds in full. If that is the case, no other
      funds will be available to pay the unpaid balance due on the Transition Bonds.





*Foreclosure
      of the Indenture Trustee’s Lien on the Transition Property May Not Be
      Practical* .
      Under
      the 1999 Restructuring Legislation and the Indenture, the Indenture Trustee
      or
      the bondholders have the right to foreclose or otherwise enforce the lien on
      transition property securing the Transition Bonds. However, in the event of
      foreclosure, there is likely to be a limited market, if any, for the transition
      property. Therefore, foreclosure may not be a realistic or practical remedy,
      and
      the value of an investment in Transition Bonds may be materially reduced.





**Risks
      Associated with Potential Bankruptcy Proceedings**





*The
      Servicer Will Commingle the Transition Charges with Other Revenues, Which May
      Obstruct Access to the Transition Charges in Case of the Servicer’s
      Bankruptcy* .
      The
      servicer does not segregate the transition charges from its general funds.
      The
      transition charges are segregated only when the servicer pays them to the
      Indenture Trustee and the Indenture Trustee deposits them to the applicable
      collection account. The servicer is permitted to remit collections on a monthly
      basis if TXU Electric Delivery or a successor to TXU Electric Delivery’s
      electric public utility business remains the servicer, no servicer default
      has
      occurred, and if:


·
              the
                  servicer meets the credit ratings requirements of the applicable
                  rating
                  agencies; or
 
 ·
              the
                  servicer provides credit enhancement satisfactory to the applicable
                  rating
                  agencies to assure remittance by the servicer to the Indenture
                  Trustee of
                  the transition charges it collects.
  16


If
      these
      conditions are not satisfied, the servicer is required to remit collections
      to
      the Indenture Trustee within two business days of receipt. Despite these
      requirements, the servicer might fail to pay the full amount of the transition
      charges to the Indenture Trustee or might fail to do so on a timely basis.
      This
      failure, whether voluntary or involuntary, could materially reduce the amount
      of
      transition charge collections available to make payments on the Transition
      Bonds.


On
        February 26, 2007, Fitch Ratings, Ltd. downgraded the servicer’s long-term debt
        rating by one notch and placed the servicer’s rating on Rating Watch Negative.
        Also, Standard & Poor’s Rating Services has placed the servicer’s long-term
        debt rating on CreditWatch negative and Moody’s Investor Services, Inc. has
        placed the servicer’s rating on review for possible downgrade. Commercial paper
        issued by servicer was also downgraded one notch to F3 by Fitch. Despite
        the
        downgrades, the servicer’s senior unsecured debt is currently rated as
        investment grade by all of the rating agencies.


The
      1999
      Restructuring Legislation provides that the Company’s rights to the transition
      property are not affected by the commingling of these funds with any other
      funds
      of the servicer. In a bankruptcy of the servicer, however, a bankruptcy court
      might rule that federal bankruptcy law takes precedence over the 1999
      Restructuring Legislation and does not recognize the Company’s right to
      collections of the transition charges that are commingled with other funds
      of
      the servicer as of the date of bankruptcy. If so, the collections of the
      transition charges held by the servicer as of the date of bankruptcy would
      not
      be available to pay amounts owing on the Transition Bonds. In this case, the
      Company would have only a general unsecured claim against the servicer for
      those
      amounts. This decision could cause material delays in payment or losses on
      the
      Transition Bonds and could materially reduce the value of an investment in
      Transition Bonds.





*REPs
      Will Commingle the Transition Charges with Other Revenues, Which May Obstruct
      Access to the Transition Charges in Case of a REP’s Bankruptcy.* A REP is
      not required to segregate the transition charges it collects from its general
      funds, either on a series basis or otherwise, but will be required to remit
      to
      the servicer amounts billed to it for transition charges, less an amount
      relating to expected customer charge-offs, within 35 days of billing by the
      servicer. A REP nonetheless might fail to pay the full amount of the transition
      charges to the servicer or might fail to do so on a timely basis. This failure,
      whether voluntary or involuntary, could materially reduce the amount of
      transition charge collections available to make payments on one or more series
      of Transition Bonds.





The
      1999
      Restructuring Legislation provides that the Company’s rights to the transition
      property are not affected by the commingling of these funds with other funds.
      In
      a bankruptcy of a REP, however, a bankruptcy court might rule that federal
      bankruptcy law takes precedence over the 1999 Restructuring Legislation and
      does
      not recognize the Company’s right to receive the collected transition charges
      that are commingled with other funds of a REP as of the date of bankruptcy.
      If
      so, the collected transition charges held by a REP prior to or as of the date
      of
      bankruptcy would not be available to the Company to pay amounts owing on the
      Transition Bonds. In this case, the Company would have only a general unsecured
      claim against that REP for those amounts. This decision could cause material
      delays in payment or losses on the Transition Bonds and could materially reduce
      the value of an investment in Transition Bonds, especially with respect to
      a
      default by TXU Energy Holdings, the largest REP in TXU Electric Delivery’s
      service territory.





17


*If
      a
      REP Enters Bankruptcy Proceedings, Transition Charge Payments Made by that
      REP
      to the Servicer May Constitute Preferences, and the Servicer May be Required
      to
      Return such Funds to the Bankruptcy Estate of the REP.* In the
      event of a bankruptcy of a REP, a party in interest may take the position that
      the remittance of funds prior to bankruptcy to the servicer, pursuant to the
      Financing Order, constitutes a preference under bankruptcy law. If a court
      were
      to hold that the remittance of funds constitutes a preference, any such
      remittance within 90 days of the filing of the bankruptcy petition could be
      avoidable, and the funds could be required to be returned to the bankruptcy
      estate of the REP by the Company or the servicer. To the extent that transition
      charges have been commingled with the general funds of the REP, the risk that
      a
      court would hold that a remittance of funds was a preference would increase.
      The
      Company or the servicer may be considered an "insider" with any REP that is
      affiliated with the Company or the servicer. If the servicer or the Company
      are
      considered to be an "insider" of the REP, any such remittance made within one
      year of the filing of the bankruptcy petition could be avoidable as well if
      the
      court were to hold that such remittance constitutes a preference. In either
      case, the Company or the servicer would merely be an unsecured creditor of
      the
      REP. If any funds were required to be returned to the bankruptcy estate of
      the
      REP, the Company would expect that the amount of any future transition charges
      would be increased through the true-up mechanism to recover the amount returned.





*If
      the Servicer Enters Bankruptcy Proceedings, the Collections of the Transition
      Charges Held By the Servicer as of the Date of Bankruptcy May Constitute
      Preferences, Which Means These Funds Would Be Unavailable to Pay Amounts Owing
      on the Transition Bonds.* In the
      event of a bankruptcy of the servicer, a party in interest may take the position
      that the remittance of funds prior to bankruptcy of the servicer, pursuant
      to
      the Financing Order, constitutes a preference under bankruptcy law. If a court
      were to hold that the remittance of funds constitutes a preference, any such
      remittance within 90 days of the filing of the bankruptcy petition could be
      avoidable, and the funds could be required to be returned to the bankruptcy
      estate of the servicer. To the extent that transition charges have been
      commingled with the general funds of the servicer, the risk that a court would
      hold that a remittance of funds was a preference would increase. In such case,
      the Company would merely be an unsecured creditor of the servicer. If any funds
      were required to be returned to the bankruptcy estate of the servicer, the
      Company would expect that the amount of any future transition charges would
      be
      increased through the true-up mechanism to recover the amount returned.





*Bankruptcy
      of TXU Electric Delivery or any Successor Seller Could Result in Losses or
      Delays in Payments on the Transition Bonds.* The 1999
      Restructuring Legislation and the Financing Order provide that as a matter
      of
      Texas state law:


·
              the
                  rights and interests of a selling utility under a financing order,
                  including the right to impose, collect and receive transition charges,
                  are
                  contract rights of the seller;
 
 ·
              the
                  seller may make a present transfer of its rights under a financing
                  order,
                  including the right to impose, collect and receive future transition
                  charges that retail customers do not yet owe;
 
 ·
              upon
                  the transfer to the Company, the rights will become transition
                  property
                  and transition property constitutes a present property right, even
                  though
                  the imposition and collection of transition charges depend on further
                  acts
                  that have not yet occurred; and
 
 ·
              a
                  transfer of the transition property from the seller, or its affiliate,
                  to
                  the Company is a true sale of the transition property, not a pledge
                  of the
                  transition property to secure a financing by the seller.





These
      four
      provisions are important to maintaining payments on the Transition Bonds in
      accordance with their terms during any bankruptcy of TXU Electric Delivery.
      In
      addition, the Company structured the transaction with the objective of
      keeping the Company legally separate from TXU Electric Delivery and its
      affiliates in the event of a bankruptcy of TXU Electric Delivery or any such
      affiliate.





18


A
      bankruptcy court generally follows state property law on issues such as those
      addressed by the state law provisions described above. However, a bankruptcy
      court has authority not to follow state law if it determines that the state
      law
      is contrary to a paramount federal bankruptcy policy or interest. If a
      bankruptcy court in a TXU Electric Delivery bankruptcy refused to enforce one
      or
      more of the state property law provisions described above for this reason,
      the
      effect of this decision on a beneficial owner of Transition Bonds might be
      similar to the treatment to be received in an TXU Electric Delivery bankruptcy
      if the Transition Bonds had been issued directly by TXU Electric Delivery.





The
      Company has taken steps together with TXU Electric Delivery, as the seller
      of
      the transition property, to reduce the risk that in the event the seller or
      an
      affiliate of the seller were to become the debtor in a bankruptcy case, a court
      would order that the Company’s assets and liabilities be substantively
      consolidated with those of TXU Electric Delivery or an affiliate. These steps
      include the fact that the Company is a separate special purpose limited
      liability company, and the Company’s organizational documents prevent the
      Company from commencing a voluntary bankruptcy case without the unanimous
      affirmative vote of all the Company’s managers, including the managers
      independent of TXU Electric Delivery. Nonetheless, these steps may not be
      completely effective, and thus if TXU Electric Delivery or an affiliate of
      the
      seller were to become a debtor in a bankruptcy case, a court might order that
      the Company’s assets and liabilities be consolidated with those of TXU Electric
      Delivery or an affiliate. A decision by the bankruptcy court that, despite
      the
      separateness of the Company and TXU Electric Delivery, the two companies should
      be consolidated, would have a similar effect on a beneficial owner of Transition
      Bonds. Either decision could cause material delays in payment of, or losses
      on,
      the Transition Bonds and could materially reduce the value of an investment
      in
      such bonds. For example:


·
              the
                  Indenture Trustee could be prevented from exercising any remedies
                  against
                  TXU Electric Delivery on an investor’s behalf, from recovering funds to
                  repay the Transition Bonds, from using funds in the accounts under
                  the
                  Indenture to make payments on the Transition Bonds or from replacing
                  TXU
                  Electric Delivery as servicer, without permission from the bankruptcy
                  court;
 
 ·
              the
                  bankruptcy court could order the Indenture Trustee to exchange
                  the
                  transition property for other property, which might be of lower
                  value;
 
 ·
              tax
                  or other government liens on TXU Electric Delivery’s property that arose
                  after the transfer of the transition property to the Company might
                  nevertheless have priority over the Indenture Trustee’s lien and might be
                  paid from transition charge collections before payments on the
                  Transition
                  Bonds;
 
 ·
              the
                  Indenture Trustee’s lien might not be properly perfected in transition
                  property collections that were commingled with other funds TXU
                  Electric
                  Delivery collected from its customers or REPs prior to or as of
                  the date
                  of TXU Electric Delivery’s bankruptcy or commingled in the general funds
                  of TXU Electric Delivery’s affiliated REP as of the date of that REP’s
                  bankruptcy, or might not be properly perfected in all of the transition
                  property, and the lien could therefore be set aside in the bankruptcy,
                  with the result that the Transition Bonds would represent only
                  general
                  unsecured claims against TXU Electric Delivery;
 
 ·
              the
                  bankruptcy court might rule that neither the Company’s property interest
                  nor the Indenture Trustee’s lien extends to transition charges in respect
                  of electricity consumed after the commencement of TXU Electric
                  Delivery’s
                  bankruptcy case, with the result that the Transition Bonds would
                  represent
                  only general unsecured claims against TXU Electric Delivery;
 
 ·
              neither
                  TXU Electric Delivery nor the Company may be obligated to make
                  any
                  payments on the Transition Bonds during the pendency of the bankruptcy
                  case and/or pay interest accruing after the commencement of the
                  case;
 
 ·
              TXU
                  Electric Delivery may be able to alter the terms of the Transition
                  Bonds
                  as part of its plan of reorganization;


19
  ·
                the
                    bankruptcy court might rule that the transition charges should
                    be used to
                    pay a portion of the cost of providing electric service; or
 
 ·
                the
                    bankruptcy court might rule that the remedy provisions of the
                    applicable
                    sale agreement are unenforceable, leaving the Company with a
                    claim
                    of
                  actual
                    damages against TXU Electric Delivery that may be difficult to
                    prove.





Furthermore,
      if TXU Electric Delivery enters into bankruptcy, it may be permitted to stop
      acting as servicer and it may be difficult to find a third party to act as
      servicer. The failure of a servicer to perform its duties or the inability
      to
      find a successor servicer may cause payment delays or losses on an investment
      in
      Transition Bonds. Also, the mere fact of a servicer or REP bankruptcy proceeding
      could have an adverse effect on the resale market for the Transition Bonds
      and
      on the value of the Transition Bonds.




*The
        Sale of the Transition Property Could Be Construed as a Financing and Not
        a Sale
        in a Case of TXU Electric Delivery’s Bankruptcy Which Could Delay or Limit
        Payment on the Transition Bonds.* The 1999
        Restructuring Legislation provides that the characterization of a transfer
        of
        transition property as a sale or other absolute transfer will not be affected
        or
        impaired in any manner by treatment of the transfer as a financing for federal
        or state tax purposes or financial reporting purposes. The Company and TXU
        Electric Delivery have treated the transaction as a sale under applicable
        law,
        although for financial reporting and federal and state income and franchise
        tax
        purposes the transaction has been treated as a financing and not a sale.
        In the
        event of a bankruptcy of TXU Electric Delivery, a party in interest in the
        bankruptcy may assert that the sale of the transition property to the Company
        was a financing transaction and not a sale or other absolute transfer and
        that
        the treatment of the transaction for financial reporting and tax purposes
        as a
        financing and not a sale lends weight to that position. In a bankruptcy court
        case involving LTV Steel Company, the debtor obtained an interim emergency
        motion to use collections from accounts and inventory that it had sold on
        the
        grounds that the sales were in fact disguised financings. The circumstances
        under which the LTV Steel Company ruling would be followed by other courts
        are
        not certain. If a court were to adopt reasoning similar to that of the court
        in
        the LTV Steel case or were otherwise to characterize the transaction as a
        financing, the Company would be treated as a secured creditor of TXU Electric
        Delivery in the bankruptcy proceedings. Although the Company would in that
        case
        have a security interest in the transition property, the Company would not
        likely be entitled to access to the transition charge collections during
        the
        bankruptcy and would be subject to the typical risks of a secured creditor
        in a
        bankruptcy case, including the possible bankruptcy risks described in the
        immediately preceding risk factor. As a result, repayment on the Transition
        Bonds could be significantly delayed and a plan of reorganization in the
        bankruptcy might permanently modify the amount and timing of payments to
        the
        Company of transition charge collections and therefore the amount and timing
        of
        funds available to the Company to make payments on the Transition Bonds.


*Claims
      Against TXU Electric Delivery or any Successor Seller May Be Limited in the
      Event of a Bankruptcy of the Seller* .
      If the
      seller were to become a debtor in a bankruptcy case, claims, including indemnity
      claims, by the Company against the seller under the applicable sale agreement
      and the other documents executed in connection with the applicable sale
      agreement would be unsecured claims and would be subject to being discharged
      in
      the bankruptcy case. In addition, a party in interest in the bankruptcy may
      request that the bankruptcy court estimate any contingent claims that the
      Company have against the seller. That party may then take the position that
      these claims should be estimated at zero or at a low amount because the
      contingency giving rise to these claims is unlikely to occur. If the seller
      were
      to become a debtor in a bankruptcy case and the indemnity provisions of the
      applicable sale agreement were triggered, a party in interest in the bankruptcy
      might challenge the enforceability of the indemnity provisions. If a court
      were
      to hold that the indemnity provisions were unenforceable, the Company would
      be
      left with a claim for actual damages against the seller based on breach of
      contract principles. The actual amount of these damages would be subject to
      estimation and/or calculation by the court. The Company cannot give any
      assurance as to the result if any of the above-described actions or claims
      were
      made. Furthermore, the Company cannot give any assurance as to what percentage
      of their claims, if any, unsecured creditors would receive in any bankruptcy
      proceeding involving the seller.





20


*A
      Bankruptcy of TXU Electric Delivery or Any Successor Seller Would Limit the
      Remedies Available to the Indenture Trustee.* Upon an
      event of default under the Indenture, the 1999 Restructuring Legislation permits
      the Indenture Trustee to enforce the security interest in the transition
      property in accordance with the terms of the Indenture. In this capacity, the
      Indenture Trustee is permitted to request a Travis County, Texas district court
      to order the sequestration and payment to bondholders of all revenues arising
      with respect to the transition property. There can be no assurance, however,
      that the Travis County, Texas district court would issue this order after a
      seller bankruptcy in light of the automatic stay provisions of Section 362
      of
      the United States Bankruptcy Code. In that event, the Indenture Trustee would
      be
      required to seek an order from the bankruptcy court lifting the automatic stay
      to permit this action by the Texas court, and an order requiring an accounting
      and segregation of the revenues arising from the transition property. There
      can
      be no assurance that a court would grant either order.


**Other
      Risks Associated with an Investment in the Transition Bonds**





*TXU
      Electric Delivery’s Obligation to Indemnify the Company for a Breach of a
      Representation or Warranty May Not Be Sufficient to Protect an Investor’s
      Investment.* If the
      seller breaches a representation or warranty in the applicable sale agreement,
      or the servicer (initially TXU Electric Delivery) breaches a representation
      or
      warranty under the applicable servicing agreement, it is obligated to indemnify
      the Company and the Indenture Trustee for any liability, obligation, claim,
      action, suit or payment resulting from that breach, as well as any reasonable
      costs and expenses incurred. TXU Electric Delivery will not be obligated to
      repurchase the transition property in the event of a breach of any
      representation or warranty regarding the transition property, and neither the
      Indenture Trustee nor the holders of Transition Bonds will have the right to
      accelerate payments on the Transition Bonds because of such a breach (absent
      an
      event of default under the Indenture). The sale agreements will provide that
      any
      change in the law by legislative enactment, constitutional amendment or voter
      initiative that renders any of the representations and warranties untrue would
      not constitute a breach under each sale agreement. TXU Electric Delivery or
      any
      successor entity acting as seller or servicer may not have sufficient funds
      available to satisfy its indemnification obligations to the Company and to
      the
      Indenture Trustee; therefore TXU Electric Delivery may not be able to pay
      investors amounts owing on the Transition Bonds in full. If TXU Electric
      Delivery becomes obligated to indemnify holders of Transition Bonds, the ratings
      on the Transitions Bonds will likely be downgraded since holders of Transition
      Bonds will be unsecured creditors of TXU Electric Delivery with respect to
      any
      of these indemnification amounts. TXU Electric Delivery will not indemnify
      any
      person for any liability, obligation, claim, action, suit or payment resulting
      solely from a downgrade in the ratings on the Transition Bonds.





*An
      Investor Might Receive Principal Payments Later, or Earlier, Than
      Expected* .
      The
      amount and the rate of collection of transition charges that TXU Electric
      Delivery will collect from each customer class will partially depend on actual
      electricity usage and the amount of collections and write-offs for that customer
      class. The amount and the rate of collection of transition charges, together
      with the transition charge adjustments described above, will generally determine
      whether there is a delay in the scheduled repayments of Transition Bond
      principal. If TXU Electric Delivery collects transition charges at a slower
      rate
      than expected from any customer class or REP, it may have to request adjustments
      to the transition charges. If those adjustments are not timely and accurate,
      investors may experience a delay in payments of principal and interest or a
      material decrease in the value of their investment. If there is an acceleration
      of the Transition Bonds before maturity, all classes will be paid pro rata,
      therefore some classes may be paid earlier than expected and some classes may
      be
      paid later than expected.





21


*Technological
      Change May Make Alternative Energy Sources More Attractive.* The
      continuous process of technological development may result in the introduction
      for an increasing number of retail consumers of economically attractive
      alternatives to purchasing electricity through TXU Electric Delivery’s
      distribution facilities. Previously, only the largest industrial and
      institutional users with large process steam requirements could use cogeneration
      or self-generation installations cost-effectively. However, manufacturers of
      self-generation facilities continue to develop smaller-scale, more
      fuel-efficient generating units which can be cost-effective options for retail
      consumers with smaller electric energy requirements. If such facilities have
      rated capacities of 10 megawatts or less, consumers that rely on such facilities
      do not generally have to pay transition charges under provisions of the 1999
      Restructuring Legislation. Consumers may avoid a portion of their overall
      transition charge bill by installing new on-site generation of over 10 megawatts
      that reduces consumption through TXU Electric Delivery’s transmission and
      distribution system up to 12.5%. Technological developments may allow greater
      numbers of retail consumers to avoid transition charges under such provisions,
      which may reduce the total number of retail consumers from which transition
      charges will be collected. A reduction in the number of payers of transition
      charges could result in delays or a failure to make payments of interest on
      and
      principal of the Transition Bonds.





22


**Item
      1B. UNRESOLVED STAFF COMMENTS**





None.





**Item
      2.**  **PROPERTIES**





The
      Company does not own any tangible property, other than books and records. The
      primary asset of the Company is the transition property described in Item 1.
      Business.





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





None.





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





None.


23





**PART
      II**





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





Not
      applicable. All outstanding common membership interests in the Company are
      held
      by TXU Electric Delivery.





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





Item
      6 is
      not presented herein as the Company meets the conditions set forth in
      General Instruction (I) (1) (a) and (b).





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





The
      information required hereunder for the Company in its reduced format as allowed
      for under the General Instruction (I)(1)(a) and (b) is set forth under
      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**





None.





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





The
      information required hereunder for the Company is set forth under Report of
      Independent Registered Public Accounting Firm, Statements of Income, Cash Flows,
      Balance Sheets, Member’s Interest and Notes to Financial Statements included in
      Appendix A of 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
      the
      Company’s 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, 2006. Based
      on
      the evaluation performed, the Company’s 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 the Company’s internal controls over financial reporting
      that have occurred during the most recently completed fiscal quarter that has
      materially affected, or is reasonably likely to materially affect, the Company’s
      internal control over financial reporting.





**Item
      9b.**  **OTHER
      INFORMATION**





None.





24


**PART
      III**





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





Item
      10
      is not presented herein as the Company meets the conditions set forth in General
      Instruction (I) (1) (a) and (b).





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





Item
      11
      is not presented herein as the Company meets the conditions set forth in General
      Instruction (I) (1) (a) and (b).





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





Item
      12
      is not presented herein as the Company meets the conditions set forth in General
      Instruction (I) (1) (a) and (b).





**Item
      13.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**





Item
      13
      is not presented herein as the Company meets the conditions set forth in General
      Instruction (I) (1) (a) and (b).





25


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





The
      Company has no Audit Committee of its own, but relies upon the TXU Corp Audit
      Committee (Committee). The Committee has adopted a policy related to the
      engagement of TXU Corp.’s independent auditor. The policy provides that in
      addition to the audit of the financial statements, related quarterly reviews
      and
      other audit services, and providing services necessary to complete SEC filings,
      Deloitte & Touche LLP may be engaged to provide nonaudit services 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 limited circumstances provided
      for
      in the SEC rules. All services performed by the independent auditor in 2006
      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, accounting consultations and audits related to mergers, acquisitions
      and divestitures, employee benefit plan audits; accounting and financial
      reporting standards consultation; internal control reviews; and the like);
      (ii)
      tax-related services (e.g. tax compliance; general tax consultation and
      planning; tax advice related to mergers; acquisitions, and divestitures and
      the
      like); and (iii) other services (e.g. process improvement, review and assurance;
      litigation and rate case assistance; general research; forensic and
      investigative services; training services 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 the
      Company, (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; and (ix) any other services that the Public
      Company Accounting Oversight Board determines, by regulation, to be
      impermissible. In addition, the policy prohibits the independent auditor from
      providing tax or financial planning advice to any officer of the Company.





Compliance
      with the Committee’s policy relating to the engagement of Deloitte & Touche
      LLP will be 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 will be provided to the Committee no less often than
      quarterly.





For
      the
      years ended December 31, 2006 and 2005, fees billed to the Company by Deloitte
      & Touche LLP, the member firms of Deloitte Touche Tohmatsu and their
      respective affiliates were as follows:





**2006**
            
            **2005****Audit
                Fees.**Fees for services necessary to perform the annual audit, review SEC
                filings, fulfill statutory and other attest service requirements
                and
                provide comfort letters and consents
            
            $
            114,000
            
            $
            112,000**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
            
            
            ─
            
            
            ─**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
            
            
            ─
            
            
            ─**All
                Other Fees.**Fees
                for services including process improvementreviews,
                forensic accounting reviews, litigation and rate case
                assistance
            
            
            ─
            
            
            ─**Total**
            
            **$**
            **114,000**
            
            **$**
            **112,000**


26





**PART
      IV**





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





(a)  Documents
      filed as part of this Report:








**Page**Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            A-2Report
                of Independent Registered Public Accounting Firm
            A-7Statements
                of Income for each of the three years in the period ended December
                31,
                2006
            A-8Statements
                of Cash Flows for each of the three years in the period ended December
                31,
                2006
            A-9Balance
                Sheets, December 31, 2006 and 2005
            A-10Statements
                of Member’s Interest for each of the three years in the period ended
                December 31, 2006
            A-11Notes
                to Financial Statements
            A-12





The
      financial statements' 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
      furnished or filed as a part of this report:


Included
      in Appendix B to this report.


27








**SIGNATURES**





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







**TXU
                ELECTRIC DELIVERY****TRANSITION
                BOND COMPANY LLC**Date:March 
                19, 2007By/s/
                T. L. BAKER**(T.
                L. Baker, as Chairman and Chief Executive**
              **of
                TXU Electric Delivery Company, the Servicer)**





**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 Electric Delivery
      Transition Bond Company LLC and in the capacities and on the date
      indicated.**





i)
            Signature
            Title
            Date/s/
            T.
                L. BAKER
            Principal
                Executive(T.
                L. Baker, Chairman and Chief Executive)
            Officer
                and Manager
            March 19,
                2007/s/
            DAVID
                M. DAVIS
            Principal
                Financial Officer
            March
                19 , 2007(David
                M. Davis, Vice President and
              Principal
                Financial Officer)/s/
            STAN
                SZLAUDERBACH
            Principal
                Accounting Officer
            March 
                19, 2007(Stan
                Szlauderbach, Senior Vice President)/s/
            DAVID
                A. CAMPBELL
            Manager
            March 
                19, 2007(David
                A. Campbell)/s/
            DAVID
                P. POOLE
            Manager
            March 
                19, 2007(David
                P. Poole)








28





**Appendix
      A**








**TXU
      ELECTRIC DELIVERY TRANSITION BOND COMPANY LLC**


**INDEX
      TO FINANCIAL INFORMATION**


**December
      31, 2006**











**Page**Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            A-2Report
                of Independent Registered Public Accounting Firm
            A-8Financial
                Statements:Statements
                of Income
            A-9Statements
                of Cash Flows
            A-10Balance
                Sheets
            A-11Statements
                of Member’s Interest
            A-12Notes
                to Financial Statements
            A-13


A
          - 1


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


**RESULTS
      OF OPERATIONS**








**BUSINESS**





The
      Company is a bankruptcy-remote, special-purpose Delaware limited liability
      company, wholly-owned by TXU Electric Delivery. TXU Electric Delivery is a
      wholly-owned subsidiary of TXU Corp. TXU Electric Delivery is a regulated
      electricity transmission and distribution company, principally engaged in
      providing delivery services to REPs that sell electricity in the north-central,
      eastern and western parts of Texas.




The
      Company was organized in November 1999 for the limited purposes of issuing
      Securitization (Transition) Bonds and purchasing and owning transition property
      (as defined in the 1999 Restructuring Legislation) acquired from TXU Electric
      Delivery. Transition property represents the irrevocable right to impose,
      collect and receive charges, referred to as transition charges, in an amount
      sufficient to pay the interest, fees, and expenses associated with the
      Transition Bonds and the aggregate principal amount of the Transition Bonds.
      For
      legal purposes, the transition property has been sold to the Company by TXU
      Electric Delivery. The Company had no operations until August 2003. In
      connection with the acquisition of the transition property, the
      Company:




·
            registered
                and issued the Transition Bonds;


·
            pledged
                its interest in the transition property and other Transition Bond
                collateral to secure the Transition
                Bonds;


·
            has
                agreed to make debt service payments on the Transition Bonds;
                and


·
            has
                agreed to perform other activities that are necessary, suitable or
                convenient to accomplish these
                purposes.





The
      Company is structured and is operated in a manner such that in the event of
      bankruptcy proceedings against TXU Electric Delivery, the assets of the Company
      will not be consolidated into the bankruptcy estate of TXU Electric Delivery.
      TXU Electric Delivery is not the owner of the transition property described
      herein, and the assets of the Company are not available to pay creditors of
      TXU
      Electric Delivery or any of its affiliates.


On
        February 26, 2007, TXU Corp. announced that it had entered into an Agreement
        and
        Plan of Merger, dated February 25, 2007 (Merger Agreement), with Texas Energy
        Future Holdings Limited Partnership (Merger Sub Parent) and Texas Energy
        Future
        Merger Sub Corp (Merger Sub), whereby TXU Corp. would merge with Merger Sub,
        and
        TXU Corp. would become a wholly-owned subsidiary of Merger Sub Parent.  See
        Note 6 to Financial Statements.


A
          - 2


**APPLICATION
      OF CRITICAL ACCOUNTING POLICIES**





The
      Company’s significant accounting policies are detailed in Note 1 to Financial
      Statements. The Company follows accounting principles generally accepted in
      the
      US.


***Revenue
        Recognition —*** The
        Company’s revenue includes an estimate for the transition charges billed to REPs
        by TXU Electric Delivery, as servicer, from the meter reading date to the
        end of
        the period (unbilled revenues). The unbilled revenue is based on actual daily
        revenues for the most recent metered period, adjusted for weather and other
        measurable factors that affect consumption, applied to the number of unmetered
        days through the end of the period. Accrued
        unbilled revenues totaled $7,930,287, $7,939,553 and $6,673,963 at December
        31,
        2006, 2005 and 2004, respectively.
  ***Restricted
      Cash -*** The
      Company has established collection accounts with the Indenture Trustee for
      each
      series of Transition Bonds. Transition charge collection and payment amounts
      are
      applied or withdrawn, as required by the Indenture, from one of the following
      four subaccounts:


·
              General
                  - holds funds to pay allocated Company expenses and make payments
                  and
                  transfers including principal, interest and other amounts as
                  required;
 ·
              Over-collateralization
                  - holds funds to cover any shortfall in transition charge collections.
                  Required funds in the subaccount will be collected, as scheduled,
                  by the
                  servicer over the expected life of the Transition Bonds and are
                  scheduled
                  to ultimately equal 0.50% of the initial principal amount of the
                  Transition Bonds;
 ·
              Reserve
                  - holds funds in excess of the amount necessary to make payments
                  specified
                  from the general subaccount described
                  above;
 ·
              Capital
                  - contains the initial capital contribution of 0.50% of the principal
                  amount of each series of Transition Bonds. Funds in this subaccount
                  are
                  available to the Indenture Trustee to make payments in the event
                  the other
                  three subaccounts are not sufficient. Any funds used from this
                  account are
                  replenished by the Indenture Trustee from subsequent excess transition
                  charge collections. Required funds in the subaccount are equal
                  to 0.50% of
                  the initial principal amount of the Transition
                  Bonds.




The
      Company has also established an Indenture Trustee reserve account with the
      Indenture Trustee to provide for the payment of fees incurred by the Indenture
      Trustee associated with the Transition Bonds in excess of the annual operating
      expenses allowed to be collected through the transition charges.





A
          - 3


**RESULTS
      OF OPERATIONS**





Operating
      revenues increased $518,586, or less than 1%, to $153,500,557 for the year
      ended
      December 31, 2006, and increased $46,268,697, or 43%, to $152,981,971 for the
      year ended December 31, 2005.





*Operating
                Revenues***Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Transition
                charge revenues
            
            $
            150,760,035
            
            $
            151,595,378
            
            $
            106,395,814Investment
                income
            
            
            2,740,522
            
            
            1,386,593
            
            
            317,460Total
                operating revenues
            
            $
            153,500,557
            
            $
            152,981,971
            
            $
            106,713,274


·
              Transition
                  charge revenues decreased $835,343 to $150,760,035 for the year
                  ended
                  December 31, 2006 driven by a decrease in the transition charge
                  tariff
                  that went into effect in May 2006. The transition charge tariff
                  was
                  increased in May 2005 to collect for the under-collection of revenues
                  related to the 2004 Bonds as discussed in Note 3 to the Financial
                  Statements. Transition charge revenues increased $45,199,564 to
                  $151,595,378 for the year ended December 31, 2005 primarily as
                  a result of
                  receiving a full year of revenues related to the 2004 Bonds in
                  2005 as
                  compared to approximately six months of such revenues in
                  2004.
 ·
              Investment
                  income increased $1,353,929 to $2,740,522 for the year ended December
                  31,
                  2006 and $1,069,133 to $1,386,593 for the year ended December 31,
                  2005.
                  Investment income represents earnings on restricted cash balances.
                  The
                  primary drivers of the increases are higher interest rates and
                  higher
                  investment balances. The restricted cash is invested in short-term
                  US
                  government securities.
  Interest
        expense decreased $2,767,369 to $52,493,680 for the year ended December 31,
        2006
        reflecting scheduled principal payments on the Transition Bonds. Interest
        expense increased $13,806,597 to $55,261,049 for the year ended December
        31,
        2005 due to recognition of a full year of interest expense related to the
        2004
        Bonds in 2005 as compared to approximately six months of such interest expense
        in 2004.
 
 Amortization
        of transition property increased $2,771,776 to $93,661,026 for the year ended
        December 31, 2006 and $42,978,226 to $90,889,250 for the year ended December
        31,
        2005 reflecting increased principal payments on the Transition Bonds. See
        discussion under “Amortization” in Note 1 to the Financial
        Statements.
 
 The
        Company recorded expenses for the over-recovery of transition charges of
        $5,886,787, $5,632,408 and $16,657,167 for the year ended December 31, 2006,
        2005 and 2004, respectively. See discussion under “Over/under-recovery of
        transition charges” in Note 1 to the Financial Statements.
 
 Net
        income totaled $629,176 and $369,376 and zero for the year ended December
        31,
        2006, 2005 and 2004, respectively. Included in investment income is interest
        earned on the indenture trustee reserve account and capital subaccounts. The
        Company intends to periodically distribute to TXU Electric Delivery interest
        income in the Indenture Trustee reserve account and interest income in the
        capital subaccounts as released by the Indenture Trustee. See Note 4 to the
        Financial Statements.


A
          - 4


**FINANCIAL
      CONDITION**


***Cash
        Flows*** —
Cash
        flows provided by operating activities in 2006 increased $12,739,405, or
        14%, to
        $106,344,427. The improvement reflected:
 ·
                a
                    favorable change of $5,631,093 in customer deposits reflecting
                    a customer
                    replacing its letter of credit held as collateral with
                    cash;
 ·
                a
                    favorable change in transition charge receivables of $4,470,040
                    reflecting
                    a temporary tariff adjustment in May 2005 to correct for under-collected
                    revenues related to the 2004 Bonds (See discussion under “Interim true-up”
                    in Note 3 to Financial Statements) and the effect of fluctuations
                    in
                    delivered volumes; and
 ·
                the
                    benefit of $2,751,759 in lower interest payments in 2006 as a
                    result of
                    scheduled principal payments on the Transition
                    Bonds.
  Cash
        flows
        provided by operating activities in 2005 increased $34,806,469, or 59%, to
        $93,605,022. The increase reflected receiving a full year of revenues related
        to
        the 2004 Bonds in 2005 as compared to approximately six months of such revenues
        in 2004.
 
 Financing
        activities used cash flows of $93,714,554 and $90,645,256 in 2006 and 2005,
        respectively, and provided cash flows of $761,685,524 in 2004. Financing
        activities for each period are presented in the table below:





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Cash
                provided by (used in) financing activities:Proceeds
                from issuance of 2004 Bonds
            
            $
            —
            
            $
            —
            
            $
            789,777,000Equity
                contribution from parent to the capital subaccount for the 2004
                Bonds
            
            
            —
            
            
            ―
            
            
            3,948,885Sinking
                fund payments on the 2003 Bonds
            
            
            (36,576,586
            )
            
            (35,760,468
            )
            
            (22,543,239
            )Sinking
                fund payments on the 2004 Bonds
            
            
            (56,520,388
            )
            
            (54,544,585
            )
            
            (9,497,122
            )Distributions
                of interest income earned on the Indenture Trustee reserve account
                to
                parent
            
            
            (617,580
            )
            
            (340,203
            )
            
            —Total
                cash provided (used in) financing activities
            
            $
            (93,714,554
            )
            $
            (90,645,256
            )
            $
            761,685,524


Cash
        flows used in investing activities totaled $12,629,873 in 2006, $2,959,766
        in
        2005 and $820,484,077 in 2004. The 2004 activity included the purchase of
        transition property from TXU Electric Delivery for $789,777,000. The investing
        activity in 2006 and 2005 and the remaining activity in 2004 represents changes
        in the balances of all restricted cash accounts.


As
      discussed in Note 1 to Financial Statements, TXU Electric Delivery files for
      increases or decreases (true-ups) in transition charges with the Commission
      to
      ensure sufficient funds will be collected during the following year to meet
      scheduled debt service payments on the Transition Bonds and to maintain the
      over-collateralization and capital subaccounts at the required levels. The
      latest filings included annual true-ups filed in May and August 2006 for both
      series of Transition Bonds and an interim true-up filed in November 2004 for
      the
      2003 Bonds. Based on the approved transition charges and current forecast of
      customer usage, it is expected that revenues collected will be sufficient to
      make the scheduled payments. Also see discussion in Note 3 to Financial
      Statements regarding the interim true-up in November 2004.




As
      of
      December 31, 2006, restricted cash included the balance in the capital
      subaccount of $2,551,158 compared to the required level of $2,500,000 for the
      2003 Bonds and $3,981,088 compared to the required level of $3,948,885 for
      the
      2004 Bonds. Additionally, as of December 31, 2006, the balance in the
      over-collateralization subaccount for the 2003 Bonds was $637,621, compared
      to
      the required level of $624,999, and for the 2004 Bonds was $829,030, compared
      to
      the required level of $822,685. There are no penalties as a result of being
      above or below the required levels in the capital and over-collateralization
      subaccounts. Any future shortfalls in the subaccounts for either series of
      Transition Bonds would be addressed in future true-up filings.





A
          - 5


***Member’s
      Interest*** — Upon
      the
      issuance of the 2004 Bonds, TXU Electric Delivery was required to contribute
      $3,948,885 (0.50% of the aggregate principal amount of the bonds) to the capital
      subaccount included in restricted cash, which is pledged as collateral for
      that
      series of Transition Bonds.





The
      Company receives interest income with respect to its Indenture Trustee reserve
      account and capital subaccounts. The Company intends to periodically distribute
      to TXU Electric Delivery interest income in the Indenture Trustee reserve
      account and the capital subaccounts as released by the Indenture Trustee.
      I nterest
      income totaling $617,580 and $340,203 was distributed to TXU Electric Delivery
      in 2006 and 2005, respectively. The distributions were recorded as a reduction
      in Member’s Interest. No distributions were made to TXU Electric Delivery in the
      year ended December 31, 2004.


**FINANCING
      ACTIVITIES**





The
      Company’s financing needs are limited to issuance of the Transition Bonds. There
      is no provision to allow for any other borrowings.





***Financial
      Covenants, Credit Rating Provisions and Cross Default
      Provisions*** —
The
      terms of the Indenture contain financial covenants that require maintenance
      of
      specified collateral deposits in proportion to the aggregate principal amount
      of
      the Transition Bonds outstanding. As of December 31, 2006, the Company was
      in
      compliance with such covenants.




**REGULATION
        AND RATES**
 
 ***Reallocation
        of Stranded Cost Recovery***
 
 The Public
        Utility Regulatory Act  requires that if statewide stranded costs,
        including regulatory assets, exceed a $5 billion threshold then any excess
        would
        need to be reallocated among retail customer rate classes. The Commission
        earlier determined that TXU Electric Delivery’s share of the excess could not be
        reallocated because of the Settlement Plan and related financing order, which
        resolved all allocation issues. In February 2007, the Commission reversed
        its
        decision, subjecting TXU Electric Delivery’s allocation to further review by the
        State Office of Administrative Hearings. Any reallocation would not impact
        the
        total transition charges collected by the Company, but rather partially shift
        the transition charges billed to REPs related to the securitization bonds
        from
        industrial and commercial to residential rate classes. The Company believes
        that
        the initial decision was correct and cannot determine the ultimate outcome
        of
        this proceeding.


A
          - 6


**FORWARD-LOOKING
      STATEMENTS**





This
      report and other presentations made by the Company contain forward-looking
      statements within the meaning of Section 21E of the Securities Exchange Act
      of
      1934, as amended. Although the Company believes that in making any such
      statement its expectations are based on reasonable assumptions, any such
      statement involves uncertainties and is qualified in its entirety by reference
      to the risks discussed under “RISK FACTORS” and the following important factors,
      among others that
      could cause the actual results of the Company to differ materially from those
      projected in such forward-looking statements:


·
              state
                  or federal legislative or regulatory developments;
 ·
              national
                  or regional economic conditions;
 ·
              the
                  accuracy of the servicer’s estimates of market demand and prices for
                  energy;
 ·
              the
                  accuracy of the servicer’s estimates of industrial, commercial and
                  residential growth in TXU Electric Delivery’s service territory, including
                  related estimates of conservation and electric usage efficiency;
 ·
              weather
                  conditions and other natural phenomena affecting retail electric
                  customer
                  energy usage;
 ·
              acts
                  of sabotage, terrorist activities or other catastrophic events;
 ·
              the
                  speed, degree and effect of continued electric industry restructuring;
 ·
              the
                  operating performance of TXU Electric Delivery’s facilities and
                  third-party suppliers of electric energy in TXU Electric Delivery’s
                  service territory;
 ·
              the
                  accuracy of the servicer’s estimates of the payment patterns of retail
                  electric customers, including the rate of delinquencies and any
                  collections curves; ·
              actions by credit rating agencies; and
 ·
              the
                  operational and financial ability of REPs to bill and collect transition
                  charges and make timely payments of amounts billed by the servicer
                  to the
                  REPs for transition charges.


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





A
          - 7





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Managers and Member of


TXU
      Electric Delivery Transition Bond Company LLC:





We
      have
      audited the accompanying balance sheets of TXU Electric Delivery Transition
      Bond
      Company LLC (the “Company”) as of December 31, 2006 and 2005, and the related
      statements of income, cash flows and member’s interest for each of the three
      years in the period ended December 31, 2006. These financial statements are
      the
      responsibility of the Company's 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. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audits 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 the Company's 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, assessing the accounting principles used and
      significant estimates 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 financial statements present fairly, in all material respects,
        the
        financial position of the Company at December 31, 2006 and 2005, and the
        results
        of its operations and its cash flows for each of the three years in the period
        ended December 31, 2006, in conformity with accounting principles generally
        accepted in the United States of America.





/s/
      Deloitte & Touche LLP





Dallas,
      Texas


March
      19,
      2007





A
          - 8




**TXU
      ELECTRIC DELIVERY TRANSITION BOND COMPANY LLC**


**STATEMENTS
      OF INCOME**








**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Operating
                revenues:Transition
                charge revenue
            
            $
            150,760,035
            
            $
            151,595,378
            
            $
            106,395,814Investment
                income
            
            
            2,740,522
            
            
            1,386,593
            
            
            317,460Total
                operating revenues
            
            
            153,500,557
            
            
            152,981,971
            
            
            106,713,274Operating
                expenses:Interest
                expense
            
            
            52,493,680
            
            
            55,261,049
            
            
            41,454,452Amortization
                of transition property
            
            
            93,661,026
            
            
            90,889,250
            
            
            47,911,024Over
                (under)-recovery of transition charges
            
            
            5,886,787
            
            
            5,632,408
            
            
            16,657,167Servicing
                fees, administrative and general expenses
            
            
            829,888
            
            
            829,888
            
            
            690,631Total
                operating expenses
            
            
            152,871,381
            
            
            152,612,595
            
            
            106,713,274Net
                income
            
            $
            629,176
            
            $
            369,376
            
            $
            —See
                Notes to Financial Statements





A
          - 9











**TXU
      ELECTRIC DELIVERY TRANSITION BOND COMPANY LLC**


**STATEMENTS
      OF CASH FLOWS**







**Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**Cash
                  flows - operating activities:Net
                  income
              
              $
              629,176
              
              $
              369,376
              
              $
              —Adjustments
                  to reconcile net income to cashprovided
                  by operating activities:Amortization
                  of transition property
              
              
              93,661,026
              
              
              90,889,250
              
              
              47,911,024Over
                  (under)-recovery of transition charges
              
              
              5,886,787
              
              
              5,632,408
              
              
              16,657,167Changes
                  in operating assets
              
              
              1,095,021
              
              
              (3,375,019
              )
              
              (11,532,312
              )Changes
                  in operating liabilities
              
              
              5,072,417
              
              
              89,007
              
              
              5,762,674Cash
                  provided by operating activities
              
              
              106,344,427
              
              
              93,605,022
              
              
              58,798,553Cash
                  flows - financing activities:Proceeds
                  from issuance of Transition Bonds
              
              
              ―
              
              
              —
              
              
              789,777,000Equity
                  contribution from parent
              
              
              ―
              
              
              —
              
              
              3,948,885Repayment
                  of debt
              
              
              (93,096,974
              )
              
              (90,305,053
              )
              
              (32,040,361
              )Distribution
                  paid to parent
              
              
              (617,580
              )
              
              (340,203
              )
              
              —Cash
                  provided by (used in) financing activities
              
              
              (93,714,554
              )
              
              (90,645,256
              )
              
              761,685,524Cash
                  flows - investing activities:Purchase
                  of transition property
              
              
              ―
              
              
              —
              
              
              (789,777,000
              )Change
                  in restricted funds
              
              
              (12,629,873
              )
              
              (2,959,766
              )
              
              (30,707,077
              )Cash
                  used in investing activities
              
              
              (12,629,873
              )
              
              (2,959,766
              )
              
              (820,484,077
              )Net
                  increase in cash and cash equivalents
              
              
              ―
              
              
              —
              
              
              ―Cash
                  and cash equivalents, beginning of period
              
              
              1,000
              
              
              1,000
              
              
              1,000Cash
                  and cash equivalents, end of period
              
              $
              1,000
              
              $
              1,000
              
              $
              1,000Supplemental
                  cash flow disclosures:Cash
                  paid for interest
              
              $
              53,052,356
              
              $
              55,804,115
              
              $
              36,915,635See
                  Notes to Financial Statements
   A
            - 10











**TXU
      ELECTRIC DELIVERY TRANSITION BOND COMPANY LLC**


**BALANCE
      SHEETS**








**December
                31,****2006**
            
            **2005****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            1,000
            
            $
            1,000Restricted
                cash (Note 5)
            
            
            54,628,619
            
            
            45,587,656Accounts
                receivable - affiliate
            
            
            ―
            
            
            28,727Transition
                charge receivable:Affiliates
            
            
            9,731,673
            
            
            11,175,991All
                other
            
            
            11,567,723
            
            
            11,189,699Total
                current assets
            
            
            75,929,015
            
            
            67,983,073Investments:Restricted
                funds held in trust (Note 5)
            
            
            16,573,015
            
            
            12,984,105Transition
                property, net of accumulated amortizationof
                $238,209,464 and $144,548,438
            
            
            1,051,567,536
            
            
            1,145,228,562Total
                assets
            
            $
            1,144,069,566
            
            $
            1,226,195,740**LIABILITIES
                AND MEMBER'S INTEREST**Current
                liabilities:Long-term
                debt due currently
            
            $
            96,548,577
            
            $
            93,096,974Accounts
                payable - affiliate
            
            
            265,240
            
            
            159,992Accrued
                interest
            
            
            11,214,829
            
            
            11,773,505Other
                current liabilities
            
            
            7,816,951
            
            
            2,291,106Total
                current liabilities
            
            
            115,845,597
            
            
            107,321,577Transition
                bonds (Note 3)
            
            
            977,786,035
            
            
            1,074,334,612Regulatory
                liability
            
            
            33,947,280
            
            
            28,060,493Total
                liabilities
            
            
            1,127,578,912
            
            
            1,209,716,682Member’s
                interest (Note 4)
            
            
            16,490,654
            
            
            16,479,058Total
                liabilities and member's interest
            
            $
            1,144,069,566
            
            $
            1,226,195,740See
                Notes to Financial Statements





A
          - 11








**TXU
      ELECTRIC DELIVERY TRANSITION BOND COMPANY LLC**


**STATEMENTS
      OF MEMBER’S INTEREST**








**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Member’s
                interest:Balance
                at beginning of year
            
            $
            16,479,058
            
            $
            16,449,885
            
            $
            12,501,000Equity
                contributions from parent
            
            
            ―
            
            
            —
            
            
            3,948,885Distributions
                paid to parent
            
            
            (617,580
            )
            
            (340,203
            )
            
            —Net
                income
            
            
            629,176
            
            
            369,376
            
            
            —Total
                member’s interest at end of year
            
            $
            16,490,654
            
            $
            16,479,058
            
            $
            16,449,885See
                Notes to Financial Statements





A
          - 12


**TXU
      ELECTRIC DELIVERY TRANSITION BOND COMPANY LLC**


**NOTES
      TO FINANCIAL STATEMENTS**








**1.**  **SIGNIFICANT
      ACCOUNTING POLICIES**




***Description
      of Business*** - The
      Company is a bankruptcy-remote, special-purpose Delaware limited liability
      company, wholly-owned by TXU Electric Delivery. TXU Electric Delivery is a
      wholly-owned subsidiary of TXU Corp. TXU Electric Delivery is a regulated
      electricity transmission and distribution company, principally engaged in
      providing delivery services to REPs that sell electricity in the north-central,
      eastern and western parts of Texas.




The
      Company was organized in November 1999 for the limited purposes of issuing
      Transition Bonds and purchasing and owning transition property (as defined
      in
      the 1999 Restructuring Legislation) acquired from TXU Electric Delivery.
      Transition property represents the irrevocable right to impose, collect and
      receive transition charges in an amount sufficient to pay the interest, fees,
      and expenses associated with the Transition Bonds, and the aggregate principal
      amount of the Transition Bonds. For legal purposes, the transition property
      has
      been sold to the Company by TXU Electric Delivery. The Company had no operations
      until August 2003. In connection with the acquisition of the transition
      property, the Company:




·
            registered
                and issued the Transition Bonds;


·
            pledged
                its interest in the transition property and other Transition Bond
                collateral to secure the Transition
                Bonds;


·
            has
                agreed to make debt service payments on the Transition Bonds;
                and


·
            has
                agreed to perform other activities that are necessary, suitable or
                convenient to accomplish these
                purposes.





The
      Company is structured and operated in a manner such that in the event of
      bankruptcy proceedings against TXU Electric Delivery, the assets of the Company
      will not be consolidated into the bankruptcy estate of TXU Electric Delivery.
      TXU Electric Delivery is not the owner of the transition property described
      herein, and the assets of the Company are not available to pay creditors of
      TXU
      Electric Delivery or any of its affiliates.




***Basis
      of Presentation*** —
The
      financial statements of the Company have been prepared in accordance with US
      GAAP and on the same basis as the audited financial statements included in
      TXU
      Electric Delivery Transition Bond Company’s Annual Report on Form 10-K for the
      year ended December 31, 2005. All adjustments (consisting of normal recurring
      accruals) necessary for a fair presentation of the results of operations and
      financial position have been included therein.





***Use
      of Estimates*** —
The
      preparation of the Company’s financial statements requires management to make
      estimates and assumptions about future events that affect the reporting and
      disclosure of assets and liabilities at the balance sheet dates and the reported
      amounts of revenue and expense. 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 during the current
      year.





***Regulatory
      Assets and Liabilities —*** The
      Company’s business meets the applicability criteria of SFAS 71. This accounting
      standard recognizes the cost-based rate making process, which may result in
      differences in the application of generally accepted accounting principles
      between regulated and non-regulated entities.  The
      regulatory liability balances of $33,947,280 and $28,060,493 at December 31,
      2006 and 2005, respectively, consists of over/under-recovery of transition
      charges as discussed below.





A
          - 13


***Revenue
      Recognition —*** The
      Company records revenue for transition charges under the accrual method of
      accounting. Revenues are recognized when transition charges are billed by
      TXU Electric Delivery, as servicer, to REPs for their connected customers on
      the
      basis of periodic cycle meter readings. The Company’s revenue includes an
      estimate for the transition charges billed to REPs by TXU Electric Delivery,
      as
      servicer, from the meter reading date to the end of the period (unbilled
      revenues). The unbilled revenue is based on actual daily revenues for the most
      recent metered period, adjusted for weather and other measurable factors that
      affect consumption, applied to the number of unmetered days through the end
      of
      the period.





***Over/under-recovery
      of transition charges*** —
The
      Company accounts for the difference between transition charge revenues and
      the
      total of interest expense, amortization of the transition property and other
      fees and expenses as an over/under-recovery of transition charges. To the extent
      revenues exceed expenses, the Company records an increase to expense with a
      corresponding increase to a regulatory liability. To the extent revenues are
      less than expenses, the Company records a decrease to expense with a
      corresponding decrease to the regulatory liability.





***Annual
      and interim true-up adjustments*** —  Variations
      in customer usage impact transition charge revenues resulting in temporary
      over/under-recovery of transition charges. In such instances where sufficient
      funds are not collected through transition charges, the over-collateralization
      and the capital subaccounts are drawn down to make scheduled payments on the
      Transition Bonds. TXU Electric Delivery files, on behalf of the Company, an
      annual true-up adjustment with the Commission with respect to each series of
      Transition Bonds. The annual true-up adjustments for the 2003 Bonds and the
      2004
      Bonds are filed in August and May, respectively. In the filing, TXU Electric
      Delivery requests the Commission to increase or decrease the authorized
      transition charges such that, based on the then current forecast of customer
      usage, sufficient funds will be collected during the following period to meet
      the scheduled debt service payments and replenish the over-collateralization
      and
      capital subaccounts to their required level. The Company also has the right,
      under certain circumstances, to file interim true-up adjustment requests
      semi-annually if needed to make scheduled payments.




***Amortization
      —*** The
      transition property acquired from TXU Electric Delivery, which totaled
      $1,289,777,000 at acquisition date, is amortized over the life of the Transition
      Bonds in an amount equal to the scheduled principal payments of the original
      debt amounts.





***Investment
      Income —*** The
      Company earns investment income on funds held by the Indenture Trustee,
      including the Indenture Trustee reserve account established to cover any future
      trustee fees and expenses associated with the Transition Bonds. These funds
      held
      by the Indenture Trustee are invested as allowed by the Indenture. Investment
      income on transition charge collections is recognized as earned.





***Income
      and Other Taxes —*** The
      Company is organized as a single-member limited liability company and will
      not
      be subject to US federal income tax as an entity separate from TXU Electric
      Delivery. In addition, the Company’s receipt of transition property, transition
      charges and short-term earnings from investments of the transition charges
      will
      not be subject to state and local tax. Accordingly, there is no provision for
      federal, state or local taxes.





***Comprehensive
      Income —*** There
      are
      no other components of comprehensive income besides net income.





A
          - 14





**2.**  **RELATED
      PARTY TRANSACTIONS**


Pursuant
        to administration and servicing agreements between the Company and TXU Electric
        Delivery, TXU Electric Delivery furnishes to the Company, at a fixed fee
        per
        year, billing, payment processing, collection, accounting, clerical, secretarial
        and other administrative services, which are classified as administrative
        and general expenses in the income statement. The Company’s expense for
        servicing and administration activities performed by TXU Electric Delivery
        totaled $931,136, $775,221 and $636,479 for the years ended December 31,
        2006,
        2005 and 2004, respectively.
 
 Transition
        charges billed to the REP subsidiaries of TXU Energy Company, which are included
        in operating revenues, totaled $71,087,632, $82,720,978 and $70,309,612 for
        the
        years ended December 31, 2006, 2005 and 2004, respectively. The balance of
        the
        transition charge receivable due from the REP subsidiaries of TXU Energy
        Company
        totaled $9,731,673 and $11,175,991 at December 31, 2006 and 2005,
        respectively.
  Accounts
        receivable due from TXU Electric Delivery totaled zero and $28,727 at December
        31, 2006 and 2005, respectively and represent amounts billed by TXU Electric
        Delivery, as servicer, to REPs as security deposits for payment of the REPs
        transition charges. TXU Electric Delivery, as servicer of the Transition
        Bonds,
        reviews the security amount for the REPs quarterly and requests increases
        when
        required.


Also
      see
      discussion in Note 3 under “Interim true-up” and Note 4 regarding cash
      distributions.





A
          - 15





**3.**  **FINANCING
      ARRANGEMENTS**


***Long-term
      Debt —*** At
      December 31, 2006 and 2005, the Company’s long-term debt consisted of the
      following:





**December
                31,****2006**
            
            **2005**2.260%
                Fixed Series 2003 Bonds due in semi-annual installments through February
                15, 2007
            
            $
            8,119,707
            
            $
            44,696,2934.030%
                Fixed Series 2003 Bonds due in semi-annual installments through February
                15, 2010
            
            
            122,000,000
            
            
            122,000,0004.950%
                Fixed Series 2003 Bonds due in semi-annual installments through February
                15, 2013
            
            
            130,000,000
            
            
            130,000,0005.420%
                Fixed Series 2003 Bonds due in semi-annual installments through August
                15,
                2015
            
            
            145,000,000
            
            
            145,000,0003.520%
                Fixed Series 2004 Bonds due in semi-annual installments through November
                15, 2009
            
            
            158,437,905
            
            
            214,958,2934.810%
                Fixed Series 2004 Bonds due in semi-annual installments through November
                15, 2012
            
            
            221,000,000
            
            
            221,000,0005.290%
                Fixed Series 2004 Bonds due in semi-annual installments through May
                15,
                2016
            
            
            289,777,000
            
            
            289,777,000Total
            
            
            1,074,334,612
            
            
            1,167,431,586Less
                amount due currently
            
            
            96,548,577
            
            
            93,096,974Total
                Long-Term Debt
            
            $
            977,786,035
            
            $
            1,074,334,612





The
      transition property sold to the Company, as well as restricted cash of
      $6,532,246 in the capital subaccount at December 31, 2006, are pledged as
      collateral for the Transition Bonds. Collections of transition charges will
      be
      used to pay the principal, interest and associated costs of the Transition
      Bonds. The Company is required to maintain restricted cash pledged as collateral
      for the Transition Bonds in an amount equal to 0.50% of the initial aggregate
      principal amount of Transition Bonds outstanding. Should the transition charges
      collected through the specified payment dates listed above not provide adequate
      funds to make the scheduled payments of principal and interest, the transition
      charges can continue to be collected for approximately two years before the
      Transition Bond goes into default for nonpayment.


A
          - 16


Maturity
      and sinking fund requirements for the years 2007 through 2011 and thereafter
      under long-term debt instruments outstanding at December 31, 2006, were as
      follows:





**Year**2007
            
            $
            96,548,5772008
            
            
            99,433,3912009
            
            
            103,243,8242010
            
            
            107,824,9742011
            
            
            113,085,241Thereafter
            
            
            554,198,605Total
            
            $
            1,074,334,612





The
      fair
      value of the outstanding Transition Bonds was approximately $1,066,336,569
      and
      $1,163,000,000 as of December 31, 2006 and 2005, respectively. The fair values
      are estimated at the lesser of either the call price or the market value as
      determined by quoted market prices.





***Financial
      Covenants*** —
The
      terms of the Indenture contain financial covenants that require maintenance
      of
      specified collateral deposits in proportion to the aggregate principal amount
      of
      the Transition Bonds outstanding. As of December 31, 2006, the Company was
      in
      compliance with such covenants.





***Interim
      true-up —*** In
      the
      November 2004 interim true-up adjustment for the 2004 Bonds, TXU Electric
      Delivery, in its role as servicer of the 2004 Bonds, made an error in the
      calculation of the transition charges applicable to the Large General Service
      Secondary class of customers. This error was clerical in nature and resulted
      in
      the wrong number of forecasted kilowatt-hours for this particular rate class
      for
      the applicable period. The result of the error was that the transition charges
      billed for this customer class were lower than required to meet the May 16,
      2005
      scheduled principal payment on the 2004 Bonds (even considering the amount
      in
      the capital subaccount for the 2004 Bonds, which was used to help meet the
      scheduled payment). In April 2005, TXU Electric Delivery, as servicer of the
      2004 Bonds, requested that TXU Energy Company, as a REP, pay a portion of its
      then outstanding transition charges related to the 2004 Bonds early in an amount
      sufficient to cover the expected deficiency. Although not required to make
      such
      early payment, TXU Energy Company agreed to make an early payment of
      approximately $2 million. TXU Energy Company made this early payment with no
      compensation from either TXU Electric Delivery or the Company. As a result,
      the
      scheduled payment of principal and interest was made in full. Although TXU
      Energy Company agreed to make an early payment of its outstanding transition
      charges, there can be no assurance that TXU Energy Company would agree to make
      another early payment. See discussion in Note 1 under “Annual and interim
      true-up adjustments”.





**4.**  **MEMBER’S
      INTEREST**


The
      Company receives interest income with respect to its Indenture Trustee reserve
      account and capital subaccounts. Cash distributions to TXU Electric Delivery,
      the amounts of which represent interest income released by the Indenture
      Trustee, totaled $617,580 and $340,203 in the years ended December 31, 2006
      and
      2005, respectively. No distributions were made to TXU Electric Delivery in
      the
      year ended December 31, 2004.





A
          - 17


**5.**  **RESTRICTED
      CASH**


**Balance
                Sheet Classification****At
                December 31, 2006**
            
            **At
                December 31, 2005****Current
                Assets**
            
            **Investment**
            
            **Current
                Assets**
            
            **Investment**Collections
                related to Transition Bonds used only to service debt
              and
                pay expenses (includes over-collateralization subaccount of $1,466,651,
—,
                $421,980 and —)
            
            $
            54,628,619
            
            $
            —
            
            $
            45,587,656
            
            $
            —Funds
                for payment of fees associated with Transition Bonds (Indenture Trustee
                reserve account)
            
            
            —
            
            
            10,040,769
            
            
            —
            
            
            10,029,173Reserve
                for shortfalls of Transition Bond charges
              (capital
                subaccount)
            
            
            —
            
            
            6,532,246
            
            
            —
            
            
            2,954,932Total
            
            $
            54,628,619
            
            $
            16,573,015
            
            $
            45,587,656
            
            $
            12,984,105









A
          - 18


**6.**  **SUBSEQUENT
        EVENTS**
 
 The
        following disclosure is included in TXU Corp.’s 2006 Annual Report on Form
        10-K.
 
 On
        February 25, 2007, TXU Corp. entered into the Merger Agreement with Merger
        Sub
        Parent and Merger Sub, whereby TXU Corp. would merge with Merger Sub and
        TXU
        Corp. would become a wholly-owned subsidiary of Merger Sub Parent. Merger
        Sub
        Parent and Merger Sub are entities directly and indirectly owned by a private
        investment group consisting of entities advised by or affiliated with Kohlberg
        Kravis Roberts and Co. and Texas Pacific Group (Sponsors).
  Under
        the
        terms of the Merger Agreement, the Sponsors will acquire all of the outstanding
        shares of TXU Corp. for $69.25 per share, representing a transaction value
        of
        approximately $32 billion in addition to the assumption by the Sponsors and
        the
        Merger Sub Parent of approximately $12 billion of debt. The Merger Agreement
        contemplates that upon the merger of Merger Sub with TXU Corp., each outstanding
        share of TXU Corp. common stock will be cancelled and converted into the
        right
        to receive $69.25 in cash, without interest, except for shares held by either
        TXU Corp. or the Sponsors or their affiliates, or by dissenting shareholders
        until their rights to dispute are satisfied.
  The
        Merger Agreement contains certain operating covenants with respect to TXU
        Corp.
        and its subsidiaries pending the consummation of the proposed merger. Generally,
        unless the parties have otherwise agreed with respect to specified business
        activities or TXU Corp. obtains the Merger Sub Parent’s prior written consent,
        which consent cannot be unreasonably withheld, conditioned or delayed by
        the
        Merger Sub Parent, TXU Corp. and its subsidiaries must carry on their businesses
        in a manner consistent with a business plan that was negotiated between TXU
        Corp. and Merger Sub Parent and otherwise in the ordinary course of business
        and
        use reasonable best efforts to preserve their present business organizations
        intact and maintain existing relationships and goodwill with governmental
        entities, customers, suppliers, employees and business organizations. In
        addition, the Merger Agreement contains certain specific restrictions or
        limitations on the activities of each of TXU Corp. and its subsidiaries,
        subject
        to the receipt of the Merger Sub Parent’s prior written consent, which consent
        cannot be unreasonably withheld, conditioned or delayed by the Merger Sub
        Parent, including the issuance or repurchase of capital stock, the amendment
        of
        its organization documents, acquisitions and dispositions of assets in excess
        of
        specified amounts, capital expenditures in excess of specified amounts,
        incurrence of certain indebtedness, modification of certain employee
        compensation and benefits arrangements, discharging of liabilities and changes
        to TXU Corp.’s trading policies, as well as executing specified trading
        transactions; however, TXU Corp. is permitted to declare and pay its regular
        quarterly dividend at the current rate of $0.4325 per quarter.
  Consummation
        of the proposed merger is subject to various conditions, including approval
        of
        the merger by a vote of two-thirds of the outstanding shares of TXU Corp.
        common
        stock, expiration or termination of applicable waiting periods under the
        Hart-Scott-Rodino Antitrust Improvements Act of 1976, approval of the Federal
        Energy Regulatory Commission (FERC) and the Nuclear Regulatory Commission
        (NRC)
        other customary closing conditions. TXU Corp. currently expects that the
        proposed merger will occur in the second half of 2007; however, there can
        be no
        assurance that the proposed merger will be consummated. TXU Corp. filed the
        Merger Agreement with the US Securities and Exchange Commission (SEC) on
        a Form
        8-K on February 26, 2007. The foregoing descriptions of the Merger Agreement
        and
        the proposed merger do not purport to be complete and are subject to, and
        qualified in their entirety by, the full text of the Merger Agreement.
  The
        funding of the transaction will not result in new debt incurred at TXU Electric
        Delivery.


A
          - 19


**APPENDIX
      B**





**TXU
      Electric Delivery Transition Bond Company LLC Exhibits to 2006 Form
      10-K**





**Exhibits**
            **Previously
                Filed***
              **With
                File Number**
            **As
                Exhibit****3(i)**
            **Articles
                of Incorporation.**3(a)
            333-91935
              (Form
                8-K filed August 28, 2003)
            4(b)
            —
            Amended
                and Restated Certificate of Formation dated as of August 11,
                2003.**3(ii)**
            **By-laws**3(b)
            333-91935
              (Form
                8-K filed August 28, 2003)
            4(a)
            —
            Amended
                and Restated Limited Liability Company Agreement dated as of August
                21,
                2003.**4**
            **Instruments
                defining the rights of security holders.**4(a)
            333-91935
              (Form
                8-K filed August 28, 2003)
            4(c)
            —
            Indenture
                dated as of August 21, 2003.4(b)
            333-91935
              (Form
                8-K filed August 28, 2003)
            4(d)
            —
            Series
                2003-1 Supplement dated as of August 21, 2003.4(c)
            333-91935
              (Form
                8-K filed June 14, 2004)
            4
            —
            Series
                2004-1 Supplement dated as of June 7, 2004.**10**
            **Material
                Contracts.**10(a)
            333-91935
              (Form
                8-K filed August 28, 2003)
            10(a)
            —
            Series
                2003-1 Transition Property Purchase and Sale Agreement dated as of
                August
                21, 2003.10(b)
            333-91935
              (Form
                8-K filed August 28, 2003)
            10(b)
            —
            Series
                2003-1 Transition Property Servicing Agreement dated as of August
                21,
                2003.10(c)
            333-91935
              (Form
                8-K filed June 14, 2004)
            10(a)
            —
            Series
                2004-1 Transition Property Purchase and Sale Agreement dated as of
                June 7,
                2004.10(d)
            333-91935
              (Form
                8-K filed June 14, 2004)
            10(b)
            —
            Series
                2004-1 Transition Property Servicing Agreement dated as of June 7,
                2004.10(e)
            333-91935
              (Form
                8-K filed August 28, 2003)
            10(c)
            —
            Administration
                Agreement dated as of August 21, 2003.10(f)
            333-91935
              (Form
                8-K filed August 28, 2003)
            10(d)
            —
            Intercreditor
                Agreement dated as of August 21,
                2003.


B
          - 1





**Exhibits****(23)**
            **Consent
                of Experts.**23
            
            
            —
            Consent
                of Deloitte & Touche, LLP, Independent Auditors for TXU Electric
                Delivery Transition Bond Company LLC.**(32)**
            **Section
                1350 Certifications.**32(a)
            
            
            —
            Certification
                of T. L. Baker, principal executive officer of TXU Electric Delivery
                Transition Bond Company LLC, pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.32(b)
            
            
            —
            Certification
                of David M. Davis, principal financial officer of TXU Electric Delivery
                Transition Bond Company LLC, pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.**(35)**
            **Servicer
                Compliance Statement.**35
            
            
            —
            Certification
                of David M. Davis, as principal financial officer of TXU Electric
                Delivery Company, the Servicer.**(99)**
            **Additional
                Exhibits.**99(a)(1)
            
            
            —
            Monthly
                Servicer Report (Series 2004-1 for October 2006)99(a)(2)
            
            
            —
            Monthly
                Servicer Report (Series 2004-1 for November 2006)99(a)(3)
            
            
            —
            Monthly
                Servicer Report (Series 2004-1 for December 2006)99(a)(4)
            
            
            —
            Monthly
                Servicer Report (Series 2003-1 for October 2006)99(a)(5)
            
            
            —
            Monthly
                Servicer Report (Series 2003-1 for November 2006)99(a)(6)
            
            
            —
            Monthly
                Servicer Report (Series 2003-1 for December 2006)99(b)
            
            
            —
            Statement
                of Balances as of December 31, 200699(c)
            
            
            —
            A
                quarterly statement affirming that, in all material respects, for
                each
                materially significant REP, (a) each REP has been billed in compliance
                with the requirements outlined in the Financing Order,
                (b) each REP has made payments in compliance with the requirements
                outlined in the Financing Order, and (c) each REP satisfies the
                Creditworthiness requirements of the Financing Order.99(e)(1)
            
            
            —
            Statement
                of Outstanding Bond Balances Series 2003-199(e)(2)
            
            
            —
            Statement
                of Outstanding Bond Balances Series 2004-199(f)
            
            
            —
            Semi-Annual
                Servicer’s Certificate November
                2006




*  Incorporated
      herein by reference.


B
          - 2