energy future holindings _061405
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energy future holindings _061405 energy future holindings _061405 Presentation Transcript

  • Texas Electric Market Restructuring A Customer Success Story C. John Wilder Chief Executive Officer June 14, 2005
  • Today’s Agenda From To Market Market Regulation A truly competitive Restructuring Restructuring market Texas Power Texas Power No customer choice Full customer control Restructuring Restructuring TXU’s TXU’s A regulated monopoly An industrial Transformation Transformation energy company 1
  • Over Time Restructuring Allows Customers To Capture The Benefits Of Open Markets And Competition… Efficiency Increased Increased consumer consumer value value Investment Innovation ••Over the long term open markets allocate resources better than monopolies Over the long term open markets allocate resources better than monopolies and regulators and regulators ••quot;Competition on its worst day is better than regulation on its best day.” quot;Competition on its worst day is better than regulation on its best day.” Pat Wood, FERC Chairman Pat Wood, FERC Chairman 2
  • …Evidenced By The Improvements Made Across Multiple Industries Increased investment... …Efficiency... ...And innovation Percent of available airline seat US Telecom investment miles filled New cable services 93-04; $ billions 77-00; Percent 96-04; No units 71 Access to over 300 33 44% 44% 27% 27% 56 channels (from 30) 23 HDTV technology DSL (Internet broadband) Pay-per-View 93-96 97-04 77 00 Digital Video Pre- Pre- Recorder deregulation deregulation Parental controls “Markets can both price and allocate capital; not just allocate,” “Markets can both price and allocate capital; not just allocate,” Financial Times Financial Times Source: British telecom, O&D survey 3
  • These Improvements Have Led To Lower Prices For Consumers… Crashing prices: Airline prices Cheap calls: US long distance Trucking prices (truckload) 79-05; Index of real prices 80-05; Index of real 67-05; Index of real $/ton (1979=100) revenue/minute (1980=100) (1967=100) 100 100 100 45% 86% 37% 45% 86% 37% 63 55 14 67 79 80 Today Today Today A competitive market forces the efficiency gains through to the customer in A competitive market forces the efficiency gains through to the customer in the form of lower prices and value added services the form of lower prices and value added services 4
  • …And Difficult Transitions For The Former Monopolies: Declining Financial Flexibility… AAA AA A BBB BB B CCC D Bankruptcies 04 90 American 04 90 04 90 04 90 Delta 96 Airlines United 90 04 90 04 AT&T 90 04 90 04 69 Telecom Qwest 90 04 90 04 MCI 90 02 90 02 Yellow 90 04 90 04 37 Trucking Ryder 90 04 90 04 5
  • …And Poor Returns Poor returns: Annual total return to shareholders (CAGR) 83-03; Percent 90% 13.0 6.9 5.7 5.8 3.5 3.1 Average -2.0 -5.1 -6.3 S&P 500 American Delta United AT&T Qwest MCI Ryder Yellow Airlines Telecom Trucking There is not a single industrial deregulated incumbent that has outperformed There is not a single industrial deregulated incumbent that has outperformed the broader market over the last 20 years the broader market over the last 20 years Source: Compustat 6
  • Today’s Agenda From To Market Market Regulation A truly competitive Restructuring Restructuring market Texas Power Texas Power No customer choice Full customer control Restructuring Restructuring TXU’s TXU’s A regulated monopoly An industrial Transformation Transformation energy company 7
  • The Texas Electric Market Is One Of The Largest In The World And Now One Of Only A Few Competitive Retail Markets Electricity consumption Competitive retail 02; TWh 3,660 1,457 971 780 513 510 487 415 344 352 320 267 218 196 United Japan Germany Canada Brazil Texas Spain States China Russia India France United South Australia Kingdom Korea Texas is the 11th biggest market in the world Texas is the 11th biggest market in the world Source: EIA 8
  • Texas Restructuring Has “Unbundled” The Electric Power Value Chain And Restructured Many Activities Competitive Transmission Generation Distribution Restructuring Generation Transmission Retail Distribution 59 active retailers 67 generators 5 T&D Examples ANP AEP Central Cirro Calpine AEP North Constellation Constellation CenterPoint Direct Energy Exelon TNMP Entergy FPL TXU Electric Delivery First Choice Sempra GEXA Texas Genco Green Mountain TXU Power Reliant Energy TXU Energy Restructuring has brought a variety of new players into the market Restructuring has brought a variety of new players into the market 9
  • Competition Has Led To The Formation Of Many Different Business Models Where companies participate …to many different models: Participate in… Examples All segments TXU Corp GTDR Texas evolved from an T&D only CenterPoint TD G R integrated model… AEP Central/North Genera- Trans- Distri- Retail Retail only Reliant Energy R G T D tion mission bution Green Mountain 5 regulated, integrated companies Retail and Centrica (Direct) G R T D generation Calpine Constellation FPL/Gexa (pending) Generation Texas Genco G T D R only ••Only time will tell which business models will succeed Only time will tell which business models will succeed ••As the market continues to mature, the winning business model may continue to change As the market continues to mature, the winning business model may continue to change 10
  • ERCOT Was Designed So That Customers Could Capture The Benefits Of Open Markets And Competition What Texas Did Right How Customers Benefited Significant investment in Simple bilateral market state of the art Expedited permitting and Wholesale Wholesale technology (efficient interconnection CCGT) Improved operational performance PTB provided headroom Many competitive options and mechanism to pass Lower prices than Retail Retail on commodity changes under continued regulation Low barriers for entry New products (loyalty Immediate competitive programs, “green power”) pricing for customers The Texas Legislature correctly designed the retail framework to: The Texas Legislature correctly designed the retail framework to: •• Ensure Texans have access to reliable electricity at competitive prices and Ensure Texans have access to reliable electricity at competitive prices and improved customer service improved customer service •• Foster competitive behavior and encourage entrepreneurship, while Foster competitive behavior and encourage entrepreneurship, while continuing to protect consumers continuing to protect consumers 11
  • Restructuring Spurred Massive Generation Investment In The ERCOT Market… In rate base Not in rate base Capacity additions 90-04; GW1 90-97 Additions= 6 GW 98-04 Additions= 26 GW 6.6 PURA 95 SB7 5.7 5.5 (wholesale (retail 4.4 competition) competition) 2.9 1.7 1.1 1.0 0.8 0.7 0.6 0.5 0.4 0.2 0.2 Year 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 Reserve Margin (%) 27 29 27 23 23 17 16 9 8 7 12 28 35 32 33 From 98-04, more than $15 billion was invested in generation infrastructure – From 98-04, more than $15 billion was invested in generation infrastructure – none of which was in the rate base none of which was in the rate base 1 GW = 1000 MW (1 MW serves approximately 1000 homes) 12 Source: Energy Velocity; NERC
  • …Bringing Efficient CCGT Capacity Into The ERCOT Generation Portfolio Average demand ERCOT generation portfolio: Average variable cost1 98-04; $/MWh Internal 98 combustion 200 Gas/oil 150 ••Restructuring led Restructuring led 100 Wind to the investment Coal to the investment Nuclear of over $15 billion of over $15 billion 50 Average price ~ $80 and the addition of and the addition of 0 the 22GW of the 22GW of 0 20 40 60 80 efficient CCGT efficient CCGT capacity 04 capacity Internal ••Overall the total 200 Overall the total combustion market is receiving market is receiving Gas/oil 150 22 GW of new less than an 8% less than an 8% efficient capacity Wind Coal return on capital 100 return on capital Nuclear CCGT 50 Average price ~ $45 0 0 20 40 60 80 Cumulative Capacity 1 Based on a $6.00/MMBtu gas price GW 13 Source: Platt’s PowerDat
  • …Leading To A Significant Reduction In Market Heat Rates ERCOT heat rate1 cycle 98-04; MMBtu/MWh 16 CCGT reinvestment economics 14 12 10 8 6 4 CCGT marginal heat rate 2 0 98 99 00 01 02 03 04 •• New capacity has led to a 40% increase in the efficiency of the marginal unit New capacity has led to a 40% increase in the efficiency of the marginal unit •• This would be similar to improving average automobile gas mileage from 20 This would be similar to improving average automobile gas mileage from 20 mpg to 35 mpg mpg to 35 mpg 1 Heat rate is a measure of the efficiency of converting a unit of fuel (MMBtu) into a unit of electricity (MWh); lower heat rates implies higher efficiency. Based on day ahead electricity and gas prices. Source: MegaWatt Daily, Gas Daily 14
  • Competition Has Forced Marginal Pricing, Preventing Most Generators From Receiving Full Compensation For Capital Invested Capital recovery Fixed cost Full reinvestment economics1 Variable cost 052; $ / MWH 72 66 16 56 Today’s prices2 3 48 Forward price 54 range3 38 24 53 8 14 16 12 4 0 Wind w/o PTC Nuclear Coal CCGT Similar to other competitive markets pricing is bid down to the variable Similar to other competitive markets pricing is bid down to the variable economics of the marginal unit economics of the marginal unit 1 Wind capacity factor=40%, Nuclear=90%, Coal=90%, CCGT=60% 2 Assumes $7.50 / MMBtu natural gas prices and 7x24 Heatrate of 8 MMBtu/MWh 3 Assumes range of $4.50-$5.50 / MMBtu natural gas prices and 7x24 Heatrate of 8-9 MMBtu/MWh 15 Source: EIA, Henwood
  • ERCOT Was Designed So That Customers Could Capture The Benefits Of Open Markets And Competition What Texas Did Right How Customers Benefited Significant investment in Simple bilateral market state of the art Wholesale Expedited permitting and Wholesale technology (efficient interconnection CCGT) Improved operational performance PTB provided headroom Many competitive options and mechanism to pass Lower prices than under Retail Retail on commodity changes continued regulation Low barriers for entry New products (loyalty Immediate competitive programs, “green power”) pricing for customers The Texas Legislature correctly designed the retail framework to: The Texas Legislature correctly designed the retail framework to: •• Ensure Texans have access to reliable electricity at competitive prices and Ensure Texans have access to reliable electricity at competitive prices and improved customer service improved customer service •• Foster competitive behavior and encourage entrepreneurship, while Foster competitive behavior and encourage entrepreneurship, while continuing to protect consumers continuing to protect consumers 16
  • Customers Have Already Begun To Reap The Benefits Of Competition… Average residential prices1 Average large business prices1 02-04; $/MWh 02-04; $/MWh 15% 20% 15% 20% 93 79 66 53 If regulation Competitive If regulation Competitive continued continued ••Even with historically high natural gas prices, customers have benefited Even with historically high natural gas prices, customers have benefited from access to lower electricity prices than they would have experienced from access to lower electricity prices than they would have experienced under regulation under regulation 1 Competitive Residential price based on 15% discount to TXU Energy PTB as currently offered by market competitors, e.g., Cirro (14.6%); Competitive large business rates include 10% wholesale gross up and 5% net margin; Regulated world assumes 9.6 GW added capacity in the rate base (as opposed to 22GW actually built) at a cost of $600/kw, O&M costs approximately $36/kw-yr resulting in an average cost of $127/kw-yr in the rate base Source: TXU Energy, ECOM model 17
  • … Giving Customers In Texas Access To Lower Prices Than Before Restructuring Change in best available price Dec 01 – Dec 04; Percent 180 101 25.2 8.4 7.5 3.7 -1.2 -1 -3.2 -3 -6.9 North Colorado Arizona Oklahoma Arkansas Gasoline Texas Houston Louisiana Utah New Natural gas Mexico Competitive providers have used efficiency Competitive providers have used efficiency to combat higher purchased power costs to combat higher purchased power costs Source: Texas PUC, EIA 18
  • Electricity Prices Have Increased Much Slower Than Inflation And Represent A Smaller Amount Of Disposable Income Change in prices Change in use of disposable income 90-04; Percent 90-04; Percent change 45 32% 62% 62% 24% 4% 3% 0% 17 -10% -13% -21% Recreation Automobiles Gasoline Electricity Consumer Residential Medical Housing Food Clothing Price electricity Index Efficiency in technology and operations has reduced the cost of electricity on Efficiency in technology and operations has reduced the cost of electricity on a real basis a real basis Source: EIA, Department of Commerce 19
  • Significant Switching Highlights Texas As The Only Truly Competitive Residential Retail Electricity Market In The U.S. Significant competition: Net incumbent switch rates May 05; Percent of load 73 72 28 14 4 Large Small and Residential Local Long distance Business Medium telephone 3 3 years after Business years after restructuring restructuring ERCOT retail switching The only true market: Net residential incumbent switch rates Feb 05; Percent of load1 28 8 7 3 3 2 2 2 1 1 TX DC NY PA MD OH MA CT ME CA 1 Texas updated as of May ’05 based on ERCOT data; Ohio excludes load attributable to municipal aggregation 20 Source: KEMA, FCC, CERA
  • ERCOT Accounts for Nearly 80% of US Residential Switching Residential switching by state2 US Residential retail sales1 2004; 100% ~ 38 TWh 2004; 100% = 1,293 TWh All other markets3 ERCOT ERCOT 8% New York 9% 9% Pennsylvania 4% 78% 92% Rest of US While ERCOT is only 8% of total electric sales in the US, it comprises 78% of While ERCOT is only 8% of total electric sales in the US, it comprises 78% of residential switching across the United States residential switching across the United States 1 Based on data from EIA; ERCOT website 2 Based on data from KEMA – 2004 Restructuring Review; state PUC websites; excludes load in Ohio attributed to municipal aggregation 3 Includes AZ, CA, CT, DC, DE, IL, MA, MD, ME, MI, MT, NH, NJ, NV, OH, OR, RI, VA 21
  • Texas Customers Receive Superior Customer Service, Even When Benchmarked Against More Mature Industries… Average speed of answer 03-05; Seconds 489 280 96% 98% 96% 98% 52 12 16 12 03 Avg Q1 05 Baby Bell National April 04 Oct 04 telephone financial TXU Energy ERCOT Competitor company svcs. co. While TXU Energy took the lead in improving call center operations, a major While TXU Energy took the lead in improving call center operations, a major competitor soon followed – exactly what you would expect in a competitive competitor soon followed – exactly what you would expect in a competitive market market Source: TXU 22
  • …And Will Reap The Benefits Of Innovative New Products Existing Product Offerings Commodity Related Price To Beat (PTB) – NTX PTB Index Discount – STX Care/Service Related Energy Related TXU Energy Rewards+ Authorized Dealer Network + HVAC Referral Program Average Bill Comfort Rewards Program Choose Your Own Due Date HVAC Financing Automatic Bank Draft Home Energy Advisor Online Express Pay – Online, Phone Home Surge Protection E-Bill Option 1 (outage notification) Several new products are already available, with many others in development Several new products are already available, with many others in development 23
  • Texas Learned From Other Flawed Market Designs, Benefiting Customers … And Texas … And Texas Other states had …But Texas Other states had …But Texas customers customers problems … avoided them problems … avoided them benefited benefited Poor boundaries Vibrant retail & Plant investment between retail & wholesale market decreased energy wholesale prices Allowed retail price Supply disconnected adjustments (PTB) Lower prices than from demand response / prior to deregulation Attractive to new retail prices generation & Robust competition Limited supply transmission projects High customer development Accommodated switching Inflexible business multiple business New products and models models services Limited competition Created incentive for Improved customer new entrants service levels The original Texas framework (SB7) has been successful, requiring only The original Texas framework (SB7) has been successful, requiring only minor adjustments. Recently, the Legislature concluded no substantial minor adjustments. Recently, the Legislature concluded no substantial changes were needed. changes were needed. 24
  • Today’s Agenda From To Market Market Regulation A truly competitive Restructuring Restructuring market Texas Power Texas Power No customer choice Full customer control Restructuring Restructuring TXU’s TXU’s A regulated monopoly An industrial Transformation Transformation energy company 25
  • How Will TXU Avoid The Pitfalls That Have Trapped Other Former Monopolies? “The brief booms that airlines occasionally enjoyed in the “The brief booms that airlines occasionally enjoyed in the 1980s and 1990s encouraged them to believe that radical 1980s and 1990s encouraged them to believe that radical change wasn’t necessary. Change didn’t happen fast enough change wasn’t necessary. Change didn’t happen fast enough because it was always a moving target,” because it was always a moving target,” Alfred Kahn, Chairman of Civil Aeronautics Board Alfred Kahn, Chairman of Civil Aeronautics Board 26
  • …By Transforming From A Regulated Monopoly To An Industrial Energy Company Market Leadership Operational Excellence Risk/Return Mindset • Superior customer service/ • Top decile throughput • Strict capital allocation brand management discipline • World class industrial • Customer segmentation production costs • Risk/return restructuring and pricing • Industry leading reliability • Commodity risk • Distinctive commodity management • Lean corporate SG&A sourcing Performance Management • High performance culture • Balanced cascading scorecards • Employee development • Incentives linked to key value drivers 27
  • Operational Excellence Is About Bringing “Lean Principles” To Generation… Lignite capacity factors Nuclear capacity factors 03-05; Percent 03-05; Percent 90 Top decile 94 94 6% 6% 7% 7% 88 Top decile 86 90 85 88 Long term Long term 03 04 05E 03 04 05E target target 1% improvement = $20MM EBIT 1% improvement = $10MM EBIT Nuclear operating expense Lignite fuel & O&M expense 03-05; $ / MWh generated 03-05; $/ MWh generated 9% 18% $16.9 $16.8 $15.8 $12.4 $12.3 Top decile $12.0 $11.0 $14.5 Top decile Long term Long term 03 04 05E 03 04 05E target target $1 per MWh improvement = $18MM EBIT28 $1 per MWh improvement = $45MM EBIT
  • … And Minimizing The Corporate Center Creating an industrial corporate center… … with lower costs 03-05; Number of employees 03-05; $ millions 1,746 370 346 87% 66% 87% 66% 125 75 296 235 Long term 03 04 05E 03 04 05E target TXU has focused on removing redundancies and TXU has focused on removing redundancies and focusing directly on value creating opportunities focusing directly on value creating opportunities 29
  • Market Leadership Will Result In A World-Class Customer Experience And An Optimized Supply Function… Better power sourcing: Better customer service: Uneconomic generation of gas fleet Average speed of answer 03-04; GWh 03-05; Seconds 280 54% 54% 3,450 1,580 115 52 30 12 16 03 Avg Q1 05 ERCOT ERCOT Baby Leading Summer 03 Summer 04 Bell fin. svc. co. TXU A B Customer retention through Reducing retail bad debt expense innovative loyalty programs 99-05; $ millions 118 121 95 Start of 75-80 deregulation 50-60 49 24 16 99 00 01 02 03 04 05E Target 30
  • The Risk Return Mindset Is Focused On Optimizing the Risk Return Profile For All Key Stakeholders Retained for Investment TXU Business Units Cash Flow Excess Excess Excess Excess from “Customer” Reinvest Financial Dividend Oper- Capital -ment Flexibility Payout ations and Asset Yes Yes, if Yes, until Yes Sales Quality service 50% of cash Strong Credit Payout of Repurchases Production returned within Coverage ratio 30-40% or Distributions reliability 3 years Debt/EBITDA Minimum ROI Debt/EV Total Payout of 15% Cap - 75% of Operational Earnings Equity Debt Holders Holders 31
  • The Industrial Skill Set Is Underpinned By A Strong Performance Management Culture Reduced number of management layers… …Implementing best in class performance 03-05; Number of layers management 38% 8 38% 6-7 6 5 • Stretch targets based on best in class performance Long term 03 04 05E • Monthly “performance dashboards” to target review financial and operational performance …With new managers having the right • Balanced scorecards that cascade from skills to compete top-level financials to front-line 03-05; Percent of management team operations 0 19 New 26 40 • Differentiated incentive systems that 100 81 reward performance against key value 74 Old 60 drivers 03 04 05E Long term • Succession plans aimed at developing a target bench two-deep at every key position 32
  • Conclusion Texas electric market restructuring has been successful at delivering significant value to consumers • Access to lower prices • Better service • Innovative new products The “invisible hand” of the market is driving change and improvement in all market competitors Given this success… • Why isn’t the market garnering more attention? • Why haven’t other states accelerated restructuring efforts? 33