Monday May 8 2006


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Here's how Texas' biggest intends cashing in on bigness

Wilder looks to cash in on giant
generators to keep market share

Expect to see TXU in PJM before long

TXU CEO John Wilder has a tough job ahead, he told investors on an earnings conference call.
        He wants to keep level TXU's retail market share in ERCOT.
        But he knows he's going to lose customers in his incumbent territory of North Texas once full competition starts Jan 1.
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[read more]         That means TXU is going to have to offset those losses with new shoppers in other parts of the state.
        TXU quarterly retail sales fell 19% from a year ago on a 26% dip in large C&I sales.
        Incumbent sales slipped 17% from a year ago.
        TXU blamed shopping and lower customer use for the dips. It lost 7.5% of the customers in the year ending March 31 with most shopping being in the middle of last year.
        Shopping has slowed considerably since then, TXU added.
        It only lost 1% of customers in the first quarter compared with 2% in the fourth quarter of 2005.
        Marketers are now offering smaller discounts because of lower margins, Wilder explained.
        Tight headroom and volatile fuel prices have squeezed competitive activity since late last year.
        It's tough for everyone right now, Wilder told investors.
        TXU is getting a margin 5-10% below its target.
        Most competitors are beating the price to beat by only 4-6%, he added.
        That's just not enough to get customers to shop, he observed.
        It's going to be a "very difficult" competitive environment as long as small margins persist, Wilder forecast.
        Margins are half of what you'd see in most other retail industries, Wilder revealed, and sometimes are only a quarter of what other retail products get.
        If margins widen, he added, you'll see more product and pricing innovation.
        Wilder still thinks TXU's retail segment is "high performance."
        Retail success will only come by serving customers better and giving them real choices to manage their power use, Wilder said.
        That's why TXU has been aggressively adding new products (RT, 4/21, 4/19, 4/18, 3/23).
        In fact, TXU has nine of the 10 cheapest power plans offered by an incumbent, Wilder boasted.
        TXU's low-cost generation portfolio is going to be a big help in attracting shoppers, Wilder explained.
        It lets TXU offer low, fixed-price contracts that other marketers' can't match.
        One of the most successful products TXU is now selling is a five-year, fixed-price plan (RT, 4/21), Wilder told Wall St.
        Customers, he observed, are starting to treat their power spending as a long-term decision like a mortgage -- instead of weekly decision like filling up their gas tanks.
        Wilder isn't worried about legislative intervention in the market.
        He's "highly confident" that lawmakers understand that long-term solutions are needed to give customers lower prices.
        Tinkering with short-term rules isn't going to work, he added.
        Long-term solutions?
        Wilder pointed to TXU's plan to build 11 new coal plants in ERCOT (RT, 4/21) as driving down heat rates thus giving customers lower prices.
        Of course, the plants -- a $10 billion investment -- are going to help TXU's bottom line too.
        TXU expects the plants to grow earnings as early as 2010 when TXU sees them adding $1.2 billion to the bottom line.
        TXU will be able to recover the cost of capital even if natural gas prices dip to $4/mmbtu, company officials said.
        Wilder isn't worried about competing coal projects in ERCOT.
        Nor does he view overbuilding as a big threat.
        Only really big players can undertake such a big investment, he argued.
        It's not a game for "a mouse," he added.
        It's not like building a peaker where you can just roll the generator off the back of a truck.
        You need scale, Wilder explained -- to get the best contractors, to get priority in getting railcars built, etc.
        That doesn't mean someone won't try to compete, Wilder noted.
        Some players always don't get it.
        But he really thinks only big players will be able to succeed.
        They're the only ones who can survive the cyclical nature for such huge assets, he added.
        TXU wants to take its coal plant "show on the road," Wilder told Wall St.
        He's seen a "substantial" amount of interest, especially in PJM.
        Where in PJM?
        Probably in the "middle of the fairway" -- Pennsylvania, Virginia and West Virginia, Wilder replied.
        Those regions have strong power prices and communities there are looking for job growth, he added.
        TXU isn't interested in going into the far west or far east of PJM, Wilder noted.
        TXU could build 5-8 gw outside of ERCOT, he predicted.
        Expect the firm to announce its first plant outside of ERCOT by the end of the year.
        TXU would sign long-term deals with big industrials or munis to sell much of the plants' output, Wilder added.
        TXU is looking to sell some of its higher heat-rate generation, Wilder added, because TXU isn't the "natural owner" of those types of plants.
        He worries that when the older, inefficient plants (now peakers) go online TXU will get too much attention from regulators as the marginal clearing prices jump up.
        Selling the plants, Wilder reminded, wouldn't really generate a lot of capital for a company as big as TXU.
        TXU has hedged 95% of its natural gas exposure for the next three years and has so far mitigated 340 million mmbtu of its exposure in 2009-2011.
        Hedging lets TXU boost cash-flow certainty as it undertakes big capital projects.
        TXU's first quarter earnings soared on strong operating results from its competitive energy business.
        TXU posted a profit of $576 million compared with $416 million a year ago.
        Operational earnings from TXU Energy Holdings -- TXU's competitive generation, wholesale and retail unit -- jumped 155% over the year-ago quarter.
        Company-wide revenues grew 12% to $2.3 billion.
        Originally published in Restructuring Today on May 3, 2006

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