Upload
finance29
View
137
Download
0
Tags:
Embed Size (px)
Citation preview
Transforming a 120 Year-Old Regulated Utility
C. John WilderChief Executive Officer
Southern Methodist UniversityJune 24, 2005
1
Safe Harbor Statement & Regulation G
This presentation contains forward-looking statements, which are subject to various risks and uncertainties. Discussion of risks and uncertainties that could cause actual results to differ materially from management's current projections, forecasts, estimates and expectations is contained in the Company's SEC filings.
Financial DefinitionsThis presentation includes certain non-GAAP financial measures. Definitions of these non-GAAP financial measures are included in the appendix of the printed version of the slides and the version included on the company’s website at www.txucorp.com under Investor Resources/Presentations.
2
SMU Has Had A Distinctive Impact On TXU
Lead by example: Employees with SMU degrees04; Percent
100%=
Total TXU employees
Management/ leadership
team
Senior leadership
team
145 78,000
SMU grads
Others
3
97 94
615
85
3
Today’s Agenda
Competitive Landscape
Competitive Landscape A monopoly’s paradise No more free lunch
TransformationTransformation A regulated monopoly An industrial energy company
2005+Objectives
2005+Objectives
A year of turnaround Defining industry performance
OverviewOverview 100 years of history An exciting and challenging future
From To
4
TXU: A Dynamic History And A Bright Future
Yesterday… Today…
5
TXU Is Focused On Three Businesses With Structural Advantages Across The Entire Value Chain…
Business
Structural advantages
Assets
TXU Power
Generation
2nd largest U.S. deregulated output
Access to low cost lignite reserves
60 TWh of baseloadproduction in a gas on the margin market
$10.8 billion
TXU Electric Delivery
Transmission and
Distribution
6th largest U.S. T&D company
Top quartile costs and reliability
Highest growth NERC region (2.5%)
Efficient capital recovery
$9.9 billion
TXU Energy
Retail
Large scale competitive retailer
Loyal customer base
Strong brand recognition
Superior service
$3.5 billion
6
…With Advantaged Scope And ScaleFinancial Metrics for S&P Electric Utilities Index05E; Mixed measures
4th Quartile 3rd Quartile Median 1st Quartile Top
Market Cap$ billions 8.2 11.2 15.5 32.53.9
20.1#3
Enterprise value$ billions
28.5#3
6.9 14.4 18.8 23.4 42.5
Free cash flow$ billions
-1.2 -0.1 0.1 0.5 2.1
1.7#2
TXU ranks #177 on the Fortune 500TXU ranks #177 on the Fortune 500
7
Today’s Agenda
OverviewOverview
Competitive Landscape
Competitive Landscape
TransformationTransformation
2005+Objectives
2005+Objectives
100 years of history
A monopoly’s paradise
A regulated monopoly
A year of turnaround
From To
No more free lunch
An industrial energy company
Defining industry performance
An exciting and challenging future
8
Upstream Downstream
DistributionTransmissionGeneration
Produce power Transmit power over long distances
Fuel
Generatingstation
Transmission wires
Transmission substation
Distribution wires
Customers
Utilities Historically Have Been Integrated Monopolies Across Upstream And Downstream Functions In Electric Power
Deliver power locally to customers
9
Generation
Utility Restructuring Has “Unbundled” The Electric Power Value Chain Creating New Competitive Businesses
Generation Transmission Distribution
Large regional markets
Wholesale trading and marketing
Super-regional to national markets
Transmission DistributionRetail Energy Services
Regionally franchised
Franchises with longstanding local service territories
Mass market, chain, niche, and large commercial/ industrial customer markets
Restructuring
Competitive
Restructuring has created extremely competitive wholesale and retail markets• Almost 70 competitive companies producing power in Texas• Almost 60 competitive retailers selling power to consumers in Texas
Restructuring has created extremely competitive wholesale and retail markets• Almost 70 competitive companies producing power in Texas• Almost 60 competitive retailers selling power to consumers in Texas
10
0
50
100
150
200
0 10 20 30 40 50 60 70 80 90
ERCOT generation portfolio: Average variable cost04; $/MWh
In The Generation Market, Competition Has Spurred Investment And Improved Efficiency…
Wholesale prices are 40% lower than they would have been under regulationWholesale prices are 40% lower than they would have been under regulation
Cumulative CapacityGW
NuclearCoal
Gas/oil
Internal combustion
CCGT
22 GW of new efficient capacity
($15 billion investment)Wind
TXU owns 8,100 MW of solid fuel generation:• 5,800 MW of lignite• 2,300 MW of nuclear
TXU owns 10,300 MW of gas/oil generation• 9,400 MW of gas• 900 MW of CT’s
11
75
85
490
240
290
650
700
Company B
Company C
Company D
449
305
290
225
190
85
75
… In The Wholesale Market, Competition Has Required The Management Of Significant Commodity Exposure…
Net gas position3
Million MMBtuEquivalent gas production1
Million MMBtuEquivalent fixed price short2
Million MMBtu
1 Estimated long term exposure (2010+) 2 Includes adders to account for shaping, line losses and congestion; Assumes residential, small, medium, and large business are short positions3 Native risk position; excludes gas contracts and hedges
Company A
TXU Long-Term1
Company F
Company E
255
345
0
15
300
0
0
12
…In Retail, Competition Brought Significant Switching, Making Texas The Only Competitive Retail Market
14426
6967
LargeBusiness
Small andMedium
Business
Residential Localtelephone 3years after
restructuring
Long distance3 years afterrestructuring
Significant competition: Net incumbent switch ratesFeb 05; Percent of load
ERCOT retail switching
1122233
78
26
TX DC NY PA MD OH MA CT ME CA
The only true market: Net residential incumbent switch ratesFeb 05; Percent of load
13
ERCOT Accounts For Nearly 80% Of US Residential Switching
US Residential retail sales1
2004; 100% = 1,293 TWh
8%
92%
ERCOT
Rest of US
While ERCOT is only 8% of total electric sales in the US, it comprises 78% of residential switching across the United States
While ERCOT is only 8% of total electric sales in the US, it comprises 78% of residential switching across the United States
4%
9%
9%
78%
Residential switching by state2
2004; 100% ~ 38 TWh
All othermarkets3
ERCOT
Pennsylvania
New York
1 Based on data from EIA; ERCOT website2 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
14
Similar To Other Restructured Markets, We Expect This Market To Continue To Drive Efficiency And Innovation…
Crashing prices: Airline prices79-05; Index of real prices (1979=100)
55
100
79 Today
45%45%
14
100
Cheap calls: US long distance80-05; Index of real revenue/minute (1980=100)
86%86%
80 Today
A competitive market forces the efficiency gains through to the customer in the form of lower prices and value added services
A competitive market forces the efficiency gains through to the customer in the form of lower prices and value added services
63
100
Trucking prices (truckload)67-05; Index of real $/ton (1967=100)
37%37%
67 Today
15
…Making The Transition For The Former Monopolies Extremely Difficult: Declining Financial Flexibility…
AT&T
Yellow
MCI
Qwest
Ryder
United
Delta
American
AAA BBBAA A B CCCBB
Trucking
Telecom
Airlines
D
9090 0404
9090 0404
9090 0404
9090 0404
Bankruptcies
96
69
37
9090 0404
9090 0202
9090 0404
9090 0404
16
5.76.9
-5.1
3.15.8
-6.3
-2.0
3.5
13.0
…And Poor Returns
Poor returns: Annual total return to shareholders (CAGR)83-03; Percent
S&P 500 American
Airlines
AT&T MCI
Source: Compustat
United Delta Qwest Ryder Yellow
TruckingTelecom
There is not a single industrial deregulated incumbent that has outperformed the broader market over the last 20 years
There is not a single industrial deregulated incumbent that has outperformed the broader market over the last 20 years
Average
90%
17
How Will TXU Avoid The Pitfalls That Have Trapped Other Former Monopolies?
“The brief booms that airlines occasionally enjoyed in the 1980s and 1990s encouraged them to believe that radical
change wasn’t necessary. Change didn’t happen fast enough because it was always a moving target,”
Alfred Kahn, Chairman of Civil Aeronautics Board
“The brief booms that airlines occasionally enjoyed in the 1980s and 1990s encouraged them to believe that radical
change wasn’t necessary. Change didn’t happen fast enough because it was always a moving target,”
Alfred Kahn, Chairman of Civil Aeronautics Board
18
Today’s Agenda
OverviewOverview
Competitive Landscape
Competitive Landscape
TransformationTransformation
2005+Objectives
2005+Objectives
100 years of history
A monopoly’s paradise
A regulated monopoly
A year of turnaround
No more free lunch
An industrial energy company
Defining industry performance
An exciting and challenging future
From To
19
TXU Business Environment – Jan 04
12.09.8
TXU Best in class
Costly operations: Nuclear operating costs03; $/MWh
18%18% 280
12
TXU Best in class
Poor service: Average speed to answer03; Seconds
96%96%
65
37
TXU
Too much debt: Debt/total enterprise valueJan 04; Percent
Top quartile (S&P Electric)
43%43%
1.1
11.9
TXU
Poor returns: Annual TRSJan 94- Jan 04; Percent
Top quartile (S&P Electric)
91%91%
20
To Turn This Company Around We Had To Start From Scratch
21
To Turn This Company Around We Had To Start From Scratch
22
To Compete In This New Market, TXU Implemented A Three Phase Transformation Process
Phase 2: Strengthen the Core &
Drive Performance Improvement
Phase 3: Sustained
Performance and Growth
Phase 1:Rationalize,
Restructure & Restore Financial Strength
• Sold disadvantaged businesses
• Repaired balance sheet
• Strengthened contribution margins
23
Step One: Focused Portfolio On Core Businesses…
Low
High
Low High
Mar
ket A
ttrac
tiven
ess
TXU’s Competitive Position
“Improve Or Sell” “Grow Core Business”
“Rationalize” “Restructure Or Sell”
Fuel Co.
Consumer Markets
Fossil
DeliveryBusiness Markets
Australia
CGE JVTXU Gas
Nuclear
Wholesale Markets
Gasgeneration
Almost $14 billion was deployed to
reduce debt and return capital to
shareholders
Almost $14 billion was deployed to
reduce debt and return capital to
shareholders
24
…Redeploying Cash To Fix The Balance Sheet And Reduce Risks
Phase 1: Uses of cash04; $ billions
Debt repurchase
Equity repurchase
Investments
7.6
5.1
1.2
14.2
Dividend 0.3
Phase 1: Sources of cash04; $ billions
Cash from ops
Cash balances
6.5
1.2
1.014.2
5.5
Divested businesses
Borrowings
Risk/Return restructuring generated over $6 billion in value and reduced entity value risk by almost $10 billion
Risk/Return restructuring generated over $6 billion in value and reduced entity value risk by almost $10 billion
Phase 1: Reduction in risk04; $ billions
Litigation
Underwater hedge
Pension/ OPEB
8.0
0.8
0.49.7Uneconomic
leases0.5
25
Phase 2 Is All About High Performance…
Phase 1:Rationalize,
Restructure & Restore Financial Strength
Phase 2: Strengthen the Core &
Drive Performance Improvement
Phase 3: Sustained
Performance and Growth
• Identified $1.6-1.7 billion in EBIT improvement
26
…Through Development Of An Industrial Skill Set
Operational Excellence
• Top decile throughput • World class industrial
production costs• Industry leading reliability• Lean corporate SG&A
Market Leadership
• Superior customer service/ brand management
• Customer segmentation and pricing
• Distinctive commodity sourcing
Risk/Return Mindset
• Strict capital allocation discipline
• Risk/return restructuring• Commodity risk
management
Performance Management• High performance culture• Balanced cascading scorecards• Employee development• Incentives linked to key value drivers
27
Operational Excellence Is About The Extra Inch
28
Operational Excellence Is About The Extra Inch
29
Operational Excellence: “Lean Principles” To GenerationNuclear capacity factors1
03-LT; Percent
88
94 9696
03 04 05E
9%9%
1% improvement ~ $10MM EBIT
Top decile
Long-term target
85 86
89 90
03 04 05E
Lignite capacity factors03-LT; Percent
6%6%
1% improvement ~ $20MM EBIT
Top decile
Long-term target
$1 per MWh improvement ~ $45MM EBIT
Top decile
$16.9 $16.8
$14.5
$15.8
03 04 05E
Lignite fuel & operating expense03-LT; $/MWh generated
14%
Long-term target
Nuclear operating expense1
03-LT; $/MWh generated
$12.0 $12.4$11.6
$10.0
03 04 05E$1 per MWh improvement ~ $18MM EBIT
Top decile
17%
Long-term target
1 Normalized for one outage per year.
30
TXU’s Customer Service Needed To Be Improved
31
TXU’s Customer Service Needed To Be Improved
32
Market Leadership Will Result In A World Class Customer Experience, And An Optimized Supply Function…
Customer retention through innovative loyalty programs
Better customer service: Average speed of answer03-05; Seconds
03 Avg ERCOT A
Q1 05
1652
115
3012
280
ERCOT B
Baby Bell
Leading fin. svc. co.
Better power sourcing: Uneconomic generation of gas fleet03-04; GWh
3,450
1,580
Summer 03 Summer 04
54%54%
16 24
49
118 121
9575-80
50-60
Reducing retail bad debt expense99-05; $ millions
99 00 01 02 03 04 05E Target
Start of deregulation
33
…And An Improved Profile Of Our Customer Mix
03 04
Losing lower profitability customers in North Texas…In-territory residential switching03-04; Thousands of customers
Betterprofit-ability
Lower profit-ability
52%
48%
230
62%
38%
164
03 04
…Gaining higher profitability customers out of territoryOut of territory customer counts03-04; Thousands of customers
43%
57%
148
31%
69%
194
TXU is focused on retaining the most profitable in territory customers and building a profitable out of territory business
TXU is focused on retaining the most profitable in territory customers and building a profitable out of territory business
Betterprofit-ability
Lower profit-ability
34
DebtHolders
FinancialFlexibility
Yes, until
Coverage ratio Debt/EBITDADebt/EV
Excess
Yes
Payout of 30-40%
ExcessDividendPayout
EquityHolders
Cash FlowfromOper-ations
andAssetSalesTX
U B
usin
ess
Uni
ts
Reinvest-ment
Yes, if
50% of cash returned within 3 yearsMinimum ROI of 15%
Excess“Customer”
Capital
Yes
Quality serviceProduction reliability
Repurchasesor Distributions
Retained forInvestment
Excess
Total Payout Cap - 75% ofOperational
Earnings
TXU Follows A Systematic Capital Allocation Process…
35
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
0 10 20 30 40 50 60 70 80
…And A Capital Structure That Is Closer To OptimalWeighted average cost of capital (WACC)03-05; Percent
Debt/Enterprise ValuePercent
03
05E
The current capital allocation process maintains an extremely strong capital structure even in downside scenarios
The current capital allocation process maintains an extremely strong capital structure even in downside scenarios
Acceptable range
04
36
Performance Management Starts With Ownership Of Performance
37
Performance Management Starts With Ownership Of Performance
38
The Industrial Skill Set Is Underpinned By A Strong Performance Management Culture
Reduced number of management layers…03-05; Number of layers
8 6 56-7
03 04 05E
100 81 74 60
0 19 26 40
03 04 05E
Long-term target
Long-term target
…With new managers having the right skills to compete03-05; Percent of management team
38%38%
New
Old
…Implementing best in class performance management
• Stretch targets based on best in class performance
• Monthly “performance dashboards” to review financial and operational performance
• Balanced scorecards that cascade from top-level financials to front-line operations
• Differentiated incentive systems that reward performance against key value drivers
• Succession plans aimed at developing a bench two-deep at every key position
39
The Market Has Responded Positively To The Transformation
TXU’s turnaround created more value than in the 20 years proceeding itTXU’s turnaround created more value than in the 20 years proceeding it
June 85 – Jun 05
333
205
TXU S&P Electric
S&P 500
7
TXU
1,075
Total annual return to shareholdersPercent
Change in market cap$ billions
240
40 11
Jan 04 – Jun 05
TXU S&P Electric
S&P 500
TXU
13
June 95 – Jun 05
11
180 180
TXU S&P Electric
S&P 500
TXU-2
40
To Compete In This New Market, TXU Implemented A Three Phase Transformation Process
Phase 1:Rationalize,
Restructure & Restore Financial Strength
Phase 2: Strengthen the Core &
Drive Performance Improvement
Phase 3: Sustained
Performance and Growth
• Continued operational improvement
• Exploring value creating growth opportunities
41
We Are Now Turning Our Attention To Profitable Growth
Retail access framework in place for all customers
No substantive activity`Retail access suspended
As deregulation unfolds, retail opportunities outside of TX may become attractive…
…Organic options exist such as re-powering gas facilities or leveraging unused coal assets
G T bi S t
GG
GGHP IP LP
Morgan Creek Twin Oak
…Leveraging technology to improve reliability and productivity
Equity share of top ten players04; Percent
…Current state of industry indicates potential opportunity for consolidation
37
68
Electric Power
Global Oil & Gas
42
Today’s Agenda
OverviewOverview
Competitive Landscape
Competitive Landscape
TransformationTransformation
2005+Objectives
2005+Objectives
100 years of history
A monopoly’s paradise
A regulated monopoly
A year of turnaround
No more free lunch
An industrial energy company
Defining industry performance
An exciting and challenging future
From To
43
TXU Faces Significant Challenges And Opportunities Going Forward
Success in our dynamic, challenging industry depends on: “Achieving industry leadership” – Driving toward top decile operations and service in our core businesses
“Cultivating innovation and initiative” – Building a high performance culture focused on continuous improvement
“Earning the right to grow” – Maintaining financial discipline and enhancing core capabilities to capitalize on future value creating opportunities
Key opportunities going forward– Implementing lean manufacturing principles in solid fuel plants– Developing world class marketing capabilities– Managing large and complex commodity risk positions– Developing a profitable growth strategy outside of the core business
44
Ultimate Success Is About “Going For The Green”
45
Ultimate Success Is About “Going For The Green”
Appendix –Financial Definitions
47
Financial Definitions
Total debt less transition bonds divided by enterprise value is used by TXU to assess credit quality.TotalDebt/Enterprise Value (non-GAAP)
Total debt less transition bonds and debt-related restricted cash divided by EBITDA. Transition, or securitization, bonds are serviced by a regulatory transition charge on wires rates and are therefore excluded from debt in credit reviews. Debt-related restricted cash is treated as net debt in credit reviews. Total debt/EBITDA is a measure used by TXU to access credit quality.
TotalDebt/EBITDA (non-GAAP)
Long-term debt (including current portion), plus bank loans and commercial paper, plus long-term debt held by subsidiary trusts, plus preferred securities of subsidiaries, including exchangeable preferred membership interests (EPMIs). 2003 total debt includes debt related to Telecom and discontinued operations.
Total Debt (GAAP)
Unusual charges related to the implementation of the performance improvement program and other charges, credits or gains, that are unusual or nonrecurring. The performance improvement program is being implemented in phases, and the charges are expected to occur largely within a one-year period. Special items are included in reported GAAP earnings, but are excluded from operational earnings. Special items associated with the performance improvement program include debt extinguishment losses and costs related to severance programs, asset impairments and facility closures.
Special Items
Cash from operating activities, less capital expenditures and nuclear fuel. Free Cash Flow (non-GAAP)
Shares of common stock outstanding multiplied by closing share price as of the balance sheet date.Market Capitalization (non-GAAP)
Total debt plus preference stock plus market capitalization less cash and restricted cash.Enterprise Value (non-GAAP)
Income from continuing operations before interest income, interest expense and related charges, and income tax plus depreciation and amortization and special items. EBITDA is a measure used by TXU to assess performance.
EBITDA (non-GAAP)
Income from continuing operations before interest income, interest expense and related charges, and income tax and special items. EBIT is a measure used by TXU to assess performance.
EBIT (non-GAAP)
DefinitionMeasure