Energy Policy Forum

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Energy Policy Forum
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Slide Master

• Issue 1
• Significant infrastructure build-out requirements
• yet,
• Capital is exiting the sector and many are under
  financial duress
• Issue 2
• Is trading, marketing and risk management a
  necessary functionin a deregulated market
• if so,
• Who will be the major participants and how will
  they be capitalized
• Issue 3
• Which business models will survive
• and
• How will investors show preference among them

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Construction ExpendituresInvestor-Owned Electric
Utilities
3
2002 Expenditure Pullback

• Plans to boost liquidity by 2 billion through
  capital raising and capital expense reductions.
  Reducing power trading activities to reflect
  current market conditions
• Delayed 6,800MW of projects under development and
  reduced construction capital expenditures by 2
  billion
• Plan to sell 2bn in assets back to basics
  strategy. Cutting capital spending by
  approximately 1 billion per annum
• Freezing new investment and pursuing significant
  asset sales
• Announces 1,800MW of new capacity in CA has been
  delayed or postponed
• Exiting the power marketing and trading business
• Selling 3bn of assets and reducing annual
  expenditures by 100mm
• Reducing build-out program and capital budget
• Exiting trading business and energy merchant
  activity
• Exiting and/or limiting non-U.S. operations
  scaling back capital budget
• Asset sale program
• Cancelled 1,168MW of generation projects for a
  total cost of 700 million
• Exiting development of new merchant generation
  plants

Dynegy NEG CMS AES Cal-ISO
IDACORP Williams Calpine Acquila Mirant El
Paso AlleghenyEnergy Entergy
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Sectors Doldrums
Reversible
?
Permanent

• Investor Psychology
• Overbuild
• Weather

• Undercapitalized
• Trading Exposures

• Commodity cycles
• Political / regulatory uncertainty
• Low return on assets

5
Top 2000/01 Power Marketers

• Enron Yes 0
• Reliant Yes 34
• Aquila Yes 26
• Mirant Yes 18
• Dynegy Yes 13
• El Paso Yes 27
• Williams Yes 15
• Average 19
• AEP No 79
• Duke No 65
• Dominion No 93
• PGE No 66
• Exelon No 75
• Constellation No 75
• Cinergy No 97
• Entergy No 90
• Average 71

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New Capital?
Regulation
Low Return on Assets
Political Uncertainty
CounterpartyCredit

• Wall Street Goldman Sachs, Morgan Stanley, etc.
• Insurance AIG
• Private Equity Berkshire Hathaway, KKR, TPG,
  etc.
• Foreign Utilities E.ON, RWE, Suez, Edf, Endesa,
  etc.
• Big Oil ChevronTexaco, BP, Shell, ExxonMobil,
  etc.

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Will Trading Survive?
Importance
Function

• Marketing long MW positions
• Hedging price exposure
• Managing third party exposure
• Proprietary trading

• High
• Medium (lack of term markets)(zero sum game)
• Low
• Low

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Potential Business Models
High Dividend, Low Growth
No Dividend, High Growth
Modest Dividend, Modest Growth
State Regulated Transmission and Distribution ie
NStar
Regulated Integrated Utility ie Southern Co.
FERC Regulated Transmission ie Trans-Elect
Energy Convergence ie Duke