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TXU Plans 8,600 MW of New TX Coal-Fired Generation

In a move that could have a substantial negative impact on gas-fired power generators in Texas, TXU Corp. announced plans last Thursday to add 8,600 MW of coal-fired power generation in Texas. The move would more than double TXU's baseload generation in the state. In an effort to calm the fears of environmentalist, TXU said it will spend $500 million on controls that it predicted would cut its emissions 20% from current levels.

The company predicted that the $10 billion in new generation would boost power supply in the state by 10%, which, it said, should be sufficient to meet Texas' growing demand through 2015. It also predicted that the new coal-fired generation would lower long-term power costs for customers by $1.7 billion annually. The company also said it will invest $2 billion in coal-gasification technology research.

"Texans want ample generation supply, access to lower electric prices, and better air quality, and TXU will deliver all three," said TXU Chairman C. John Wilder. "Our new service offerings and this massive investment in power infrastructure will save consumers money, add reliable electric generating capacity to reduce dependence on high cost natural gas, create jobs, and lower key emissions -- all at the same time."

TXU noted that Texas has one of the fastest growing economies in the country and is projected to add nearly six million residents within a decade. At the same time, the state's electric power reserve margins are compressing rapidly and are expected to fall below levels deemed reliable by 2010.

With 72% of the state's generation capacity dependent on natural gas for fuel, compared to the U.S. average of 45%, the state also has been significantly exposed to rising natural gas prices, which have quadrupled since the 1990s and are expected to remain high. At the same time, U.S. imports of liquefied natural gas are expected to increase five-fold.

"There is no easy solution to reduce U.S. dependence on foreign energy sources and to reduce power prices," said Wilder. "To address these challenges, TXU has a three-part plan. We will invest in lower cost power supplies, innovate with new service offerings that enable customers to save money and improve air quality by reducing emissions."

TXU said it will more than offset key emissions from the new power generation units by reducing emissions at existing facilities. The company plans to double its solid-fuel generation capacity while reducing at least 1.5 pounds of key emissions for every one pound from the new units -- equal to an overall reduction of 20% relative to current levels. TXU called it the largest voluntary program of its type in the nation.

The company plans to spend $500 million for the voluntary emission reductions, accomplished through fuel switching and emissions control retrofits. These actions are expected to reduce TXU's current mercury emissions by more than 50% and make substantial reductions in sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions as well.

TXU's planned investment also includes up to $2 billion for installation of control technology to minimize emissions at the 11 expansion plants. The new plants will have among the lowest SO2, NOx, and mercury emissions rates in the nation and will be 80% cleaner than the average U.S. coal plant, TXU said.

The new power plants include the following units:

TXU said air permit applications were filed Thursday with the Texas Commission on Environmental Quality (TCEQ) for eight of the units, totaling 6,400 MW of net capacity. The new units will be located at existing power plant sites in Fannin, Freestone, McLennan, Mitchell, Rusk, and Titus Counties. If approved, the new units are expected to be operational by 2010. TXU previously announced the other three units (Oak Grove and Sandow), totaling 2,200 MW.

Merrill Lynch analyst Steve Fleishman said in a research note on Friday that TXU's plans are bad news for Texas gas-fired power generators. "Companies with more direct exposure to pressure on market heat rates would be those generators in Texas that are predominantly gas-fired, including Calpine, FPL and International Power," Fleishman said.

TXU said it can build generation in the state at three-quarters of the cost of other developers because of its scale, existing sites, rail facilities, water rights, and other infrastructure. Fleishman said the unit costs of the new plants would be about $1,100/kW. "This is very low for coal capacity..." He said the cost of construction "compares favorably with recent Texas asset sales" such as International Power's $1.14 billion purchase last Thursday of the 632 MW coal-fired Coleto Creek Power generation facility from Topaz Power Group.

However, the 11 proposed coal-fired power plants could have a negative impact on TXU's own gas business. "Potential concerns include additional gas exposure in TXU's outlook as well as reduced potential for market heat-rate expansion... This might have a negative influence on TXU's existing commodity businesss, but we are confident benefits would outweigh such pressures," said Fleishman.

He predicted the new plants would lead to an additional $2/share in earnings for the company, which already has a 20% share of the Texas power generation market. That would more than double the earnings impact from using surplus cash for share buybacks, he said.

Funding for the projects is expected to come from a mix of project debt and free cash flow. TXU projects $7.2 billion of available cash from 2006-2010 after base capital spending, dividends and construction of the Sandow and Oak Grove power plants, according to Fleishman. TXU also said it is talking to municipal utilities, electric cooperatives and large industrial customers about becoming equity owners in the new plants as a way to lower its capital outlay.

"Other funding might include a possible sale of the [regulated transportation and distribution] business," Fleishman said.

In the meantime, however, TXU said it plans to launch a new renewable power company, called TXU Renew, with a goal of doubling its renewable energy portfolio by 2011, bringing total renewable energy portfolio to 1,400 MW.

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