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TXU Plans to Pursue New Coal Plants Outside of ERCOT; PJM Eyed

Fresh off of news that the company plans to build a significant amount of new coal-fired generation in Texas, the CEO of TXU Corp. last Tuesday told investors that the company also is looking to construct coal-fired power plants outside of the Electric Reliability Council of Texas (ERCOT) market, with the PJM Interconnection region getting a closer look.

"We are currently developing an advantaged business model that will enable profitable expansion in markets outside of Texas," TXU CEO John Wilder said in a conference call related to the company's release of first quarter 2006 earnings results.

During the call, he noted that attractive returns of TXU's clean coal investment program are driven by six factors. One of the six factors involves the advantaged business model targeting non-ERCOT expansion.

"Our review of these markets indicate economics that could be even more attractive than ERCOT," he said. "It is clear that multiple states want the economic benefits these projects can bring."

Wilder said that the company has formed a team with advisors "who have worked with firms like Toyota to help site new facilities and develop strong economic incentive packages for their clients. We expect to announce our initial projects outside of ERCOT by the end of '06 and are projecting a scaled portfolio of five to eight gigawatts in" non-ERCOT markets.

"We want to take this show on the road," Wilder said. "We have had actually a substantial amount of interest in other states and, specifically, in PJM."

He said that every customer "frankly, across the nation, has the same need for access to more stable, secure, long-term power to get off the highly volatile gas on the margin generation that we have in many of these markets. These new plants generate substantial jobs for local communities. They generate substantial tax base."

Wilder said that there are "several opportunities that we're looking at today that have long-term manufacturing capabilities that are actually looking at being closed or off-shored because of the high power price." TXU has "over a dozen or so opportunities that we're looking at right now."

TXU has fully analyzed PJM "because we believe that is the market that makes the most sense for this kind of strategy and we'll be sorting through" specific site and contracting opportunities, he said.

"We have a number of these opportunities where we could, much like our Sandow plant [in Texas]....have an anchor tenant for a quarter up to a half of the off-take long-term for the plant at very competitive power prices. And we think this model works in that market just as well as it works in the ERCOT market."

Wilder said that TXU would generally look to "the middle of the fairway" of PJM. "So we wouldn't head west, we wouldn't head deep east. We'd just run through the Pennsylvania, Virginia, perhaps even West Virginia, corridor, in terms of a targeted zone. Those are zones with very strong power prices due to the supply curve in PJM, as well as the emissions costs that are added on top of the generation stack in PJM."

Also, these are zones "in which communities are looking for jobs" and have had a "number of energy-intensive manufacturing facilities that are really struggling competitively because of the rise in wholesale power prices in the PJM market."

TXU in late April announced plans to add 6,400 MW of new coal-fired power generation in Texas, in addition to the 2,200 MW of new coal-fired power plants that it previously announced (see NGI, April 24).

TXU on Tuesday reported net income available to common shareholders of $576 million, or $1.22 per share, in the first quarter of 2006 compared to first quarter 2005 net income available to common shareholders of $416 million, or a net loss of $0.10 per share.

Operational earnings, which exclude special items and discontinued operations, were $516 million, $1.09 per share, in the first quarter 2006 compared to $246 million, $0.51 per share, in the first quarter 2005.

TXU's outlook for operational earnings for 2006 remains at a range of $5.50 to $5.75 per share of common stock, with the midpoint representing a 69% increase over 2005, and the outlook for 2007 operational earnings remains at a 2% increase relative to the midpoint of the 2006 outlook.

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