1. Texas-Cristobal Mega-Transco Growth Options & Synergy Savings Executive Summary February 4, 2000
PricewaterhouseCoopers LLP
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2. Objectives This Engagement Evaluates areas of revenue growth
Examines commercial, strategic, and organizational aspects of each option
Provides a preliminary value assessment
Provides a preliminary assessment of synergy savings in:
Operations & Maintenance (O&M) costs
General & Administrative (G&A) costs
Broader Objectives
To assist Texas in its
internal examination of the value of the deal
initial discussions and negotiations 2
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3. Growth Options & Synergy Categories
Five Growth Options
Improve Pricing & Network Utilization
Implement Radical Outsourcing and Technology Joint Ventures
Acquire Transmission Assets and Performe O&M for Others
Develop Merchant Facilities
Enhance Rights-of-Way
Synergy Savings
Lower O&M costs
Lower G&A costs
Synergies apply to both pipes and wires 3
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4. Texas’ Value Proposition
Texas brings superior commercial, strategic, and organizational expertise to the mega-transco
An overall P/E four times that of Cristobal partners
A proven track record of creating value
Ability to design and commercialize innovative products and services
Regulatory knowledge and expertise
Successful track record of spinning off businesses
Superb organizational and management skills 4
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5. Growth Option 1 - Improved Pricing & Network Utilization
Definition
Increase electric and gas throughput and profits through innovative pricing and products
Preliminary Value
Potential EBITDA of $42 - $125 MM
Timeframe
40%, 75%, and 100% in years 1, 2, and 3
Key Success Factors
Optimize realtime gas and electric information
Regulatory approval of rates 5
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6. Growth Option 2 - Implement Radical Outsourcing & Technology Joint Ventures
Definition
Adopt radical outsourcing of non-core functions
Implement new network technologies by sharing risks with technology innovators
Preliminary Value
Potential EBITDA of $31 - $50 MM
Timeframe
25%, 50%, 75%, and 100% in years 1, 2, 3, and 4
Key Success Factors
Willingness to strip staffing to strategy, finance, and contracting
Ability to implement cutting edge technologies 6
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7. Growth Option 3 - Acquire Transmission Assets and Perform O&M for Others
Definition
Acquire other RTOs or transmission assets from utilities
Take on O&M responsibilities of others
Preliminary Value
Potential EBITDA of $53 - $151 MM
Timeframe
May be slow to develop
25%, 50%, and 75% in years 3, 4, and 5
Key Success Factors
Aggressive bidding for assets and contracts
Utilities’ willingness to sell assets 7
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8. Growth Option 4 - Develop Merchant Facilities
Definition
Develop new transmission facilities explicitly for open access
Decide when and where to build electric or gas transmission lines
Preliminary Value
Longer term option with little or no potential value in the five year horizon
Timeframe
Slow to develop
Key Success Factors
Ability to recongnize new capacity and line siting needs (gas versus electric)
Ability to gain rapid regulatory and right-of-way approvals 8
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9. Growth Option 5 - Enhance Rights-of-Way
Definition
Add new energy facilities to existing lines and rights-of-way
Site new cable, fiber optic, and telecommunications lines
Implement existing rights-of-way for alternative uses such railroad or for tourism
Preliminary Value
Longer term option with little or no potential value in the five year horizon
Timeframe
Slow to develop
Key Success Factors
Ability to recognize implementable alternative uses of existing RoW
Ability to gain regulatory approval 9
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10. Range of EBITDA Contributions from Growth Options10
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11. Synergy Savings - Operations & Maintenance
Definition
Achieve Texas’ level of O&M costs per mile in Cristobal’s gas network
“Texasize” the O&M practices in Cristobal’s electric network
Preliminary EBITDA Contribution
Pipes-to-Pipes $84 MM
Pipes-to-Wires N/A
Timeframe
50% in year 1, 100% in year2 11
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12. Synergy Savings - General & Administrative
Definition
Achieve Texas’ level of G&A costs per mile in Cristobal’s gas network
“Texasize” the G&A practices in Cristobal’s electric network
Preliminary EBITDA Contribution
Pipes-to-Pipes $14 MM
Pipes-to-Wires $4 MM
Timeframe
50% in year 1 and 100% in year 2 12
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13. Total EBITDA Contributions
Months from Approval
$ Million
Note: Values for growth options are mid points of estimated EBITDA range 13
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14. Incremental Market Value from Growth & Synergy
$ Million 14
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15. Incremental Market Value at 17X EBITDA15
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16. Relative Contributions of Growth and Synergies Overtime (At EBITDA x17)
All figures in $ Million 16
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17. Conclusions
The realization of incremental market value at several multiples of EBITDA is possible only through the participation of Texas in the mega-transco deal
The EBITDA contributions from growth options and synergy savings range from $94 million in year 1 to $318 million in year 5
At 17 multiple, the incremental market value of growth and synergy savings represent $1.6 billion in year 1 to $5.4 billion in year 5
These values represent increments over mega-transco’s preliminary market value of $17 billion of 9% in year 1 and 32% in year 5
Additional EBITDA contributions may be realized for other growth options once more information becomes available 17
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