HOUSTON: TXU Corp., the biggest power producer in Texas, will curtail plans for coal-fired generators to win support from environmentalists for a proposed $44 billion (Rs1,94,832 crore) buyout by Kohlberg Kravis Roberts & Co. and Texas Pacific Group.
Dallas-based TXU has agreed to cancel eight of the 11 coal units it has planned and to support mandatory US limits on power-plant pollution that contributes to global warming, said a statement from the Natural Resources Defense Council. The company will devote $400 million to cutting power demand in Texas, pleasing environmental groups that favour conservation.
“The new owners don’t want to be your grandfather’s power company,” said David G. Hawkins, director of the environmental group’s Climate Center. They will “turn instead to cleaner sources of energy,” he said yesterday in a phone interview.
More utilities have been lining up to support mandatory federal limits on the release into the atmosphere of carbon dioxide and other gases that cause global warming. Utilities such as Duke Energy Corp. last month joined General Electric Co. and Lehman Brothers Holdings Inc. in a new group calling for greenhouse gas rules. TXU will apply to join that group, the US Climate Action Partnership, Hawkins said.
A report this month from a United Nations panel found growing scientific certainty that burning fossil fuels is causing the Earth to warm, leading to floods, droughts and rising sea levels. In response, the Bush administration said the causes of global warming are no longer up for debate.
The board of Dallas-based TXU has been meeting to consider the offer from KKR and Texas Pacific to buy the company at $69 to $70 a share, a person familiar with the matter said yesterday. Any purchase would need approval from regulators in Texas, where the proposed coal plants have prompted hunger strikes, protests against the governor who supports the plan, and opposition from the mayors of Houston and Dallas.
Managers including TXU Chief Executive Officer C. John Wilder are investing in the buyout, the person said. Wilder, 48, has overseen an almost fivefold gain in TXU shares since taking over in February 2004. TXU was near bankruptcy in 2002 after a failed overseas expansion.
TXU spokeswoman Lisa Singleton declined to comment on the buyout proposal or the coal plants. Ruth Pachman, a KKR spokeswoman, and Owen Blicksilver, a representative for Texas Pacific, also declined to comment on the buyout offer yesterday.
The buyout bid, almost $10 above the $60.02 closing price for TXU stock at the end of last week, would value the company at about $32 billion. The buyers would assume about $12 billion in debt, according to the person familiar with the deal, who asked not to be named because the negotiations are confidential.
That would make the takeover the largest-ever by a private-equity firm. KKR founders Henry Kravis and George Roberts held that title until earlier this month when Stephen Schwarzman’s Blackstone Group LP bought Equity Office Properties Trust, the largest US owner of office buildings in a $39 billion deal.
Hawkins said he negotiated for the past couple of weeks with William K. Reilly, a former administrator of the US Environmental Protection Agency who acted on behalf of Texas Pacific. Reilly is president of a water-purification company owned by Texas Pacific. The buyout firm, and Goldman Sachs Group Inc., which may finance the deal, were anxious to ease potential opposition, Hawkins said.
Two proposed leveraged buyouts of utilities have died at the hands of state regulators, raising concern that KKR and Texas Pacific might struggle to get this deal done.
Arizona state officials in December 2004 rejected the sale of UniSource Energy Corp., owner of the state’s second-biggest utility, to a partnership backed by New York-based KKR along with J.P. Morgan Partners LLC and Wachovia Capital Partners.
Oregon in March 2005 rejected a purchase of Portland General Electric by Fort Worth, Texas-based Texas Pacific.
Closely held buyout firms such as KKR use a mix of cash from investors plus their own funds and debt secured on the target they buy to finance their deals. They typically seek to expand companies or improve performance before selling them within five years to other funds or in initial public offerings.
In addition to settling the environmental issues, the buyout firms may need to show the Texas Public Utility Commission that they will not add debt that would weaken the power company.
Two of the biggest proposed utility mergers of the last two years have also been scuttled by state opposition.
The planned $17.8 billion takeover of Newark, New Jersey- based Public Service Enterprise Group Inc. by Chicago-based Exelon Corp. was abandoned on Sept. 14 after New Jersey’s Board of Public Utilities demanded concessions on rates that the companies were not willing to make.
FPL Group Inc.’s planned $12.4 billion purchase of Constellation Energy Group Inc., owner of Baltimore’s utility, was dropped in October after Maryland politicians concerned over rising power rates threatened a protracted review. FPL is based in Juno Beach, Florida, and owns the state’s largest utility.
Constellation and Public Service Enterprise Group both trade at a higher price than TXU compared with this year’s expected earnings. Shares of Constellation, based in Baltimore, trade at 16.6 times forecast 2007 profit, while Public Service has a price-to-earnings ratio of 15.4. TXU traded at 10.8 times earnings as of last week.
Dallas Mayor Laura Miller has charged that TXU is “purposely misleading the public in order to build old-technology coal plants the cheapest way possible to get the biggest return on their money.”
Wilder’s power plant expansion aimed to give the company low-cost power to sell in the state’s deregulated wholesale market as power needs jumped in the coming decade. The prospect of increased pollution that could make smog worse, along with global warming concerns, stirred opposition to TXU’s plans.
On 21 February, administrative law judges in Austin, Texas, delayed by about four months the hearing process on seven proposed units. The judges are to make recommendations to regulators on whether those units should be approved. Governor Rick Perry had tried to speed up the approval process.
The three proposed coal-fired units that aren’t being abandoned, at power-plant sites known as Sandow and Oak Grove, would be fueled with lignite, a brown coal that is produced from shallow mines in Texas.
NRG Energy Inc., the second biggest power producer in Texas, has proposed its own set of power plants in Texas.
Karen Hadden, executive director of the Sustainable Energy and Economic Development Coalition in Austin, Texas, said she was pleased to hear that many of the generators won’t be built. Hadden, who went on a hunger strike last year to protest coal- fueled power, credited grassroots organizing for helping derail the units.
Hadden said she will fight the Oak Grove units and perhaps coal-fired proposals from other companies. “We’ve won several battles, but the war is not over.”