$45 Billion Deal Near For Texas Power Firm

By David Cho and Steven Mufson
Washington Post Staff Writers
Saturday, February 24, 2007

A consortium led by private-equity firms Kohlberg Kravis Roberts and Texas Pacific Group is nearing a deal worth close to $45 billion for a Texas energy giant in what would be the largest leveraged buyout ever, according to a source with knowledge of the negotiations.

News of an offer for TXU Corp., the largest power company in Texas, came a mere two weeks after the buyout record was set by the Blackstone Group's $39 billion purchase of Equity Office Properties Trust.

TXU's board could vote on the offer as soon as tomorrow.

Shares of TXU closed at $60.02 Friday, up $2.38. In after-hours trading the stock soared to $71 a share, up more than 18 percent.

A spokesman for Kohlberg Kravis Roberts and Texas Pacific Group declined to comment on the matter.

TXU has 2.4 million electricity customers in Texas and a network of generating stations, including two nuclear-powered and nine coal-fired plants. Deregulation recently took effect in the state, and the company has divided itself into three parts -- a regulated utility, a power wholesaler and a power generation unit with 18,300 megawatts of capacity.

But the company's claim to fame recently has been a controversy over its plan to build 11 conventional coal plants. That would more than double the company's emissions of carbon dioxide, the most prevalent of greenhouse gases, at a time when Congress is looking at ways to cap greenhouse gas-emissions.

It is not clear how a buyout would affect those plans. Part of the attraction of TXU is its location in a fast-growing state. The new plants could take advantage of its rapidly growing energy demand. But leveraged buyout firms usually trim costs and rarely expand a company's operations. And many executives in the industry have said they never expected the company to build all those plants anyway.

The private-equity firms are expected to propose around $70 per share for TXU and assume about $12 billion of its debt, putting the total value of the transaction at $44 billion to $45 billion.

If a buyout goes through, TXU would become a private company and no longer have to reveal its financial statements publicly or comply with federal regulations such as the Sarbanes-Oxley Act. But it probably would still have to disclose some information to state and federal power regulators.

That change is likely to draw scrutiny from members of Congress, especially those now devising ways to cap and reduce greenhouse gases. Some lawmakers have alleged that TXU might be expanding now so that the new plants would be included in its baseline emission levels. That would be important if Congress adopted a cap-and-trade system similar to Europe's, with allocations distributed to companies based on their past emissions.

Jeff Bingaman (D-N.M.), chairman of the Senate Energy and Natural Resources Committee, and Barbara Boxer (D-Calif.), chairwoman of the Senate Environment and Public Works Committee, last month wrote an op-ed article in the Dallas Morning News warning TXU and its investors that such a strategy wouldn't work.

"In fact, companies that appear to be inflating their emissions right before legislation is passed are likely to find themselves in a position of having to make even larger emissions reductions than companies that do not attempt this strategy," they wrote.

TXU says its expansion plans reflect the needs for more electricity in Texas.

"Because our state is seeing such phenomenal economic growth, we're expected to add the population of Tennessee over the next decade in Texas," said Kimberly Morgan, a TXU spokeswoman. "Combine that with no new baseload generation being built. That presents a prime setup for generation in the state." (Morgan gave the interview before the proposed buyout became known.)

The TXU deal would exceed the infamous $31.3 billion leveraged buyout Kohlberg Kravis Roberts made for RJR Nabisco in 1989, memorialized in the book "Barbarians at the Gate."

In 2004, Kohlberg Kravis Roberts and Texas Pacific Group were part of a consortium that paid $3.7 billion for what was then the second-biggest power generating company in the state, Texas Genco. The investing group sold that utility for about $5.8 billion last year.


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