Energy Firm Accepts $45 Billion Takeover
Monday, February 26, 2007
TXU, the largest energy provider in Texas, agreed last night to a $45 billion buyout that would not only be the largest private-equity deal in history but would also feature an unusual twist: The buyers have promised environmental groups they would cancel a slew of coal-fired power plants on the firm's drawing boards.
The buyout firms' deal with environmental groups, which could become a landmark in the battle over climate-change policy, would force an abrupt turnaround in the strategy of TXU, which has defied environmentalists' and congressional criticism of its plans to expand coal use and carbon dioxide emissions.
The environmental agreement was the idea of the private-equity firms Texas Pacific Group and Kohlberg Kravis Roberts, which made it a condition of the acquisition, according to several sources involved in the negotiations, who gave details of the deal on condition of anonymity because it had not been announced yet.
Texas Pacific's head, David Bonderman, is no stranger to creative deals in the energy sector or in the cause of environmentalism. Bonderman sits on the boards of the World Wildlife Fund and the Grand Canyon Trust. He was a key figure in negotiating with power plants in Arizona to reduce air pollution over the Grand Canyon. In the TXU case, he tasked William K. Reilly, who had led the Environmental Protection Agency under President George H.W. Bush, to reach out and negotiate with environmental groups.
If shareholders approve the acquisition, TXU would back federal legislation that would require reductions in carbon dioxide emissions through a cap-and-trade system. It would shelve plans for eight of 11 coal-fired plants that current TXU executives had proposed for Texas and would drop plans to build new coal plants in Pennsylvania and Virginia. The company would also double its spending to promote energy efficiency, to $80 million a year, for five years.
"We think this is really a big deal, a watershed moment in America's fight against global warming," said Jim Marston, regional director of Environmental Defense in Austin, who helped forge the environmental accord in a 17-hour negotiating session with the buyout firms on Wednesday. He said it would reshape the electricity sector in Texas and alter the attitudes of Texas congressmen toward climate-change legislation.
The buyout firms also promised to cut TXU's emissions of carbon dioxide, the most prevalent of greenhouse gases scientists blame for global warming, to 1990 levels by 2020. This matches the targets contained in legislation passed last year in California but exceeds anything TXU is obligated to achieve. When the three new coal plants are on line, the company's emissions are projected to be nearly 20 percent higher than they were in 1990.
In return, Environmental Defense, which has been leading the fight against TXU's coal expansion plans, would drop its objections to the three large new units, including two 800-megawatt units at Oak Grove, Tex., and a 600-megawatt plant at Sandow, Tex. The private-equity firms held an initial round of talks on Friday with another environmental group that opposes the Oak Grove units.
The unusual talks between the buyout firms and environmental groups began Feb. 14. Reilly, who now heads a Texas Pacific subsidiary that invests in water projects in the developing world, called Fred Krupp, president of Environmental Defense.
"Reilly told us that they were negotiating to buy TXU but that they would not go through with the deal unless they could re-create the company as a green electricity generator," Marston said.
Last Tuesday, Marston got a phone call asking him to get on a plane in two hours and fly to the Texas Pacific headquarters in downtown San Francisco. Talks began 8 a.m. in a Texas Pacific conference room, and by 1 a.m. Thursday, they had a three-page list of commitments. Then the buyout executives flew in a private jet to Austin to discuss them with Texas Gov. Rick Perry (R) and other state leaders.
Although the deal is not a contract and wasn't signed, the buyout firms say they intend to fulfill the commitments.