Environmentalists may gain clout in buyouts

NEW YORK — The impending private-equity buyout of Texas’ largest electricity producer may give rise to more deals in which environmental lobbyists are invited to sit at the negotiation table. Last Monday, TXU Corp. announced that Kohlberg Kravis Roberts & Co. of New York and Texas Pacific Group Inc. of Fort Worth had partnered with Goldman Sachs & Co. of New York to acquire the Dallas-based energy giant in a transaction valued at $45 billion, about $13 billion of it in debt. The KKR- and TPG-led group of private investors will pay $69.25 per share. But the terms of the acquisition are eclipsing the news of the record-breaking price for the Texas coal burner. Since last year, a coalition of environmentalists, investors and politicians have lobbied against TXU’s plan to build 11 coal-fueled generation units. TXU has argued that they are necessary, but critics have claimed that the plants are environmentally and financially unsound. There were shareholder resolutions and television advertisements, and then KKR and TPG came forward to change everything. They wanted to buy TXU and invited its greatest detractors — environmentalists — to the table. Environmental Defense, a New York-based advocacy group that has fought vociferously against the proposed coal plants, negotiated with the prospective buyers in a 17-hour meeting, said the organization’s president, Fred Krupp. In the end, the group agreed to settle a lawsuit it had filed against TXU, and TXU will drop plans to build eight of the 11 coal plants. “[This] signals a change in the way corporate America is thinking about environmental performance,” said David Hawkins, director of the climate center of the Natural Resources Defense Council, an Environmental Defense partner in New York. “While this earthquake took place in Texas, the reverberations are going to be felt from Wall Street to Washington.” It is a Texas company, Mr. Krupp said. “[That] tells us that the utility sector sees that we’re moving into a carbon-constrained world,” he said. Ignoring that reality makes for a risky investment, said David Gardiner, author of “TXU’s Expansion Proposal: A Risk for Investors,” a report released Feb. 25 by Ceres Inc., a Boston-based organization that coordinated shareholder resolutions against TXU in December. Those resolutions, which were aimed at stopping TXU’s plans to build the additional coal plants, were filed by five New York pension funds, the Connecticut state treasurer’s office and the Benedictine Sisters of Boerne (Texas). “Given the anticipated focus on federal regulations of CO2 emissions in the new Congress, TXU’s strategic thinking seems glaringly shortsighted and unsustainable,” New York City Comptroller William C. Thompson Jr. said in a statement. “Concerns that investors have been raising about the TXU plan have directly had an impact [on the acquisition terms],” said Mr. Gardiner, president of Arlington, Va.-based environmental research firm David Gardiner & Associates LLC. They are not just environmentalists, he explained. “These are investors who are worried about the bottom-line impact on the firm and on their investments.” “Our analysis shows that the original TXU plan was financially flawed,” Mr. Gardiner said. The intended results of the buyout vindicate that research, which showed that 75% of TXU’s anticipated growth could be met through energy-efficient developments rather than coal, he said. The fact that KKR and TPG agreed that TXU would build only three of 11 coal plants suggests that the buyout firms probably agreed with the research results, Mr. Gardiner said. TXU also underestimated its liability costs, which include the expenses of cleaning up and future regulatory requirements, he said. Although other groups have publicly voiced concerns over the remaining coal-fueled plants that might be constructed in the aftermath of this buyout, the TXU that would emerge would be greener. TXU pledges to create an independent sustainable-energy advisory board and support a mandatory cap-and-trade program to regulate carbon emissions. Former Secretary of State James A. Baker III will serve as advisory chairman to the new owners, and William Reilly, a former administrator of the Environmental Protection Agency, will join the board. The agreement also stipulates that TXU may petition other potential buyers through April 16. Otherwise, TXU, KKR, TPG and the rest of the investor group expect the transaction to close in the second half of 2007, subject to shareholder and regulatory approval. Goldman Sachs’ private-equity affiliate GS Capital Partners, along with Lehman Brothers Holdings Inc., Citigroup Inc. and Morgan Stanley, all of New York, intend to be equity investors at closing, according to a TXU statement.