US corporation may limit coal power plants

Posted: 26 March 2007

An interesting sign of the changing times has been revealed in recent reports that one of the most environmentally unpopular US utility corporations had abandoned plans to build 8 coal power plants, in favour of more environmentally friendly options. This report by Felicity Barringer and Andrew Ross Sorkin appeared in the New York Times on 28 February 2007.

Under a proposed $45 billion buyout by a team of private equity firms, the TXU Corporation, a Texas utility that has long been the bane of environmental groups, will abandon plans to build 8 of 11 coal plants and commit to a broad menu of environmental measures, according to people involved in the negotiations.

The roster of commitments came through an unusual process in which the equity firms asked two prominent environmental groups what measures could be taken to win their support. The result is an about-face from the company's earlier approach to climate-change issues, and includes a goal of returning the carbon-dioxide emissions by TXU to 1990 levels by 2020.

Environmental groups said yesterday that they had never known of a financial deal with such an ambitious built-in environmental component.

Two private equity firms, Kohlberg Kravis Roberts & Company and the Texas Pacific Group, have proposed to buy TXU in what would become the largest leveraged buyout ever.

The transaction will be put to the TXU board for a vote on Sunday. [Apparently approved but see footnote].

Costly litigation People involved in the negotiations said that Goldman Sachs, an adviser and lender to the buyers, helped broker peace with environmental groups and sought their support for the transaction. Goldman Sachs has been one of the most aggressive firms on Wall Street about taking action on climate change; the company sends its bankers home at night in hybrid limousines.

For the investor groups, the effort was as much about making a sound business decision to ensure the deal's completion as it was about any environmental concerns.

By bringing the environmental groups into the process, the buyers may have helped avert years of costly litigation over emissions from their plants. But they may also have raised new questions about how they will meet the energy needs that TXU intended to address by building all 11 plants; the company is said to be examining ways to expand in cleaner forms of energy. None of the parties interviewed was able to provide details.

Environmentalists said they hoped that the TXU deal would represent a turning point in the attitude of energy businesses as they adjust to what many anticipate will be a new regulatory and public-relations landscape in an era of climate change.

"We have history's largest purchase of a power company, with the new owners wanting to move the company in a direction that is consistent with a world that takes global warming seriously," said David Hawkins of the Natural Resources Defense Council, one of the two environmental groups invited to the negotiations. That group, and the other participant, Environmental Defense, which often use the courts to confront businesses, are persistent critics of TXU.

Turning point The commitments come at a time of uncertainty for utilities that are considering building coal-fired plants. They do not know if such plants will be grandfathered by Congress and excluded from future restrictions on carbon-dioxide emissions, or whether anything they build now will have to operate in a starkly different regulatory environment.

TXU will discard plans to build eight of 11 proposed new coal plants, which would have been major new sources of emissions. Those plants - which would have added more than 9,000 megawatts of new capacity, the equivalent of 3.5 per cent of the nation's current coal-fired power - had been part of a planned $10 billion expansion of coal-fired electricity.

TXU, which is based in Dallas, also intends to expand the renewable energy portion of its portfolio and reduce or offset its emissions significantly, said people who were familiar with the plans.

Less than a week ago, according to Fred Krupp, the president of Environmental Defense, the two environmental groups were approached by representatives of the private-equity buyers. He said he received a call from William K. Reilly, the former Environmental Protection Agency administrator, who is advising the Texas Pacific Group.

Environmental outlaw

Mr. Hawkins, who runs the climate-change programme for the Natural Resources Defense Council, said that the investment team was essentially asking "what would it take" to gain environmentalists' support.

James D. Marston, who runs the Texas energy programme for Environmental Defense, yesterday called TXU's plans "a turning point in the fight against global warming."

Mr. Marston had led an intense advertising campaign painting TXU as an environmental outlaw pursuing a strategy that would hurt the climate and perhaps its own bottom line, if federal policy changed and companies were charged for the carbon dioxide they emitted.

But people familiar with the investors' thinking took pains to say that the investors brought the measures to the environmental groups, and were not acting out of any fear of the groups' potential to wage a legal and public-relations campaign against them.

Matthew L. Wald contributed reporting

Still uncertain

Later reports (March 16) said that the Texas state Senate had approved legislation that would strip TXU of some of its power plants and increase state authority over TXU operations - including the right to approve the utility's proposed $45 billion sale to a group led by Kohlberg Kravis Roberts and Texas Pacific Group.

This followed earlier reports that TXU had manipulated the state's wholesale electricity market to reap millions in additional profits.

Under one of the bills passed by the Senate, no company would be allowed to control more than 25 per cent of the power-generating capacity in a single region of the state. TXU, which controls more than 50 per cent in North Texas, would have to sell or give up control of some of its power plants if the measure were to become law.

But a K.K.R. sppokesman has warned that the proposed restrictions on ownership of power plants could significantly alter the proposed sale.