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Buyers of Texas Power Company Agree to ‘Think Green’

February 26, 2007 at 6:20 PM EST
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MARGARET WARNER: The proposed acquisition of TXU, the largest electricity producer in Texas, is notable not just because it’s the largest private buyout ever, but because two leading environmental groups were involved in negotiations over the deal.

As part of the transaction, the private equity firms buying the company — led by Kohlberg Kravis Roberts and Texas Pacific — committed TXU to become a greener company, by adopting more environment-friendly policies.

In return, two groups who’ve been a thorn in the side of TXU — Environmental Defense and the Natural Resources Defense Council — publicly endorsed the deal.

Specifically, the new owners have committed to: cancel plans to build eight new coal-fired plants, though three others will be built; spend $400 million over five years to promote energy efficiency and reduce demand; and join other companies in support of mandatory national caps on carbon emissions linked to global warming.

The background behind the deal

MARGARET WARNER: For more on the unusual circumstances of this buyout and its potential impact, we turn to New York Times business reporter Andrew Ross Sorkin. He also edits the paper's financial news blog, "DealBook."

Andrew, welcome back to the program. Tell us the story here. How did two environmental groups get involved in a private equity buyout?

ANDREW ROSS SORKIN, New York Times: Well, you know, it really is a very interesting story, because TXU, which had been the whipping boy of the environmental world, in part because they had proposed building 11 coal-fired plants, which as we all know are the most pollutive of really any type of energy that's being built today, they had been the whipping boy.

And here comes Texas Pacific and KKR, Kohlberg Kravis Roberts, which was looking to buy this company. And as they were negotiating with TXU, they were saying to themselves, "You know, we may get a lot of pushback. We may become the enemy combatants of this world."

And as private equity firms, which historically as we know have wanted to stay very private, they said, "How do we counter this? How do we get ahead of this?"

And so they went to these environmental groups before announcing their transaction to bring them on board. And in the end, the environmental groups, at some level, held them hostage to getting what they wanted before this deal was announced today.

MARGARET WARNER: And they had a personal connection, did they not, through some of the senior people on each side?

ANDREW ROSS SORKIN: They did, and it's very interesting. Texas Pacific is run by a fellow -- was founded by a fellow named David Bonderman, who is on the world wildlife foundation fund. And he also works with a guy named Bill Reilly, who used to work for the EPA under George Bush. And so they decided, "We needed to reach out to the environmentalists."

At the same time, Goldman Sachs, the Wall Street investment bank which was advising and investing in the deal, was also heavily involved. They are one of the most aggressive firms when it comes to climate control and going green, if you will. Hank Paulson, who is now the secretary of the treasury, but was the CEO of the company, had been the chairman of the Nature Conservancy, an activist environmental group.

And if you can believe this, the bankers at Goldman Sachs go home at night in hybrid limousines, so to them it was very important that this deal was environmentally clean. In fact, they had told Texas Pacific and KKR that they would not get involved with this transaction unless they changed their ways.

Making concessions

MARGARET WARNER: Now, explain to us why these high-flying Wall Street firms, private equity firms, would be interested in acquiring -- we always think of utilities as being kind of old-timey, boring investments.

ANDREW ROSS SORKIN: Right. You know, it's funny. What private equity is looking for is stable, cash-flow businesses. And as we all know, a utility, electric company is like the toll booth. You and I have to go through it every month.

And so this is a business that, at least in all likelihood for the next five or 10 years, which is really how long these private equity firms will likely hold this company, at the most, you know, it looks like a great asset, because they can take the cash from these businesses on a monthly basis and effectively pay off the mortgage, because what they do is they lever these companies up.

They buy them with a small amount of cash and add on a lot of debt. And so they need a kind of steady, stable of cash to pay for this deal.

MARGARET WARNER: Now the new owners-to-be, if this deal goes through, of TXU, have committed -- we just outlined some of the steps they've committed to taking, including not building eight of the 11 plants, but they're still building the three, as I understand it, "dirtiest," quote, unquote, plants.

ANDREW ROSS SORKIN: They are. They are.

MARGARET WARNER: Why did the environmental groups agree to this in the first place? And how much will the way TXU does business change as a result of some of the commitments they've made?

ANDREW ROSS SORKIN: Well, that's actually a very interesting question, because one of the things that has not really come out yet is that, even though they have committed to going from 11, effectively, to three -- and, by the way, the three had already started, so there is already money in the ground. They are building those plants as we speak.

And that's, in fact, one of the major reasons why the environmental groups have to claim this as a victory, because it was very hard to go back. And they weren't going to stop building these things.

But there's also a bit of window-dressing on this deal, because, privately at TXU, even though they had proposed building 11 of these plants, privately they had been planning actually to roll their plan back to six or five plants. So, in fact, it's not clear that the private equity guys have created such a win for these environmentalists after all and, in some ways, are using this as a way to buy goodwill with the public.

Money vs. green decisions

MARGARET WARNER: And how much goodwill have they bought with the state legislature, regulators, the political powers that be, all the hurdles that they'll have to jump over, one, to get the deal approved, and then, two, to be able to go forward in the way they want to, business-wise?

ANDREW ROSS SORKIN: Right. I think that they started clearly on a good foot. This is an unregulated utility for the most part. There are not so many layers that they have to -- there are not so many hurdles they have to jump through. And so we will see how this goes.

As for a business, you know, these plants that they were building, it's unclear that they were going to generate huge amounts of profits for the company, at least initially.

And, in fact, from a business perspective -- and let's remind everyone: Part of this is about business. These guys are trying to make money. And by not building these additional eight plants, that is a lot of cash that's not going into the ground that can be going to help finance this deal and, in the end, can be going right into their pocket.

So there are lots of economies, if you will, that are making this deal work, the economics that are making this deal work, as much as environmental concerns.

A broader trend

MARGARET WARNER: So they figure they can do well by doing good, as the saying goes. Step back. Do you see -- is there a broader trend here? Do you see climate change or other environmental concerns affecting decisions by Wall Street firms like this?

ANDREW ROSS SORKIN: Absolutely. You know, I was just in Davos, came back two-and-a-half weeks ago, where, I have to tell you, the only issue on the table was the issue of climate change, going green.

It was on everybody's list of things to really be paying attention to, and not so much just to be good to the environment, because these people were really trying to figure out how "going green" movements can really help business and how there's money to be made.

And I do think that this is the first step in a series of steps that we're going to see over the next several years, where you see businesses really try to change their ways, in part to help the environment, but in part because there's a good business logic behind it.

MARGARET WARNER: Andrew Ross Sorkin of the New York Times, thank you.

ANDREW ROSS SORKIN: Thank you, Margaret.