Big green buyout
Texan takeover may signal changes in the way America generates electricity.
Controversial plans for eight new coal-fired power plants in Texas look likely to be scrapped as part of a proposed buyout of Dallas-based electricity generator TXU Corporation.
The US$45-billion deal that has been announced between TXU and investors led by Kohlberg Kravis Roberts & Co. and Texas Pacific Group goes along with a change in the company's stance on green issues. As well as revising its plans for new power stations, the company will commit itself to cut carbon-dioxide emissions back to 1990 levels by 2020 and adopt strict environmental rules.
If the deal goes ahead it will be the biggest such leveraged buyout — a corporate acquisition financed with loans — in the history of the United States. The team that set it up sought the help of some of the same environmental groups that had previously sued TXU over the company's environmental policies and aggressive expansion plans, which involved 11 new coal-fired power stations.
"This is a watershed moment in America's fight against global warming," says Fred Krupp, president of Environmental Defense, a New York-based environmental group involved in the negotiations.
Details of the deal were announced on 26 February. The private-equity firms and their banks, including Morgan Stanley and Goldman Sachs, agreed to pay $32 billion for TXU's stock and to assume more than $12 billion of the company's debts. The deal is attractive to the buyers, says Barry Abramson, a utilities analyst at Gabelli Asset Management in Rye, New York, because Texas is a deregulated market which is growing quite fast, and TXU owns a number of low-cost power plants. While private equity deals are often associated with the subsequent break-up of companies, Abramson believes that is not the case for the TXU buyout.
The environmental aspects of the deal seem likely to make the deal more acceptable to a wide range of interests. Under the new ownership the company says it will abandon plans for all but three of its planned 11 coal-fired power plants. The three remaining plants will not be equipped with low-emissions technology, but will be designed in such a way that they could be fitted for carbon capture and storage in the future. Tom Smith, director of the Austin, Texas, office of Public Citizen, which has opposed the plans for new plants, points out that the remaining three plants are the three dirtiest from the original proposal, and would produce as much as 20,000 tonnes of sulphur dioxide and 8,900 tonnes of nitrogen oxides a year. He argues there should be a two-year moratorium on building the new plants as alternatives are studied: “The war is far from over.”
In addition, the company has announced plans to invest $400 million in increasing the efficiency with which energy is used. It will also reduce emissions from existing plants and lobby for a cap-and-trade emissions scheme (which would provide it with carbon-emission permits that it could sell if it cut its current emissions with more efficient plant).
TXU also says that it will offer rebates on solar-panel investments by customers and continue to be the largest purchaser of wind-generated power in Texas, increasing its purchase to 1,500 megawatts. Texas governor Rick Perry last year announced a public-private initiative to invest $10 billion in increasing Texas's windpower
The agreement has been hammered out in the past fortnight at a series of secret meetings between investors and lawyers. Leading US environmental groups, including Environmental Defense and the Natural Resource Defense Council (NRDC) were involved in the process, and reportedly agreed to a 'ceasefire' in campaigns against TXU if the company agreed to drop its plans for additional plants. The fact that TXU is also the operator of a nuclear plant, and may plan to build more, does not appear to have been an issue.
"It's a huge turnaround," says Dave Hawkins, director of NRDC's climate centre. "A company that was until last week opposed to fighting global warming has now pledged to support mandatory carbon caps. The effort by the buyers does signal a change in the way carbon America thinks about climate change."
TXU's plans for the 11 new coal-fired power plants, announced in 2006, caused a storm of protest by politicians, religious groups and small-business owners when announced last year. In part as a result of this, Smith points out that the company's plans had already run into difficulty with the Texas legislature: "Everyone was getting the message that TXU was not going to be able to build all of these plants," Smith says. TXU's shares had dropped from more than $67 last September to a low of $53 early last week before being valued at $69.25 in the buyout offer.
"The prospect of global-warming legislation is having a depressing effect on the ability to get financing for new coal projects," says Hawkins. It is a depressing effect that TXU might well have felt itself — and that the TXU deal may bring home to other utilities.
The TXU deal could be overturned if a bigger offer is made, and it has yet to be approved by the regulators. TXU is a dominant player in the Texas electricity market, which was deregulated in 2002, and there are concerns that reducing its plans for increased generation might lead to price rises. As Texas is poorly connected to other states by high voltage wires, there is also little ability to import power.
Additional reporting by Geoff Brumfiel