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Green Spin in TXU Buyout Bid

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Environmentalists have been cheering that, to win approval of the proposed leveraged buyout of Texas utility TXU Corp., acquirers KKR, Texas Pacific Group, and Goldman Sachs have agreed to drop plans to build 8 of 11 coal-fired electricity plants that TXU had aggressively pursued. According to a story in CNN Money, “Green Groups Strut Their Stuff on Wall Street,

Before announcing the biggest buyout on record, the private equity buyers of utility TXU Corp. came calling on environmental groups, the latest sign of how the green lobby is increasingly shaping the agenda on Wall Street….

Critics who had howled at TXU’s initial plan to build 11 plants powered by coal hailed the decision as a victory, saying it would prevent 56 million tons of carbon emissions a year.

“The buyout and turnaround of TXU’s position on global warming is an earthquake that happened in Texas, but shock waves are going to be felt from Wall Street to Washington,” Dave Hawkins, director of the Natural Resource Defense Council’s Climate Center, said on a conference call Monday afternoon.

In addition to revising its coal plant strategy, TXU Corp. has pledged to support programs that regulate carbon emissions….

It also will invest $400 million over the next five years in conservation and energy efficiency.

Unfortunately, there is less to this than meets the eye. The decision to cut the number of plants was a pragmatic economic decision; the green spin was gravy. However, the one victory the green lobby can claim is that, by making approvals more time consuming and costly, they are raising the cost of nasty conventional energy sources. But that is a much more limited victory than they are claiming. From the Financial Times, “Green promises help with TXU endorsement,”

In dressing up their bid for TXU, the Texas-based utility, in a shiny green mantel, Kohlberg Kravis Roberts and Texas Pacific Group showed their presentational skills at their best.

Their promises to reshape TXU’s environmental strategy, including the cancellation of eight of the 11 coal-fired power plants that the company planned to build in Texas, won them the endorsement of campaign groups such as the Natural Resources Defence Council – potentially valuable allies in what could be a contentious bid.

The environmental issues raised by the bid are genuine, and the commitments made by KKR and TPG are sincere.

As the US moves towards policies to curb carbon emissions, it is significant that the buyout partners say that TXU will throw its weight behind the campaign for mandatory limits on carbon dioxide emissions, and will cut its own emissions in the next decade….

But there are also some very sound reasons for TXU to drop its planned investment in power plants that are more hard-nosed than high-minded.

The plan to add 11 power plants generating about 9,000 megawatts to TXU’s capacity was both commercially and politically ambitious.

Politically, it stirred up a storm of criticism from environmental groups, and ran into trouble with the Texas authorities.

Commercially, it involved a heavy spending programme. TXU boasted last year that while it was building its new plants it was likely to be investing more in Texas than the refining and micro-electronics industries put together. Its capital spending would have been about 135 per cent of its earnings from 2006-10.

For a lean, cost-conscious private equity owner, such a large investment programme was never going to be appealing.

Even without the bid, TXU might have had to think again about its spending, according to Anthony Damiano of Wood Mackenzie, the consultancy, in Houston. The delays put into the programme by the political opposition, and rising costs for big capital projects, were threatening its viability.

“TXU made it very clear that part of the reason for doing this expansion so quickly was to keep the costs down, and delays getting the permits had raised the costs,” Mr Damiano said.

“It raises the question of whether this deal is a way to get out of TXU’s difficulties in achieving this plan. If so, you have to say it has been brilliant, both for the PR spin and in terms of getting a getting a good valuation.”

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