New Level Of Sophistication Shown In TXU Deal

Federal regulators and environmentalists seem ready to pounce on buyout firms looking for windfall profits from energy production. But Kohlberg Kravis Roberts & Co., Texas Pacific Group and Goldman Sachs & Co., which last month agreed to purchase energy behemoth TXU Corp. (NYSE: TXU), are determined to turn them into harmless kitty cats.

Their strategy for TXU, whose towering price tag of $45 billion would make it the largest LBO in history, includes hundreds of millions of dollars worth of environmentally-friendly investments and concessions. Perhaps the most significant of these is TXU’s agreement to forgo the construction of eight of 11 coal-fired power generation plants that it planned to build. The move, supported by environmental groups, would prevent 56 million tons of annual carbon emissions.

Instead, TXU has said it would increase its purchase of wind-power by 2.5 times, making it the largest buyer of wind power in Texas, according to the company. By 2020, TXU plans to have slashed its carbon emissions output to 1990 levels. Already two environmental groups, Environmental Defense and the Natural Resource Defense Council, have endorsed the transaction.

Regulators are still likely to scour the deal for flaws, if only because of the size of the company’s operations. Dallas-based TXU provides electricity and related services to approximately 2.3 million customers in the state of Texas. Its facilities include 41 generating plants that create the power, and 704 distribution substations. The company reported 2006 earnings of about $2.6 billion, compared to $1.6 billion the year before.

Among the regulatory bodies that will examine the deal is the Public Utility Commission of Texas, which reviews utility company acquisitions in the state. A spokesman for the commission was quoted as saying the commission would examine the deal for “however long it takes to be comfortable.” The Nuclear Regulatory Commission and The Federal Energy Regulatory Commission may also weigh in on the deal.

At least one other large energy-related LBO has run into resistance from federal regulators, although for antitrust reasons. The Carlyle Group and Riverstone Holdings were recently singled out by the Federal Trade Commission on antitrust issues related to their $22 billion buyout of energy-services company Kinder Morgan Inc. The FTC forced Carlyle to take a passive position in a related energy portfolio company to complete the deal.

No doubt anticipating regulatory hurdles, KKR, Texas Pacific Group and Goldman Sachs have hired a cast of former political bigwigs with connections to the federal government. They include former U.S. Secretary of State James Baker III, who will serve as advisory chairman to the buying group. Future TXU board members will include William Reilly, chairman emeritus of the World Wildlife Fund and former EPA administrator; Donald Evans, former U.S. Secretary of Commerce; James Huffines, chairman of the University of Texas Board of Regents; and Lyndon Olson Jr., former Texas State Representative and former U.S. Ambassador to Sweden.

KKR and TPG met with wild success in the last power generation deal they collaborated on. In late 2004, the two firms, along with The Blackstone Group and Hellman & Friedman, acquired Texas Genco Holdings, the wholesale power generation unit of CenterPoint Energy. That $3.65 billion deal still stands as the largest U.S. power deal sponsored by financial buyers ever closed, according to Buyouts data. In early 2006, the four Texas Genco buyers made a windfall when they sold the company for $8.3 billion to NRG Energy Inc.

In addition to KKR, TPG and Goldman Sachs, equity investors in the TXU deal include GS Capital Partners, Lehman Brothers, Citigroup and Morgan Stanley. The $69.25 per share price represents a 25 percent premium to TXU’s average closing price over the 20 days ending Feb. 22, 2007. The transaction includes about $8 billion in cash, $24 billion in new debt and the assumption of about $13 billion in existing debt. Debt financing will be provided by Citigroup, Goldman Sachs, JP Morgan, Lehman Brothers and Morgan Stanley.

Terms of the deal include a $1 billion reverse breakup fee to be paid to TXU if the financing falls apart. TXU also has a go-shop period, which runs through April 16. The deal is expected to close sometime in the second half of 2007. Calls to KKR and TPG were not returned by press time.—A.N.