Once Green-Friendly, Largest Buyout Ever Now Battling EPA

A subsidiary of Energy Future Holdings Corp., the Texas utility that a group of buyout firms bought in 2007 for $45 billion with support from environmental advocacy groups, sued the Environmental Protection Agency this week for imposing anti-pollution rules it says will kill jobs and threaten reliable electricity.

The lawsuit by the subsidiary, Luminant, is the latest in a string of aggravations from the company to sting its private equity owners, led by Kohlberg Kravis Roberts & Co. and TPG Capital, and drags them into a national conversation over the role of business regulations in a struggling economy.

“As expected, the only results of this rule will be putting Texans out of work and creating hardships for them and their families, while putting the reliability of Texas’s grid in jeopardy,” Texas governor and Republican presidential contender Rick Perry said, according to the Houston Chronicle.

The lawsuit also puts the firms in the awkward position of being at odds Environmental Defense Fund, with which the firms negotiated heavily to get its support for the buyout and which has an ongoing partnership with KKR to help make its companies more environmentally friendly.

“Yesterday, Luminant chose to reverse course and fight vital clean air rules that will save lives in Texas, and that other utilities in Texas have been able to meet,” the Environmental Defense Fund said in a sharply worded press release on Sept. 13. “Luminant isn’t closing these plants because of EPA regulations—that’s just their cover story. They’re closing the plants because they did not act timely.”

The Cross-State Air Pollution Rule, which goes into effect Jan. 1, would require power plants in 27 states to install pollution controls to cut emissions that the EPA says threatens the health of thousands in neighboring states. Luminant, calling the deadline “unrealistic,” said in a press release that it “reluctantly must take the difficult steps of idling” two generating plants and ceasing operations at three mines, cutting about 500 jobs.

In 2007, KKR and TPG tapped politically connected friends such as William Reilly, a former administrator with the EPA, and former Reagan cabinet member James Baker to help them gain traction in pursing the company, then known as TXU Corp. They won support from the Environment Defense Fund and other environmental groups in part by scrapping plans to build eight of 11 coal-fired plants. And in 2008, the Environmental Defense Fund and KKR announced a “Green Portfolio” partnership to improve the environmental performance of the buyout shop’s companies.

Since then, Energy Future Holdings has struggled to pay down more than $35 billion in debt while prices for natural gas have plummeted.

The Environmental Defense Fund continues to work with the private equity firms on both Energy Future Holdings and the green portfolio program, Tom Murray, a managing director for corporate partnerships, told Buyouts. “We believe that a really effective way to help protect the environment is to partner with business,” said Murray, who said the lawsuit does not strain the relationship with KKR. “To solve the problems, business needs to be part of the solution. Just because we team up with leading companies does not mean we forfeit our ability to speak out on issues when we disagree, and this is one where clearly disagree.”

Murray added that the green portfolio program cut 345,000 metric tons of greenhouse gas emissions and 1.2 million tons of waste while cutting $160 million in costs for eight KKR companies from 2008 through 2009. KKR announced in October 2010 that five more of its companies would join the program, bringing its total to 17 companies.

Executives at TPG Capital declined to comment, while executives at KKR did not immediately respond to requests for comment.