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Utility deal calms foes with green concessions

An investor group pledges to cut TXU electric rates and drop plans for some coal-fired plants.

DALLAS - Texans weary of high electric bills and environmentalists who fought TXU Corp.'s plans for more coal-fired power plants offered only muted criticism Monday of the proposed takeover of the state's largest electric utility.

If federal regulators and TXU shareholders approve the $32-billion bid, the investor group led by Kohlberg Kravis Roberts & Co. and Texas Pacific Group will pull off the largest private buyout in history.

The buyers promised to cut electric rates by 10 percent, saving residential customers $300-million per year, and freeze those prices until September 2008. They also extended an olive branch to environmentalists by agreeing to drop plans for eight of 11 proposed new coal-burning power plants and make other green concessions.

While some environmentalists and civic leaders hailed the decision to drop most of the coal plants, others vowed to keep fighting to block the company from building the three coal plants that the buyers wanted to keep.

TXU serves 2.3-million customers, mostly in the Dallas-Fort Worth area, and competes against other power producers in the deregulated Texas electric market as far afield as Houston.

TXU lost about 5.5 percent of its retail customers in the 12 months ended last Sept. 30. Still, the company has prospered because electric rates in Texas are tied to the price of natural gas while TXU generates much of its power more cheaply at coal and nuclear plants. That's led state lawmakers to grill company officials over their rates - especially at a time when analysts are forecasting TXU earned about $2.5- billion in 2006.

The offer from KKR, Texas Pacific Group and four Wall Street firms - Goldman Sachs, Lehman Brothers, Citigroup and Morgan Stanley - to pay $69.25 per share for TXU represents a 15 percent premium over TXU's closing share price on Friday. The buyers will also assume more than $12-billion in debt.

Dallas-based TXU can listen to other offers until mid April, but if a better one comes along, KKR and Texas Pacific will have a chance to trump the bid.

TXU chief executive C. John Wilder said he had never shopped the company since arriving in early 2004.

"This came completely out of right field," he said. But he added that power companies make logical targets for private-equity buyers who have been on a shopping spree the past couple of years.

KKR and Texas Pacific showed creativity by seizing on TXU's grim environmental image to win backing for the deal even before it was announced. Their proposal to scale back TXU's $10-billion power plant expansion won the support of two influential groups, the Natural Resources Defense Council and Environmental Defense.

But some of TXU's critics were unhappy because the two groups agreed to a nonbinding deal that would let the new owners build three other coal plants, including two units that could emit more mercury than the proposed plants that will be scrapped.

"Environmental Defense blessed those two stacks when they don't have the authority to do that," said Dallas Mayor Laura Miller. She leads a coalition of cities, including Houston, that opposes TXU's coal plants.

Regulatory hurdles have tripped up previous efforts by buyout firms to enter the power business, including KKR's bid to buy UniSource Energy Corp. in Arizona and Texas Pacific's offer for Portland General Electric in Oregon.

State regulators in Texas have no authority to stop the deal, according to TXU officials, although they could consider the effects of the sale on proposed rate hikes.

The biggest buyouts

TXU Corp. agreed to be acquired for nearly $32-billion, plus the assumption of nearly $13-billion in debt, by a group led by two of the nation's biggest private equity firms, Kohlberg Kravis Roberts & Co. and Texas Pacific Group. Should the deal be completed, it would be the largest leveraged buyout in history (excluding debt). Almost all of the world's biggest buyouts have occurred in the past two years. Here are the top deals by value, including debt:

TXU Corp. $31.8-billion on Feb. 24, 2007: Aholding company that manages a portfolio of energy businesses in Texas, serving residential customers and small businesses, municipalities, electric cooperatives and other distribution companies.

RJR Nabisco Inc. $25.1-billion on Oct. 24, 1988: Conglomerate formed in 1985 by the merger of Nabisco Brands and R.J. Reynolds Industries. The buyout was the subject of Barbarians at the Gate: The Fall of RJR Nabisco, a book later turned into a cable TV movie for HBO.

Equity Office Properties

$22.9-billion on Nov. 20, 2006: Formed in 1976, Equity Office Properties Trust PLC is the largest owner of office buildings in the United States.

HCA Inc. $21-million on July 24, 2006: Hospital Corporation of America is now the world's largest private operator of health care facilities.

Clear Channel $18.6-billion on Nov. 16, 2006: Founded in 1972, Clear Channel Communications Inc. now owns more than 1,100 AM, FM and shortwave radio stations, nine satellite radio stations on XM Satellite Radio and more than 30 TV stations in the United States, among other advertising and media outlets here and in other countries.

Source: Wall Street Journal Online

[Last modified February 27, 2007, 00:01:02]