The Dallas Morning News reports this morning that the investment firms, Texas Pacific Group, Kohlberg Kravis Roberts & Co., and Goldman Sachs, have not only offered to buy TXU, which has been the brunt of controversy and lawsuits over its proposal to build 11 coal-fired power plants in Texas, but to reduce the number of coal-fired plants to three and to otherwise produce more renewable energy. In doing so, the three firms have entered into agreements with environmental organizations as part of the proposed takover of TXU. This may be a first in the investment community--a "Green Takeover."
The full text of The Dallas Morning News article follows:
Prospective TXU buyers would build fewer coal plants
Group promises only 3 new coal plants, is likely to cut prices
02:00 AM CST on Sunday, February 25, 2007
By ELIZABETH SOUDER / The Dallas Morning News
The companies that want to buy TXU Corp. would build only three of the 11 coal-fired power plants TXU has proposed, and would cut retail electricity prices, addressing two issues that fueled public outcry against the power company.
The buyers, Texas Pacific Group, Kohlberg Kravis Roberts & Co. and Goldman Sachs, signed an unusual agreement with two environmental groups. They promised to scale back the coal plant building program – as well as to cut pollution and greenhouse gas emissions – if TXU accepts their offer of around $45 billion for the company.
Negotiators say the deal is the first of its kind.
Jim Marston, regional director for Environmental Defense in Texas, described in an interview Saturday the points of the deal his group and the Natural Resources Defense Council signed with the buyout companies.
"It really is, I think, a watershed moment in America's fight against global warming. They have made a number of very important commitments related to both local air pollution problems in Texas as well as commitments to do something against greenhouse gas emissions," Mr. Marston said.
"The fact that it's a Texas company doing this, as opposed to lobbying for delays, is a big deal," he said.
The agreement is designed to clear TXU's name among environmentalists, consumers, regulators and politicians after the plan to build 11 coal-fired power plants prompted substantial environmental debate in Texas. The issue also put TXU at the center of a national discussion about global warming, because coal plants emit more carbon dioxide than plants using other types of fuel. The commitments also address the controversies that drove some state lawmakers to seek to force a breakup of TXU.
Meanwhile, someone with direct knowledge of the buyout offer said TXU's board is meeting this weekend to consider the offer that would take Texas' largest power company private. The deal would be the largest buyout ever.
TXU officials won't comment on the offer, and the buyers have remained officially mum.
An official with Texas Pacific Group contacted the environmental groups about a week and a half ago to propose talks. The groups met in San Francisco on Wednesday – the day two administrative law judges in Austin decided to postpone the TXU permit hearings by four months. The judges were heeding a decision by a state district judge that Gov. Rick Perry's order to fast-track plant permits is probably unconstitutional.
After a 17-hour meeting, the groups had an agreement. In return for the environmental commitments, the advocacy groups agreed to settle a lawsuit concerning one of the TXU coal plants.
The buyers agreed to the following points:
•Build only three new coal-fired power plants using traditional coal technology. The buyers would pursue permits for the Sandow plant and the two Oak Grove plants, and yank permit applications for all other coal plants.
•Keep TXU's promise to cut total emissions of regulated pollutants 20 percent from current levels after the new plants are built. Those pollutants are nitrogen oxides, sulfur dioxide and mercury, but do not include carbon dioxide.
•Not to propose building any traditional, pulverized coal plants outside of Texas. TXU had planned to expand the building program to the Northeast.
•Support federal legislation to impose a cap on carbon dioxide emissions and agree to cut TXU's own emissions to 1990 levels by 2020. The 11 plants TXU proposed to build would emit 78 million tons of carbon dioxide a year, boosting TXU's total annual carbon dioxide emissions to 94 million tons.
•Join U.S. Climate Action Partnership, a group of 10 industrial and financial companies that are urging the government to create a cap-and-trade program for greenhouse gases. Companies would get credits to emit a certain amount of carbon dioxide each year, and as companies cut their emissions they could sell the credits to others.
•Pursue more wind power, and double the amount TXU spends on energy efficiency programs to $80 million for the next five years. The investors would probably keep TXU at least that long before selling, according to a source with direct knowledge of the buyers' thinking.
•Explore using coal gasification technology for subsequent plants. Coal gasification is a process that burns coal more cleanly and allows the carbon dioxide to be captured and stored. Current TXU managers have said the technology hasn't been proven to work efficiently on Texas coal.
•Create a sustainability energy committee to advise the new company. Officials with the Environmental Defense and the Natural Resources Defense Council would sit on the committee.
Cutting retail electricity prices isn't part of the environmental deal. But people with knowledge of the buyers' thinking said they also plan to lower consumer rates.
Such a move would please key Texas lawmakers who have filed legislation designed to cause prices to drop by limiting the size of power companies and forcing TXU to break apart.
Sen. Troy Fraser, R-Horseshoe Bay, last year chastised TXU chief executive John Wilder during a public hearing for hiking retail prices after the 2005 hurricanes drove natural gas prices – and thus power prices – higher but not dropping prices when natural gas rates fell.
TXU executives have argued that Texas needs the plants to meet growing demand for power. Power grid officials predict that by 2010 Texas' power supply will become uncomfortably tight on days when people use the most electricity. But since TXU announced the plan, rivals have announced plans to build their own coal, nuclear and wind generation facilities.
TXU executives have also said building 11 coal plants could reduce wholesale electricity costs by $1.7 billion. That's because coal plants are cheaper to operate than natural gas plants, which are currently the dominant type of generation in the state. By adding the cheaper coal power to the grid, natural gas plants wouldn't have to operate as often. Lower wholesale prices could trickle down to consumers if retail electricity providers cut the price they charge.
The strategy was to design one coal plant, called a reference plant, and replicate it across the state and around the country. By building so many plants at once, TXU was able to push the cost down to about $10 billion, or $1,100 per kilowatt, a cost so low that some rival power executives doubted it could be done.
Some people who oppose the plants speculate that TXU expected the new plants to strengthen the company's market position so much that it would discourage competitors from building their own plants in Texas and would solidify TXU's position as the largest power company in the Texas market.
The buyers promised environmentalists they would eliminate the reference plant plan and only build the three plants that TXU had proposed before announcing the reference plant strategy.
Permits for those three plants aren't part of the case that was delayed by four months. TXU had applied for these permits earlier, but they are all also delayed for various reasons.
Hearing judges recommended that regulators deny permits for the two Oak Grove plants. The permits now await a final decision by the Texas Commission on Environmental Quality. And the commission is waiting until the Texas Senate confirms the nomination of a third commissioner so the group can vote on the permits with a full board.
The Sandow plant is unique because TXU wants to build it on behalf of Alcoa to replace some older coal plants at an Alcoa facility. But the process has been delayed by lawsuits brought by environmentalists in federal court.
Environmental Defense is a nonprofit environmental advocacy group with 400,000 members. One of the group's functions is to ask big companies to agree to take specific action to reduce their impact on the environment. If a company refuses to negotiate, Environmental Defense may resort to suing the company over environmental infractions or to block the company's growth plans.
TXU's current executives haven't negotiated with Environmental Defense. Last October, the environmental group sued the Texas Commission on Environmental Quality, which decides on air permits, to block TXU's coal plant permits. And earlier this year, Environmental Defense launched an advertising campaign, including television ads, targeting TXU's proposed plants.
The group will settle its lawsuit if the buyout firms purchase TXU, Mr. Marston said.
Natural Resources Defense Council also uses litigation and lobbying to pursue environmental protection.
David Hawkins, director of the council's climate center, said he didn't get everything he wanted out of the negotiations. He'd prefer TXU didn't build any traditional coal plants.
"But the outcome ... is a very substantial move and one that is a move away from old-fashioned coal technology and toward putting efficiency and renewables at the core of modern business plan for the power sector," he said.
"Multibillion-dollar buyouts occur fairly often, but this kind of decision by the buyout companies to incorporate environmental objectives as part of the overall transaction, I think, has not happened before," he said.