An investor group led by Kohlberg Kravis Roberts & Co. (KKR) and Texas Pacific Group (TPG) is acquiring TXU in a transaction valued at $45 billion. The deal includes an agreement with environmental groups to scrap eight of 11 planned coal-fired power plants. In the weeks leading up to the Feb. 26 announcement of the deal, talk had intensified that the utility was planning to drop at least several of its planned power plants in the face of vocal public opposition.
The announced scale-back represents a 75 percent reduction in new coal capacity for TXU. (News reports said that could affect more than 30 million tons a year of planned coal sales from Wyoming’s Powder River Basin.) To satisfy ERCOT’s requirement for immediate additional capacity to meet the state’s increasing electricity demand, TXU said it still expects to build two coal units at the Oak Grove site and one coal unit at the Sandow site. TXU said it would immediately suspend the permit application process for the other eight units and withdraw them entirely once the sale closes. TXU said it does not intend to apply or reapply for permits to build additional coal units using current pulverized coal-fueled technology.
TXU also said it will reduce mercury (Hg) emissions, sulfur dioxide (SO2) and nitrogen oxides (NOX) by 20 percent from 2005 levels, through reductions at existing units and installation of emission controls on the new Oak Grove and Sandow units. TXU will reduce carbon emissions by increasing efficiency of its generating facilities by up to 2 percent.
 TXU still plans to build one coal unit at its Sandow site. |
TXU also plans to more than double its purchase of wind power to more than 1,500 MW. TXU will also promote solar power through solar/photovoltaic rebates. The company also intends to join the FutureGen Alliance, a non-profit consortium of companies supporting FutureGen, the U.S. Department of Energy project intended to create the world’s first near-zero-emissions fossil-fuel power plant.
In addition, the company said it will join the United States Climate Action Partnership (USCAP), a group of businesses and environmental groups organized to help enact an “environmentally effective, economically sustainable and fair” climate change program. TXU is also pledging to support a mandatory cap and trade program to regulate carbon emissions.
Under terms of the merger, shareholders will be offered $69.25 per share at closing, which represents a 25 percent premium to the average closing share price over the 20 days ending February 22, 2007. GS Capital Partners, Lehman Brothers, Citigroup and Morgan Stanley intend to be equity investors at closing. The funding of the transaction will not result in new debt incurred for the regulated utility, an important factor for regulators who will consider the acquisition.
After the sale closes, the company’s electric utility, generation, wholesale and retail electric activities will remain under the same jurisdiction of the Public Utility Commission of Texas, Nuclear Regulatory Commission and Federal Energy Regulatory Commission.
The newly privatized company plans to offer price cuts and price protection to electric customers, strengthened environmental policies, investment in alternative energy and corporate policies tied to climate stewardship.
The company is offering the following price cuts and price protections:
- 10 percent price decrease resulting in more than $300 million of annual savings for residential customers
- Price protection through September 2008
And the agreement also puts forward several environmental policies and investments in alternative and renewable energy, including:
- $400 million investment in demand side management initiatives
- Transaction endorsed by Environmental Defense and Natural Resources Defense Council
- Increased commitment to renewable energy sources and investing in alternative energy technologies
- TXU will create an independent Sustainable Energy Advisory Board made up of individuals who represent the following interests: the environment, customers, Texas economic development and ERCOT reliability standards
The acquisition is planned to include an environmental focus that will make TXU a “leader in conservation and energy efficiency”, creating a “fundamental change in the Texas electric market,” according to a statement. In addition, the company will seek greater involvement among environmental, government and community leaders.
C. John Wilder, chairman and chief executive officer of TXU Corp., said in a statement that the company’s new strategy will address Texas’ immediate and future energy and reliability needs in a way that “responds to the desires of policy makers and other key stakeholders to incorporate new technology advancements and conservation.”
Henry Kravis, founding partner of KKR, said the investors plan to hold TXU as a long-term asset. “We recognize the need to balance growth with environmental considerations.”
Fred Krupp, President of Environmental Defense, said the NRDC “fully supports” the transaction and the company’s support for mandatory global warming legislation.
Once the transaction is closed, TXU plans to its split operations into three independently managed businesses. They include:
- Generation: Luminant Energy will be the new company name, encompassing TXU’s power, wholesale, development and construction businesses
- Transmission and Distribution: TXU Electric Delivery will be renamed Oncor Electric Delivery
- Retail: TXU Energy will retain use of its name for the retail business
Under the merger agreement, TXU may solicit proposals from third parties through April 16. TXU’s board of directors said it intends to solicit proposals. TXU said it did not intend to disclose developments with respect to this solicitation process unless and until its board of directors has made a decision regarding any alternative proposals.
The investor group expects to close the deal in the second half of 2007, subject to receipt of shareholder approval and required federal regulatory approvals. The consortium of investment banks providing committed financing to the investor group in support of the transaction includes Citigroup, Goldman Sachs, JP Morgan, Lehman Brothers and Morgan Stanley.
Credit Suisse Securities and Lazard acted as financial advisors to TXU. Sullivan & Cromwell LLP and Cravath, Swaine and Moore LLP acted as outside legal advisors to TXU and the Strategic Transactions Committee, respectively, in connection with the transaction.
Citigroup, Goldman Sachs, JP Morgan, Lehman Brothers and Morgan Stanley acted as financial advisors to the investor group. Simpson Thacher & Bartlett LLP, Vinson & Elkins LLP, Covington & Burling LLP, Hunton & Williams LLP and Stroock & Stroock & Lavan LLP acted as legal advisors to KKR, TPG and the investor group.
-David Wagman