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When two investment firms set their sights on acquiring Texas' largest electric company, they recruited a pair of surprising partners to their takeover team — the Natural Resources Defense Council and Environmental Defense, two leading advocacy organizations.
The resulting $45 billion takeover proposal in February by Kohlberg Kravis Roberts & Co. and Texas Pacific Group was the largest private buyout bid in history. But it captured even more attention because of what the environmental groups extracted from KKR and TPG, as the takeover firms are commonly called.
If they successfully acquire TXU Corp., KKR and TPG have pledged a long list of changes, including:
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Shrink from 11 to three the number of new coal-fired power plants TXU plans to build in Texas.
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Scrap plans to build new coal plants in Pennsylvania and Virginia.
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Reopen several mothballed natural gas plants, which pollute less than coal.
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Explore the possibility of building a plant that burns coal cleanly.
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Cut carbon dioxide emissions to 1990 levels by 2020.
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More than double TXU's use of wind power.
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Promote consumer use of solar power.
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Double spending to promote energy efficiency among its customers.
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Create a sustainable energy advisory board that includes representatives from national environmental groups.
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Tie executive compensation to climate-change goals.
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Cut some electric rates.
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Support federal legislation to mandate reductions in carbon dioxide emissions.
James Marston, who led Environmental Defense's campaign against the proposed TXU power plants and participated in the negotiations with KKR and TPG, called the bid "a turning point in the fight against global warming." TXU's size would enable it to reshape the power industry in Texas and influence the state's federal lawmakers to support climate-change legislation, he predicted.
"It's one thing for companies in California to take the lead in reducing pollution," Marston said. "But this is Texas."
"To say TXU is just another company," agreed David Hawkins, who represented the Natural Resources Defense Council in the negotiations, "is like saying Muhammad Ali was just another boxer."
TPG Partner William Reilly, who was key to bringing the bidders together with the environmentalists, said the success of those talks "has led us to expect a future that will be collaborative and history-making."
Daniel Esty, director of Yale University's Center for Business and Environment, said the bid demonstrates the "revolution" occurring in contemporary corporate responsibility.
"KKR and TPG most certainly have not gone soft," Esty said. "The masters of the universe have not given in to greenmail in a fit of political correctness. To the contrary, they are super-sophisticated business people who have learned that success in the marketplace now depends on getting corporate environmental strategy right."
The takeover certainly would launch a dramatic makeover of TXU, which has battled environmental groups over its plant-construction plans and other issues. It has been described as leading the power industry in its advocacy of coal. The 11 plants would have added another 78 million tons of carbon dioxide annually, more than doubling TXU's current 55 million. The three plants still in the bidders' plans would increase emissions by nearly 20 percent.
TXU Mining's Big Brown site, near Fairfield, Texas, provides coal for a nearby coal-fired power plant. (AP Photo/David J. Phillip)
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KR and TPG first told TXU of their designs on the company in November 2006. In February, Reilly called Environmental Defense President Fred Krupp and asked for a confidential discussion. Reilly, the first President Bush's Environmental Protection Agency director, wanted help preparing a bid that environmental groups could support. Ironically, TXU Chairman John Wilder earlier had rejected a Krupp request to talk about the power-plant plans.
The two equity firms believed TXU's stock was undervalued because of its dependence on coal. And they already were trying to develop a more promising business plan with their lead financial adviser, Goldman Sachs, which itself works with environmental groups and transports its executives in hybrid limousines.
Marston and Hawkins were assigned to represent their groups in talks with Reilly and other representatives of the equity firms. After a week and a half of phone conversation, Marston flew to San Francisco for the final session, which began at breakfast in San Francisco's luxurious Mandarin Oriental Hotel. With Hawkins participating by telephone the talks finally wrapped up at TPG's offices overlooking San Francisco Bay at 1 a.m. on Feb. 22. Only then did the KKR and TPG representatives fly to Austin to tell Texas government officials of their plans. On Feb 25, TXU's board approved the sale. It still must be submitted to a shareholder vote.
Not everyone is satisfied with the outcome. Some worry that TXU's coal-plant cutbacks would cause an electricity shortage within just a few years and lead to rate hikes. Others plan to keep opposing the three plants that TXU still plans to build. They also worry the new owners might not keep their promises, which are not legally binding.
"Promises are only promises," said Tim Morstad, advocacy director for AARP-Texas.
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