Market News

 February 26, 2007
Texas coal plan altered by 'green' buyout

 Dallas, USA (GLOBE-Net) -- The largest ever leveraged buyout in the United States has an environmental angle to it, as a $45 billion bid for Texas utility company TXU Corp. includes a pledge to drastically scale back the company's plans to expand coal power, invest in wind energy, and support federally legislated greenhouse gas emissions limits.

A bid by investment firms Kohlberg Kravis Roberts & Co. and Texas Pacific Group, joined by Goldman Sachs, has been accepted by TXU's board. The latter firms will put up $5 billion in Cash, while Goldman Sachs will invest $1.5 billion. Lehman Brothers Holdings Inc., Citigroup Inc. and Morgan Stanley are also investing, with the remainder of the deal to be financed by debt, reports Bloomberg.

In an apparent first, the investors behind the buyout have made a series of commitments to environmental organizations who are involved in litigation against TXU.

TXU made headlines and became the target of campaigns to reduce greenhouse gas emissions for its $10 billion plan to build 11 large coal-fired generation plants. Texas is already the largest greenhouse gas emitter in the U.S., and the expansion would have significantly increased that profile.

TXU had remained committed to its plan until recently, touting a "clean coal initiative" which would reduce emission of regulated pollutants including sulphur dioxide, nitrogen oxides and mercury, by 20 percent due to the installation of more pollution-control equipment on older plants. However, rising pressure from environmental groups and investors led the company to consider a plan to cut the number of new plants to 5 of 6, press reports indicate.

Investors had become increasingly cautious about the large capital expenditure for the plants, and the rise in greenhouse gas emissions which could significantly alter the firm's risk profile should federal emissions legislation be introduced as expected.

In response, Kohlberg Kravis Roberts & Co. and Texas Pacific Group formed a buyout strategy with lead advisor Goldman Sachs, to head an investment partnership that became known as "The Green Group".

The landmark plan included negotiations with Environmental Defense and the Natural Resource Defense Council to support the deal and settle pending lawsuits against the firm, based on a number of environmental pledges made by the investment group.

The buyout partnership will scrap plans for eight of the coal plants, following through on only three of the proposed facilities. The cancelled plants would have added more than 9,000 megawatts of new energy capacity, representing 3.5 percent of the country's total coal-fired power.

Instead, TXU will seek to reduce it's greenhouse gas emissions to 1990 levels by 2020, pursuing more wind power and other low-emissions energy sources to do so.

Further commitments under the "10-point plan" include a $400 million investment to encourage energy efficiency in Texas, and a 6 percent cut in residential electricity rates within 30 days followed by a 4 percent cut later this year.

The company will also support federal legislation to cap greenhouse gas emissions from power plants.

Major investors seeing environmental opportunities

The TXU deal provides an example of a recent trend that has seen major investment firms pursuing opportunities in environmental performance, and in particular in reducing greenhouse gas emissions.

TXU's share price had dropped significantly in recent months, with the coal-expansion plan seen as a major contributor to the fall. Investors became disenchanted with the plan following huge protests by environmental and public groups, lawsuits against TXU and the state, and the increasing likelihood of greenhouse gas legislation in the U.S. The coal-based plan was seen as too risky and environmentally irresponsible, said some investors.

Evidence that climate change will have direct financial implications has been heeded by many large investment firms, as they have responded with increased investments in areas such as renewable energy, and expanded their investment analysis to include exposure to 'carbon risk'.

Information on companies' climate change risk exposure was sought by the Carbon Disclosure Project, a coalition of investment organizations representing more than US$40 trillion in assets. he Project is an explicit recognition that climate change has clear financial implications which should be considered by investors, and a sign that environmental and climate issues are affecting capital allocation and investment decisions.

Such consideration is crucial to preserving Canada's economic competitiveness and environmental integrity, says a recent report from the National Round Table on the Environment and the Economy (NRTEE).

  • See: Linking Capital Markets and Sustainability
  • Goldman Sachs has been at the forefront of investment in environment-related technologies. The company plans to invest $1 billion in projects that develop alternative sources of energy, including a $30 million stake in Ottawa-based Iogen Corporation, which is now planning to build a commercial scale plant for production of cellulose ethanol.

    Similar to policies adopted by Citigroup, Bank of America, and JPMorgan Chase, Goldman's commitment includes explicit prohibitions against financing or investing industrial activity in ecological no-go zones and recognizes the rights of indigenous peoples to free, prior informed consultation.

    The TXU deal is the most significant application of this shift in awareness of environmental risks and opportunities by large investors, and the level of engagement by those involved could be a sign of things to come. Investors are becoming more involved in how their assets affect the environment, and also more concerned about how those environmental impacts change their bottom line.