Monday, February 26, 2007

TXU-saved from itself

In an earlier post, I likened TXU, the giant Texas electric utility, to the Enron of yore. Now the Barbarian at the Gate*, Henry Kravis and is buyout firm, KKR, might be better labeled the angel at the pearly gate.

Late last week, it was widely reported that KKR had made a buyout proposal to TXU, the largest U.S. private equity deal ever. When I first read it, I thought, are they nuts? Why would KKR want the one utility vilified for wanting to build new coal plants the old-fashioned way? I couldn't find anyone in the industry who thought what they were doing was smart. Even those who champion coal didn't believe the cost numbers they were putting out there. While everyone else's costs for power plants (of lal types) were going up, TXU's were going down. I make an example out of TXU in my forthcoming book (available in May), "Lights Out! The Electricity Crisis, The Global Economy, And What It Means To You," stating that it represents everything that most everyone wants to change about the electricity industry.

Surprise! Literally the next day, I read that the first thing the buyers plan to do is scrap TXU's ambitious but fatally flawed plan to build coal plants. Instead, one element of the new go-forward plan would be to spend $400-million on energy conservation. That's peanuts compared to the $10-billion TXU would have to spend to build the 10,000 megawatts of generating capacity the utility was planning. But at least the strategy had changed. Of course, I also read that the money could be used to finance the buyout so let's not pretend that the cold warrior from the leveraged buyout days of the 1980s all of a sudden got a streak of altruism.

Still, the news is a breath of fresh air strategically for the electricity industry. I'm not a basher of coal by any means-plenty of better ways to use the stuff are available than the option TXU had selected. Mostly, I interpret this move, supported by the back story of KKR and its financiers seeking the advice and counsel of environmental groups, as a sign that the investment community is also aligned with public opinion behind the idea that global warming must be addressed. I also think this is a healthier and more practical sign than Al Gore winning an Oscar for his docu-drama on global warming, "An Inconvenient Truth."

The air over Texas may be cleaner but KKR's bank account will be fatter, too. An angel with less soot on the white robe, perhaps?

*A book called "Barbarians at the Gate" was written about KKR and the hostile takeover of RJR-Nabisco in the 1980s.