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KKR Barbarians Go Green as Buyout Firms Profit Cutting Energy

For much of 2006 and into 2007, Environmental Defense Fund had been battling to stop TXU Corp., Texas’s largest power producer, from building 11 coal-fired plants. The barrage of lawsuits, town-hall meetings and online community groups was also becoming a major headache for KKR & Co., TPG Capital and Goldman Sachs Group Inc.’s private-equity arm, which were planning the world’s biggest leveraged buyout of the utility company.

“We had to get the environmentalists on board,” recalls William Reilly, senior adviser at Fort Worth, Texas-based TPG, who headed the Environmental Protection Agency under President George H.W. Bush.

Reilly sat down with James Marston, director of EDF’s Texas office, on Feb. 21, 2007, Bloomberg Markets magazine reports in its May issue. Over scrambled eggs and coffee at San Francisco’s Mandarin Oriental hotel, the two agreed that to win environmentalists’ blessing, TXU’s new owners would build just three plants, Marston says.

At TPG’s California Street offices, co-founder David Bonderman and KKR partner Frederick Goltz weighed in. By 1 a.m., the would-be acquirers had agreed to cut TXU’s carbon emissions to 1990 levels by 2020, spend $400 million on energy efficiency and tie executive pay to environmental goals. The $43 billion LBO was announced four days later.

Photographer: Peter Foley/Bloomberg

Henry R. Kravis, co-chairman and co-chief executive officer of Kohlberg Kravis Roberts & Co. Close

Henry R. Kravis, co-chairman and co-chief executive officer of Kohlberg Kravis Roberts & Co.

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Photographer: Peter Foley/Bloomberg

Henry R. Kravis, co-chairman and co-chief executive officer of Kohlberg Kravis Roberts & Co.

“We did it to be on the right side of history,” Reilly says.

New Image

Long the masters of dealmaking and cost cutting, buyout firms are allying with environmentalists to craft a new green image.

KKR, architect of the nasty takeover in Bryan Burrough and John Helyar’s “Barbarians at the Gate: The Fall of RJR Nabisco,” hired EDF’s Elizabeth Seeger to help wean companies off carbon. TPG has put 10 of its acquisitions, or about a quarter of its holdings, on low-energy diets. Washington-based Carlyle Group, the world’s second-largest private-equity firm, behind New York-based Blackstone Group LP (BX), weighs such ideas as whether ecofriendly packaging can trim shipping costs before it inks a deal.

Buyout firms are in a good position to deliver on environmental pledges, says Anne Simpson, a senior portfolio manager at the California Public Employees’ Retirement System, the largest U.S. public pension fund, because they plan for the long haul and make blanket decisions covering dozens of firms.

‘Vagaries of Public Markets’

KKR, founded in 1976, owns or has stakes in 58 companies with $220 billion in annual revenue. Retailer Toys “R” Us Inc., hospital giant HCA Holdings Inc. and research firm Nielsen Holdings NV are among the big names.

“As a private-equity firm, you have more scope to influence what your companies are up to,” Simpson says. “They are not subject to the vagaries of public markets.”

Not everyone is buying the industry’s newfound green patina. Michael Lazarus, a senior scientist at the Seattle office of the Stockholm Environment Institute, says KKR is simply couching good business practices in environmental trappings.

“If these companies could show that they were reducing energy intensity well beyond the industry norms, and thus showing leadership, that might be news-worthy,” Lazarus says. “I don’t see that here.”

Last year, the EPA honored 50 environmental leaders for their commitment to curbing greenhouse gases. Snack-food and soft-drink maker PepsiCo Inc. and appliance manufacturer Whirlpool Corp. (WHR) were among the Energy Star winners. KKR companies were not.

Profit Motive

Buyout firms publicize good deeds in press releases and tout green achievements on websites, but they’re still mostly concerned about the bottom line, says Colin Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth College’s Tuck School of Business in Hanover, New Hampshire.

“LBO firms are not making investments just to enhance their reputations,” Blaydon says. “Going green is a way of cutting fuel costs -- and long-term trends are for those costs to rise.”

Environmentalists are nudging their new partners to take bigger steps. EDF President Fred Krupp says he phoned Henry Kravis, KKR’s co-founder and co-chairman, in October 2007. Over lunch, he suggested that Kravis’s firm, which had just become partial owner of TXU, work with EDF to trim costs and carbon emissions at its other holdings.

Green Savings

Seeger, 34, came on board as EDF’s liaison and helped set up what KKR calls the green portfolio. Kravis and fellow founder George Roberts declined to comment for this story.

KKR, originally called Kohlberg Kravis Roberts & Co., enrolled three companies in the voluntary program in 2008. Those firms, Primedia Inc. (PRM), Sealy Corp. (ZZ) and U.S. Foodservice Inc., cut fuel, materials and paper consumption, saving $16.4 million that year, Seeger says in a 41st-floor conference room steps from a wall adorned with black tribal masks and abstract paintings at KKR’s midtown Manhattan headquarters.

“A real sign of success for me personally is when I go back to revisit a company and they’ve started to think of new, innovative programs or products,” says Seeger, who has an environmental studies degree from the University of Chicago and an MBA from the University of Pennsylvania’s Wharton School.

Seeger says her first hurdle at KKR was figuring out how to measure performance.

“One of the challenges of working with companies on environmental issues is the historic absence of good metrics,” she says.

Meaningful Metrics

For U.S. Foodservice, she traveled to Rosemont, Illinois, to assess the delivery fleet’s efficiency.

“It’s not as easy as miles per gallon, it turns out,” she says.

Instead, Seeger looked at how many restaurants or hospitals the company served per gallon or how much Angus beef or frozen lasagna it delivered.

After working with Seeger, the nation’s second-largest food distributor installed controls that prevented trucks from going over 62 miles (100 kilometers) per hour and added shut-offs that end idling after four minutes. It installed programmable thermostats at storage facilities and replaced light bulbs with high-intensity fluorescent lighting at 34 locations, saving $7.7 million.

In addition, U.S. Foodservice saved $14.6 million in fuel costs and lowered carbon dioxide emissions by 13 percent in the 2008 to 2009 period from its 2007 base line, she says.

‘Work in Progress’

KKR hasn’t forsaken all carbon-intensive practices. Its partnership with Premier Natural Resources LLC in Tulsa, Oklahoma, buys oil and gas fields. A venture with Hilcorp Energy Co. drills shale gas deposits in Texas.

While TXU, renamed Energy Future Holdings Corp., is sticking to its promises with EDF, the utility is the 12th- largest carbon emitter among U.S. fossil-fuel-burning power producers in 2008, a study published in 2010 by the New York- based Natural Resources Defense Council found. A 2006 NRDC report ranked TXU as the 13th largest.

“This is very much a work in progress,” says Ralph Cavanagh, co-director of the NRDC’s energy program.

TXU’s 3 new coal-fired plants -- the ones whittled down from the proposed 11 -- are adding an extra 22 million tons of CO2 to the atmosphere every year, says Tom Smith, Texas director of Public Citizen, a consumer advocacy group founded by Ralph Nader.

‘A Pittance’

“EFH has spent a great deal of money on energy efficiency and wind and solar,” Smith says. “The benefits are a pittance compared to the environmental damage EFH is doing.”

The utility invested $229 million for energy improvements as of 2010, spokeswoman Lisa Singleton says. EFH is the largest provider of wind power in Texas and the fifth largest in the U.S., she says.

KKR is making better progress with the 17 companies now in the green portfolio. Sealy, the world’s largest mattress maker and one of the original members, cut CO2 emissions for 2008 and 2009 by a total of 23 percent with software that pinpoints shorter delivery routes. The Trinity, North Carolina-based company also loaded its trucks with more beds per trip. It reduced waste 37 percent from 2007 by recycling leftover cotton and wood. In total, Sealy has avoided $12.1 million in costs it would have incurred had it not changed, according to KKR data.

Cooling Computers

KKR put SunGard Data Systems Inc. in Wayne, Pennsylvania, on a plan to lower energy use at 60 data centers in North America and Europe. Computers in these buildings process trading and financial data for banks and brokerages that manage $25 trillion of assets. They also produce three-quarters of the company’s greenhouse gas emissions, says Ryan Whisnant, SunGard’s director of sustainability.

“In addition to powering the servers, the biggest energy use is cooling the data centers,” Whisnant says.

Engineers configured the server cabinets to separate cold air that cools the servers from hot air the computers discharge. SunGard’s financial system unit is consolidating 25 centers into just 5, for net savings of $5 million over 5 years and an annual reduction of almost 1,000 metric tons of CO2, Whisnant says.

Despite the improvements, SunGard’s greenhouse gas emissions rose 6 percent in 2009 from a year earlier as business grew. It avoided $3.8 million in operating costs it would have paid had it not made the changes, KKR says on its website.

Reporting costs that a company avoided or CO2 that it would have emitted isn’t the same as making actual reductions, says Kim Sheehan, a University of Oregon advertising professor and a founder of Greenwashing Index, which evaluates environmental claims. KKR may be touting more than it’s delivering, she says.

‘Public’s Impression’

“On some of these companies, the public’s impression is that the greenhouse gas emissions are reduced but in reality they increased,” Sheehan says after examining green portfolio data on KKR’s website.

KKR announced in June 2010 that eight green portfolio members had saved $160 million and trimmed CO2 emissions by 345,000 metric tons in 2009. At three of the eight, however, emissions increased.

Discount retailer Dollar General Corp. (DG) accounted for $106 million, or 66 percent, of the reported savings. Its emissions from stores and trucks rose 5 percent after it added more than 450 outlets. Even so, KKR said Dollar General had saved $67 million based on the number of products shipped per ton of CO2. Another $39 million in savings came from reducing packaging waste.

‘Starting Phase’

“We are still in a starting phase and these are growing companies,” Seeger says. The challenge is to expand and cut emissions without hurting profits, she says.

EDF began working with Carlyle in 2009. A Carlyle managing director combed through the firm’s previous 320 deals. Then, along with Cincinnati-based consultant Payne Firm Inc., it created what it called the EcoValuScreen. Carlyle is adopting metrics that cover greenhouse emissions, waste, water use, toxic chemicals and forest products in evaluating deals.

“We had looked at environmental issues -- but from a risk perspective,” says Bryan Corbett, a Carlyle principal. “EDF wanted us to think about operational change that might improve environmental performance and help the bottom line.”

Carlyle put its metrics to work in July 2010. It paid $3.8 billion for vitamin maker NBTY Inc., which manufactures nutritional supplements under the Nature’s Bounty, Holland & Barrett and Puritan’s Pride brands.

$20 Million in Savings

Before Carlyle completed the deal, Payne consultants evaluated manufacturing and distribution and suggested ways to cut packaging and increase recycling. In January, NBTY opened a plant in Burton-on-Trent, England, that can produce more than a million packets of dried fruits and nuts per week. The plant has a recycling facility right on the grounds.

When TPG, founded as Texas Pacific Group, bought Caesars Entertainment Corp. in 2008 with Leon Black’s Apollo Global Management LLC, the world’s biggest casino operator had been investing in energy savings since 2003. Under its new owners, Caesars accelerated its efforts, cutting annual carbon emissions by 106,000 metric tons and trimming electricity consumption by 163 million kilowatt-hours annually, partly by upgrading air conditioning better designed to cool giant gambling parlors in the desert. The result: $20 million in annual savings, says Pat Tiernan, TPG’s sustainability operations executive.

‘Low-Hanging Fruit’

Environmentalists say buyout firms can go further.

“Ecoefficiency is low-hanging fruit,” says Michelle Chan, economic policy project director at Friends of the Earth. “It makes a lot of financial sense, but I like to see more ambitious projects.”

Harrah’s Rincon, a TPG-Apollo property, shows what’s possible. The Valley Center, California-based entertainment spot built a 3,936-panel solar field that provides electricity to power about 90 percent of the resort’s heating and air conditioning and offsets almost a quarter of its total energy consumption.

If KKR and fellow buyout giants are serious about gaining green credibility, Seeger and other newly empowered environmental advocates have plenty of similar ideas in their repertoire.

To contact the reporter on this story: Kambiz Foroohar in New York at kforoohar@bloomberg.net.

To contact the editor responsible for this story: Michael Serrill at mserrill@bloomberg.net.

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