How Green Green-Lighted the TXU Deal

Environmental groups played a key role in the $45 billion private equity buyout of the highly profitable Texas utility. Is it a "milestone"?

When the directors of TXU Corp. (TXU) sat down the night of Feb. 25 to vote in favor of the $45 billion buyout offer from private equity firms Kohlberg Kravis Roberts, Texas Pacific Group and Goldman Sachs, a small group of environmentalists could rightly claim that they helped make the deal possible.

It's a turn of events in a bitter feud between environmentalists and the highly profitable Texas utility giant that no one could have predicted. Until two weeks ago, representatives from the Environmental Defense and the Natural Resources Defense Council (NRDC) thought they were in for a long, drawn out battle with TXU over its unprecedented $10 billion plan to build 11 coal-fired plants in Texas. The plants would have more than doubled the amount of carbon dioxide the company sends into the atmosphere. Indeed, TXU's plans had turned into a national referendum on coal-generated electricity. City mayors, business and religious leaders, and the state of Oklahoma joined forces with the environmentalists to fight the project.

But instead of fighting, the environmental groups helped to broker a deal with the private equity groups, sharply reducing the number of coal-fired plants to be built in Texas. Given the fierce resistance to TXU's plans, the private equity firms had decided that they would only go ahead with their takeover bid if they had buy-in from environmentalists and could work to turn TXU into a leader on environmental issues. That led to William Reilly, a longtime conservationist-turned-private equity investor at Texas Pacific Group, to reach out to environmental groups and get them involved in working out a deal under the type of deadline more common to boardrooms than environmental meetings.

Burning Up the Phone Lines

After 11 days of phone calls that culminated in a 13-hour marathon of negotiations Feb. 21, the two sides hammered out a 10-point agreement that will reposition TXU squarely on the side of the environmentally conscious. While not legally binding, the agreement between the environmental and private equity groups commits the new owners to build just three of the proposed plants. In addition, TXU will join a coalition of 10 companies supporting federal carbon-reduction legislation, and crafting a plan for Texas that will mimic California's successful energy efficiency program. "TXU has obviously been in the crosshairs," says Reilly.

The landmark deal for TXU didn't get rolling until Feb. 14 when Reilly called the leaders of Environmental Defense and NRDC. Reilly has known both of them for years and felt comfortable telling them in confidence that his group was looking at buying TXU, the largest generator and seller of electricity in the fast-growing Texas market. But Reilly and his other private equity partners didn't want to go ahead without an agreement from the environmental groups to pull back their opposition and support the buyout. "Smart money knows that global warming is real and that a sophisticated approach to this is good business," says David Hawkins, one of the negotiators for the environmental groups.

It also helped that Reilly has a strong conservationist streak. He ran the Conservation Foundation, which later became the World Wildlife Fund, for 18 years until President George H.W. Bush appointed him as head of the Environmental Protection Agency in 1989. After leaving the EPA, Reilly was persuaded by Texas Pacific Group Managing Partner David Bonderman to become an advisor to Texas Pacific Group in 1994. Three years later, Reilly developed the group's Clean Tech Fund.

The Clincher

The negotiations came down to a full day on Feb. 21 in Texas Pacific Group's offices in San Francisco. Phoning in was Hawkins; at the table were Reilly and Jim Marston. A 54-year-old native Texan, Marston has spent most of his 20 years with Environmental Defense working on Texas state issues. Marston helped put in place a program to spearhead on-the-ground battle against the utility, a departure for a group that typically tries to work with corporations.

In contrast to Marston, 63-year-old Hawkins is a national policy hand. The director of NRDC's climate center, his career has been devoted to working on broad legislative and regulatory issues in Washington. Living in Chevy Chase, Md., just outside of Washington, Hawkins was part of NRDC's push on the national level to draw attention to the TXU proposals.

Marston flew in and represented the two environment groups in the room with negotiators from the private equity groups, including Reilly. As they hammered out the deal, Marston would call Hawkins, who was stuck back East. By 1 a.m. the next morning, a 10-point plan was hammered out. On Sunday, Feb. 25, the board signed the agreement.

Now, with the deal approved by TXU's board, the next step will be seeing how the new managers hold up their side of the bargain. Marston points to one item in particular that makes him believe the new owners want to turn the company into an environmentally responsible utility. The proposal? Linking senior executive pay to how they meet environmental goals. "Even if they do just some of the things they're talking about, we believe this agreement will be a milestone for the industry," says Marston.

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