WASHINGTON -- The board of Texas' largest electric utility last night tentatively approved a record $45 billion takeover bid by two private equity firms in a deal hailed by environmentalists as a major turning point in the battle against global warming.
The prospective owners of the TXU Corp. have told environmental groups that they would cancel eight of 11 coal plants proposed by the company and also back national legislation for mandatory reduction in carbon dioxide emissions, a major contributor to climate change.
TXU was expected today to formally announce the buyout, according to people familiar with the deal. The sale, which needs shareholder approval, would be the largest leveraged buyout in US corporate history.
"This could make a difference in helping stop hundreds of coal-fired power plants in the pipelines," said David Hawkins , director of the climate center at Natural Resources Defense Council, who engaged in unusual talks with the investors about the deal over the past two weeks.
The record buyout would exceed the Blackstone Group's recent $39 billion acquisition of the office landlord Equity Office Properties.
Under the terms of the TXU deal, the firms are expected to pay about $70 per share for the company and assume $12 billion of its debt, putting the total value of the transaction at $44 billion to $45 billion.
Many investors in the United States are attracted to coal because of its abundance and low excavation costs, but coal-powered plants emit large amounts of greenhouse gases into the atmosphere, contributing roughly 33 percent of the country's carbon dioxide emissions, according to the Environmental Protection Agency. That amount is more than any other source, including all emissions from cars and trucks.
The two equity firms, Kohlberg Kravis Roberts & Co. and the Texas Pacific Groups , sought out Hawkins's group and Environmental Defense , which have been among several environmental groups that have strongly denounced TXU's ambitious coal plan.
Hawkins said the new investors told him they would still build three coal-fired plants because of the large amount invested in equipment for them.
Even though 150 coal-fired plants are currently proposed in the United States, TXU's $10 billion coal expansion plan drew the strongest criticism because it was the single largest proposal and also because of its setting: Texas now leads the nation in wind power, one of several rapidly growing alternative energy sources.
During the past year, environmental groups have held extensive talks with banks and investors about the hidden costs of energy plants that send large amounts of carbon dioxide into the atmosphere, gradually increasing the average temperature of the planet.
The unusual decision by the two equity firms to engage in discussions with environmentalists before the deal reflect the change in the investment climate for coal-fired plants, environmentalists said yesterday.
The deal approved last night "sends a pretty powerful message that you cannot embark on a new coal-fired generation plant without doing very extensive due diligence and making sure the risks are manageable," said Dan Bakal , director of electric power programs for Ceres, a Boston-based nonprofit coalition of environmental and investor groups.
"I'm constantly talking to people on Wall Street, and it does seem with every passing day there is increasing recognition of the real financial risk associated with climate change."
Hawkins said the investors wanted support from environmentalists going into the deal, and pledged to expand TXU's renewable energy portfolio, strive for better energy efficiency, and offset some of its emissions by investing in renewable energy sources.
The deal, Hawkins said, could change the perception of TXU overnight, from what has been seen by environmentalists as one of the country's largest polluters into a force for the positive, especially considering the investors' pledge to work for national legislation that calls for mandatory caps on greenhouse gas emissions.
The administration opposes such action, saying it would adversely affect the economy. But a coalition of environmentalists and large US corporations, including General Electric and DuPont, announced support earlier this year for a plan that would reduce carbon dioxide emissions by 60 to 80 percent of today's levels by 2050.
"This is a big deal politically if the largest energy company in Texas supports global warming legislation," Hawkins said. "That is going to affect the votes of the Texas delegation [in Congress], and that could make a difference in enacting a global warming bill in the next two years."
At stake in such national legislation would be the cost of energy sources, adding expenses for those plants that emit carbon dioxide, such as coal-fired plants.
That, environmentalists and economists say, would dramatically change the calculus of investing into coal-fired plants initially and into the future. Such plants have a life span of roughly 60 years.
"We are now operating on a tilted playing field -- not a level playing field -- in the competition for electric power supply," Hawkins said. "The coal power plant projects are enjoying, in effect, a market subsidy now. They look more attractive than they are because [carbon dioxide] emissions are ignored by the marketplace. But if legislation controls those emissions, overnight that changes the economics, and then we could see more wind and solar power projects, for instance."
But Bakal said some environmentalists might still question the decision by investors to continue plans for three coal plants in Texas.
The 11 proposed plants would have added more than 9,000 megawatts of new capacity; it was unclear what the power capacity of the three plants would be.
"What will be interesting is if they really go forward with these three plants," he said. "If 11 doesn't make sense, you could almost argue that one doesn't make sense."