The deal between the Texas utility giant and a group of investors led by Kohlberg, Kravis, Roberts & Co. is the largest private investment merger in U.S. business history at $45 billion. The buyout comes to $32 after TXU's $13 billion in debt is paid off.
Included in the group of investors are Texas Pacific Group, Goldman Sachs & Co., GS Capital Partners, Lehman Brothers and Morgan Stanley. Goldman Sachs, Lehman Brothers and Morgan Stanley are already investors in the wind market. Under the agreement, shareholders would receive $69.25 per share, 25 percent more than the closing price Friday when the deal was being finalized.
"Our new strategy will meet two important objectives: addressing Texas' immediate and future energy and reliability needs; and doing so in a manner tat responds to the desires of policymakers and other key stakeholders to incorporate new technology advancements and conservation," said John Wilder, chairman and chief executive officer of TXU Corp.
Though the deal was already endorsed by the Environmental Defense and Natural Resources Defense Council, it still must be approved by the shareholders and regulators. Pending approval, TXU also has 50 days to accept other bids.
"Environmental Defense commends KKR and TPG for the many commitments they have made to reduce air pollution and emissions including their support for a mandatory federal cap and trade program to regulate carbon emissions," said Fred Krupp, president of the organization.
To gain the support of reluctant environmental organizations, negotiators agreed to meet electricity demand with renewable sources, generated more cleanly than the proposed coal projects. TXU announced the company will spend twice the amount of money it now spends on buying wind power. The company's wind purchases will more than double to 1,500 megawatts.
At 2,768 megawatts, Texas has the largest installed capacity in the United States, according the American Wind Energy Association's data from December 2006. There are 34 projects completed and seven under construction that will increase the state's generation capacity 1013 megawatts. The largest wind farm in Texas was developed by FPL Energy, a subsidiary of Florida Power & Light. Its 421 turbines were manufactured by Siemens and GE.
Representatives from both companies cited high demand as causing somewhat of a turbine shortage during a wind-power conference in San Diego earlier this month. Foreign manufacturers and developers are hesitant to invest in the unstable U.S. wind market. Many industry officials and supporters of wind power have suggested a long-term production tax credit or a federal renewable portfolio standard might help to create more confidence in the industry.
The wind market faces stormy conditions with increasingly high capital costs and turbine and raw material shortages, both a result of unstable regulatory framework and incentives. Despite a lack of security, the wind industry has grown exponentially over the last several years.
Aside from the power purchase agreement, TXU will invest $400 million conservation and energy activities over the next five years. The company pledged to reduce mercury, sulfur dioxide and nitrogen oxide emissions and use clean coal IGCC technology in its two new coal facilities. KKR and TPG agreed to knock TXU's emissions levels back to 1990 levels by 2020. Those are the cuts that would have been mandated if the United States had signed the Kyoto Agreement, Krupp said during a National Public Radio interview. The company will also seek to join the U.S. Climate Action Partnership.
Before the applications were dropped, Environmental Defense had files a federal lawsuit and was leading an advertising campaign in opposition to the 11 proposed coal plants. Krupp said the suit will be settled now in exchange for the canceling of the coal plants and the increased investment in wind.
The deal also entails a 10 percent decrease in electricity prices for customers through 2008 resulting in an estimated $300 million savings. Also included in the merger is the cancellation of eight proposed coal plants, preventing the emission of about 56 million tons of carbon annually.
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