Don't mess with Texas (cont.)

Consider that an ironic twist: Both KKR and TPG have had previous attempts to buy out regulated power companies, in Arizona and Oregon respectively, blocked by state agencies. In both cases, the agencies cited concerns that private equity firms, being private, wouldn't share enough information to ensure that rates were as cheap as possible.

Part of the appeal of this particular deal was that it did not require regulatory approval. Even so, "we knew there would be a lot of interest by legislators, regulators and public policy groups," says KKR and TPG spokesman Heller. "Consequently, we were and are fully prepared to engage all of the relevant stakeholders in the political process."

As well they should be. Lawmakers are hoping to hit the firms where it hurts if they don't cooperate - on the bottom line. "The legislation that we're passing will have a material impact on this deal," says Senator Fraser. "If they want to make a profit, they're going to have to charge more, and we feel like TXU is already overcharging today. My goals and theirs are in conflict."

That is not necessarily true, says a source at Texas Pacific who asked to remain anonymous. "In order to see the benefits of this change, you must have a long-term perspective," he says, explaining why taking TXU private will create value. "Our moves will be actually be earnings negative in the near term."

In addition to rate cuts to build market share, the new owners will have cheaper access to capital and add board members like former Secretary of State James Baker and former EPA chief William Riley.

In politics, however, perception is reality. Next Monday, the full Senate will consider the bills. "It's been called the issue of the session," says State Senator Troy Fraser. "You've got half the electric purchasers in the state served by TXU, which means that for half the legislature, it's their constituents being abused."

Another serious threat to the deal comes on the environmental front. While TXU's buyers earned the epithet "Green" in many headlines by agreeing to cut eight power plants from a plan to build 11, local environmental lobbies say it isn't enough - all 11 have got to go.

The focal point of that lobbying against TXU's plans in Texas has been Laura Miller, mayor of Dallas. Along with Bill White, mayor of Houston, she enlisted big-time litigator Steve Sussman (who's working pro bono), and local business personalities like Garrett Boone, founder of the Container Store, and David Litman, founder of Hotels.com.

While the Texas public, according to a poll taken last October by the Dallas Morning News, is split on the issue, Miller's coalition did convince a state advisory panel to recommend against building any of the 11 plants.

On Monday, Miller met with David Bonderman, founder of the Texas Pacific Group, and others from the buying group. She told Bonderman she did not want the three remaining plants built. "Of the 18 plants proposed for Texas, 45 percent of the emissions from the 18 plants would come from the two at Oak Grove and one at Sandow," she says, referring to three remaining projects. Because two would be located near Dallas, she added, they would push the city over EPA pollution limits, which by law cuts off all federal funding for Dallas.

Miller says there were no concrete agreements, but that KKR and TPG agreed to consider her request to use newer methods of coal energy - like gasification, which removes the polluting elements of coal before it is burned for fuel - instead of the current plan for just burning coal lignite, a far dirtier form. Miller brought in scientists from Princeton and other energy companies who argued it was feasible to use gasification. Previously, TXU had said such technology wasn't ready for primetime.

"They know what our issues are," Miller says. "There's a chance we'll get some concrete results."

A spokesman for TPG and KKR declined to comment on the meeting but reiterated that the firms are open to discussion on all issues. If the buyers don't improve or cancel the plants, Miller says she can bring to bear a broad public coalition of cities, businesses and citizens to oppose the three plants. She will also start calling some of Bonderman's own friends to lobby TPG and KKR. She noted that Bonderman is on the board of the Grand Canyon Trust, a group that opposes new coal plants near the Canyon. And, she added, "one of my first donors, and a member of our business coalition, is Ed Bass," a billionaire Texas oil investor for whom Bonderman was once chief investment officer. "When I told that to Bonderman," Miller says, "he just smiled."

The future of TXU will soon move from discussion to reality. Next Monday, the Senate will start debating the three energy bills. And later this year, the Texas Commission on Environmental Quality is expected to vote on the approval of two of the three coal plants still planned. The third was granted approval last year.

The private equity buyers have shown signs they are anxious to play ball. Fred Goltz, the KKR partner who testified to the House, did promise that KKR and TPG would remain invested in TXU for at least five years, so long as no new laws were passed that would, for example, force a breakup of the company. KKR and TPG have also said they don't plan on spinning off any pieces of the business.

KKR and TPG also launched a new Web site with more about their plants for TXU, texasenergyfuture.com, and announced that the $50 in rebates discussed by the House would be paid.

"The investor group has listened to the concerns expressed by the Public Utility Commission of Texas," KKR and TPG said in a press release last week, "and the distinguished members of the Texas Senate and House of Representatives." The two firms aren't otherwise commenting on future plans.

Certainly it would surprise everyone if two of the best dealmaker dogfighters working today, Henry Kravis and David Bonderman, simply meekly accepted the verdict of the Texas legislature. Already, KKR and TPG have hired lobbyists like Ron Kirk, former Dallas mayor, and Jack Roberts, a former deputy state comptroller, who was brought along to a meeting with Senator Fraser last week. "They were trying to tell me they were very anxious to develop good will with the legislature," says Fraser, "which I guess means they'll support my legislation."

Don't count on it.

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SEC alleges insider trading in TXU ahead of buyout

TXU bidders pledge no sale for five years 

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