February 26, 2007

What is KKR up to?

You've no doubt heard the news that shareholders at TXU have accepted the LBO offer from KKR. You've probably also heard about the commitment the new owners have made to taking the company in a much greener direction. That last part has left some wondering WTF are thinking? Is it pure social responsibility or business genius?

KKR and Texas Pacific Group agreed over the weekend to drop most of TXU's ambitious plans for building new coal-fired power plants, a move designed to win support for the deal from environmentalists and other critics of the company. The new buyers also agreed to support a mandatory national program to cap emissions of greenhouse gases and pledged not to build coal-fired plants outside Texas.

I'm voting for the latter, here's why...

1) Value added services - the technology to deliver broadband over power lines has been in existence for a while. It's a new revenue stream for TXU that will require a minimal upfront investment since they already have the distribution system in place.
2) The additional plants were a stupid move, over committing to a legacy generation system while technology continues to advance rapidly.
3) Then there is this

The Natural Resources Defense Council said the new buyers have agreed to withdraw permit applications for eight of the 11 proposed plants and decline to propose new coal plants outside Texas and support caps on emissions linked to global warming.

The buyers also agreed to support a system of trading credits for cutting emissions, called cap and trade.

Pollution credits... by voluntarily reducing emissions, they'll end up with some pollution credits they can sell and realize a gain on. Every single year, it's a revenue stream they can tap without any new investment. While pollution credits aren't worth much now, they are going to be worth something much more down the road.
4) They are planning a massive expansion of wind and cheap solar capacity in West Texas, coupled with an investment in upgrading the distribution grid. Over time, wind power and passive solar are cheaper than coal by virtue of a free input. This is long term thinking that will reap big rewards down the road while earning huge PR benefits. See again #3 for the secondary impact on pollution credit sales.

The credits are the big thing. As the EU moves to tighten restrictions these will be become inherently more valuable worldwide. The US will soon be moving in that direction. The reason the cap and trade system has not really worked is that companies have never had to face real consequences. That's changing and the system will start to show some of the promised benefits.

Oh, and the KKR/TPG group stands to make a ton of money, not only off operations but through the eventual sale of the enterprise back to the public.

Posted by mcblogger at February 26, 2007 01:30 PM

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