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TXU, The Buyout and the Power of "Greenmail"

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I am sure you've read your latest issue of Pensions Management by now, but if you've yet to crack the April ish, here's a sneak peak at one column inside. Douglas Cogan, who's the environmental, social and governance research director at Institutional Shareholder Services, writes that on the very same day Al Gore won an Oscar for the lecture-doc An Inconvenient Truth, "America reached a turning point in its protracted policy debate over global warming." Only, it had nothing to do with the movie or with Gore. Rather, Cogan writes, "it was a decision made inside a boardroom in Dallas, Texas."

What's he talking about? Here's a hint: TXU, specifically Kohlberg Kravis Roberts and Texas Pacific's $45 billion bid to take it private. After the jump, Cogan explains in the subscription-only piece what he believes is the real reason behind the deal -- and the impact it will have on other U.S. power companies (including locally based ExxonMobil), their shareholders, their pension plans and the power of "greenmail." --Robert Wilonsky

TXU deal: a turning point

On the day Al Gore won an Oscar for his documentary film, An Inconvenient Truth, America reached a turning point in its protracted policy debate over global warming. But it wasn't that Hollywood vote, or even an election, which turned the tide that day. It was a decision made inside a boardroom in Dallas, Texas.

On February 26, directors of giant electric utility TXU announced they were giving up on plans for 11 new coal plants, which, if built, would add global warming emissions equal to those of a country the size of Sweden. As part of a proposed $45bn buyout, TXU agreed to scale back to just three plants and join a new industry coalition.

That coalition -- the US Climate Action Partnership -- was launched on the eve of president Bush's state of the union address and is being led by 10 US industrial powerhouses, including General Electric, Duke Power, Caterpillar and DuPont. These firms want to end the decade-long impasse over Co2 emission controls so they can have more certainty over their business planning decisions.

The takeover bid

That's part of what's driving the TXU takeover bid as well. Goldman Sachs and private equity firms Kohlberg Kravis Roberts and Texas Pacific recognise the "serious challenge" of global warming -- which president Bush acknowledged for the first time in his January 23 state of the union address. With new leadership in congress and the next presidential election less than two years away, these investors know the risks inherent in TXU's giant $10bn coal-plant expansion plan. They teamed up with some of the nation's leading environmental groups to craft a leaner strategy that puts more emphasis on energy efficiency, renewables and clean coal technologies.

A warning flag

Investors first raised a warning flag at TXU in 2003, when nearly one quarter of its shareholders backed a proxy request from the Connecticut Retirement System for management to report on its climate change strategy. When its new coal plant orders signaled it had none, the Connecticut system as well as the New York City pension funds returned with new shareholder proposals this year, confident they would get even more backing from other big institutional investors.

Though a buyout of TXU may render these proposals moot, other US power companies - with nearly 150 coal plants on order - aren't likely to escape such shareholder scrutiny. Already, 35 US companies have received climate change proxy proposals this year, including six electric utilities.

The next big test may come on March 29, when Dynegy and LS shareholders vote on a proposed merger. The change of heart at TXU leaves LS with the nation's most ambitious coal development program -- nine new plants with more than 7,000 megawatts of generating capacity. If the merger goes forward and the plants are built, the 'new Dynegy' will double its share of power coming from coal -- which may come as a particular jolt to 'old Dynegy' shareholders who presently own a company with power coming mainly from cleaner-burning gas-fired plants.

Another Texas-based firm, ExxonMobil, has five climate-related shareholder proposals pending this spring. Exxon has the dubious honor of being the longest-running recipient of such proposals, the first of which came to a vote way back in 1990. Now even this long-time holdout is softening its stance on climate change, pledging to end support of certain groups disputing scientific evidence while playing a more proactive role in policy discussions.

A new form of blackmail

Some critics charge that activist pension funds and banks like Goldman Sachs working in tandem with environmental groups are exposing companies to a new form of 'greenmail'. To get these groups off their backs, they say, companies are being forced to make costly environmental concessions that cause their share prices to suffer.

But in the case of TXU, the inconvenient truth is that the market - not these actors - caused its stock price to falter as its risky coal-plant expansion plan was being called into question. That gave private equity investors the opportunity they needed to launch their buyout bid.

Climate change is business

However this deal and the Dynegy/LS merger turn out, the recent turn of events shows that addressing climate change is now part of doing business across America, even in the Lone Star state. And from here, there's no turning back. The United States has crossed the global warming rubicon.

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