The New, Green Face of Wall Street
Big corporate takeovers happen all the time. Mergers and acquisitions are so run-of-the-mill it is hard to keep track of who owns what anymore. But this week was different. This week the largest buyout was set in motion -- Kohlberg Kravis Roberts & Co. and Texas Pacific Group is hoping to buy the Texas utility giant TXU for $45 billion. And the best part of the whole deal is not its size but the conditions of sale.
In a matter of a few days one of the country's dirtiest utility companies went from an environmental foe to model for "green" business and the repercussions for not just Wall Street, but the rest of America, are huge.
TXU had been battling environmental and community groups since last spring when it announced plans to build 11 new pulverized coal-fired power plants across Texas -- essentially committing the state to 50 more years of the dirtiest of dirty power -- with an estimated 78 million tons of CO2 emission expected per year.
With money and political clout, the project seemed like a done deal, but that didn't stop Environmental Defense, the Natural Resources Defense Council (NRDC), Public Citizen, Rainforest Action Network (RAN) and dozens of other groups from unleashing their organizing wrath.
The coal plants were fast-tracked in their permitting process by Texas Gov. Rick Perry, long known to be a friend of the utility companies. But then, little by little, environmental groups and their allies began to wear at TXU -- targeting potential investors, mounting ad campaigns and throwing up litigation roadblocks.
TXU appeared to stumble last week when a judge announced that Perry had overstepped his bounds in the fast-tracking and delayed the permit hearings four months, giving TXU opponents time to gather money and muscle.
And then just days later news broke that a deal was being negotiated for TXU to be purchased by two private equity firms -- and helping to make that deal a reality were representatives from Environmental Defense and NRDC -- marking the first known time that environmental groups have been brought to the table.
"What I can tell you is, a little over a week ago I got a call from Bill Riley, an old friend," Fred Krupp, president of Environmental Defense said in an interview, "who said that the Texas Pacific Group and KKR were interested in purchasing TXU, but would only go forward if they could recreate the company as a 'green' power generator."
Less is more
The board of TXU agreed Monday to the terms of the buyout (although they are considering other offers) and environmental groups have hailed the deal as a "watershed moment" in the fight against climate change -- for good reason.
TXU agreed to immediately drop eight of the 11 proposed coal-burning plants; it canceled plans to build coal plants in other states; it came out publicly in support of federal legislation to set limits on CO2 emissions; it agreed to reduce their CO2 emissions back to 1990 levels by 2020 (the terms of the Kyoto Treaty that the U.S. did not sign); and it pledged to double the amount that it spends on wind power and energy efficiency -- agreeing to shell out $400 million to help lower demand through conservation.
"It is a big deal," said Jim Marston, of Environmental Defense, who helped negotiate the deal. "We have the largest CO2 emitter in Texas now on record saying 'we're for federal legislation.' And, not only have they canceled plans for eight plants in Texas, but many more they were planning in Pennsylvania, Georgia and Virginia."
And, Martston adds, "They are promising a new ethic" to reward executives for how well the company does environmentally. "That's a big deal for us," he said.
Michael Brune, the president of RAN called the move the "beginning of the end of Big Coal's dominance over America's energy future" -- a hopeful statement.
"Twenty months ago, many of the nation's political and business leaders were marching behind the Bush energy plan, a lockstep that resulted in proposals to build more than 150 new coal-fired power plants," he said. "Investment banks on Wall Street facilitated these proposals by committing billions of dollars for dirty coal plants that would burden the country with outdated technologies and unprecedented growth in greenhouse gas emissions for generations to come. The pledge by TXU's new owners reflects an emerging economic and political reality: any further investment in dirty, inefficient coal plants is risky business."
Investing in the future
For once, it is not business as usual for Wall Street. The deal indicates a new breakthrough in the fight against global warming, because it signifies a shift in investor thinking about the realities of carbon "footprints" -- or the impact corporations make on the environment with CO2 and other greenhouse gas (GHG) emissions.
"I think they chose to pare back the original TXU plan not because it was environmentally flawed but because it was financially flawed due to environmental reasons," said David Gardiner of David Gardiner & Associates, a consulting firm that helps companies make decisions about environmental and sustainability issues.
"For the first time you've got a set of private equity investors who are not only considering climate risks in a big investment, but they are actually doing something about it," said Gardiner. "This sends a very strong signal to anybody who is thinking about investing in or building coal plants -- they should think very carefully."
More and more, companies are being forced to consider the reputational and litigation risks associated with environmentally damaging projects. "You get involved in a controversial fight over a set of power plants, like TXU, and your reputation could take a hit," said Gardiner. "That has a real impact in terms of the way you can interact with your customers and important decision makers."
Probably the biggest concern for investors and big industry is looming national legislation to regulate CO2 emissions. After the Democratic takeover in November, what seemed like a distant dream to regulate GHG emissions, suddenly became politically viable. Currently there are four bills in the Senate that would establish various levels of "cap-and-trade" legislation to force companies to emit less CO2 and to make polluters pay.
"It's not a matter of if we are going to have climate legislation," said Gardiner, "but when and how."
Federal legislation will help limit investment risk by giving companies a strict set of regulations to plan for. "We are talking about a very large transition in our energy economy in the next 40-50 years, to a much cleaner phase. That has to happen, not just in the U.S., but around the world," said Gardiner.
"I now have other companies that are proposing coal plants in Texas that want to talk to me," said Marston. "And I just did two briefings for Wall Street with investors and had corporate, institutional, and private interests on the phone to talk about this as the new model. When you make an investment decision now, you'd better think about the risk involved with future CO2 regulation -- it is coming soon. Those who don't plan for that do so at their own peril."
This new energy future is full, not just of potential peril for investors, but an incredible amount of promise, as the TXU buyers believe.
"The guys who did this deal, they are not doing it out of some sort of philanthropic idea. They think this is the new model of electric company that can survive and make money in a carbon-constrained world," said Marston.
Some companies have caught on recently to the realization that what's good for the environment is also good for business. In January, nine corporations formed the United States Climate Action Partnership (USCAP), to urge the government to enact climate legislation, among them were PG&E, DuPont and Duke Energy.
And just this week, Edison Electric Institute, American Gas Association and Electric Power Supply Association -- three of the largest energy trade associations -- also gave their support for federal regulation.
There is also a lot to be gained from efficiency and conservation, as TXU will prove, as well as in renewable energy. A group of 400 conservation, energy and farm organizations asked Congress this week to support a plan to increase the country's percentage of renewable energy from the current 6 percent to 25 percent by 2025.
And the push in Washington is also felt on Wall Street.
"Discussions about what interests rates mean for stocks are giving way to chatter about what a 1-degree rise each year in temperature would do to profits at businesses ranging from carmakers to solar companies," USA Today reported. "Global warming has emerged as a major market-moving force that represents a generational shift likely to influence how people invest for decades."
The greener picture
In the annals of environmental work, if this deal goes through, it will go down as a very big win -- one of David and Goliath proportions. But Texas still does face construction of three more plants by TXU, two of which will be in the Austin area, a region already threatened by poor air quality.
And there's the price tag for consumers. "Despite promised rate cuts," the Houston Chronicle wrote, "the utility will still charge residential users substantially more than the national average."
But, the paper concludes, "In a state that leads the nation in emissions of greenhouse gases, the TXU deal is a signal that the growing national concern over the impact of climate change and the lingering danger of toxic emissions must be addressed here as well as in Washington."
Let's hope that trend continues to spread across the country and the market continues to reflect the changing consciousness of Americans. The financial sector has an opportunity to be the driving force for the change we need. As Brune of RAN said, "We can meet our energy needs more quickly, more cheaply, and more cleanly through investments in wind and solar power and energy efficiency. We are counting on Wall Street to step up to the plate and start funding the future."