What Would KKR Buyout Mean For Coal Plant Litigation?

By now, you’ve all heard of the likely buyout of TXU by Kohlberg Kravis Roberts & Company (KKR), which would be the biggest-ever leveraged buyout in American history.

TXU’s board is reportedly considering the merger this weekend. Of course, this has caused a massive surge in TXU’s stock shares. The transaction is reportedly worth $48 billion.
So, what does all this mean?

First off, the sale would require approval of the Public Utility Commission of Texas. I have no idea how long such an approval would take. With all of the hot water TXU is in right now over its high rates and coal power plants, it may take a while. Of course, since the PUC is filled with appointees of Texas Governor Rick Perry, I’d say that even massive public outcry wouldn’t halt PUC approval of the sale.

However, other states have nixed similar KKR buyouts:

Arizona state officials in December 2004 rejected the sale of UniSource Energy Corp., owner of the state’s second-biggest utility, to a partnership backed by Kohlberg Kravis. Oregon in March 2005 rejected a purchase of Portland General Electric by Texas Pacific Group.

The fact that KKR would likely divest itself of TXU fairly quickly should create pause for the PUC:

Closely held buyout firms such as KKR use a mix of cash from investors plus their own funds and debt secured on the target they buy to finance their deals. They typically seek to expand companies or improve performance before selling them within five years to other funds or investors in IPOs.

As for the coal power plant litigation and permitting process, that’s another ball of wax. The litigation and the permitting process would theoretically continue uninterrupted. KKR would inherit all of TXU’s problems and litigation and permitting hearings.

Of course, KKR could make a business decision to withdraw the permit applications. What would the implications of that be?

Well, several fold. Although the actual need for the plants is somewhat in dispute, eventually Texas will need more power.  Withdrawing the permit applications would further delay their construction.

It would also likely cause the company’s stock price to drop. How much is pure speculation.

However, KKR could decide it doesn’t want the PR disaster of the permitting process for the 11 new plants, nor the massive litigation.

Or, KKR could decide to make the plants “clean coal” plants. After all, with its financial resources, KKR could modify the designs of the plants and eat the cost as a lost with the anticipation of making all that back once TXU is divested from its portfolio with the new plants.

Only time will tell, however, what will happen.

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