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A View on the TXU Leveraged Buyout

Is power a public good or a private goodie?

Fortnightly Magazine - April 2007

customers potentially be harmed if this LBO transaction is permitted? Is this sale truly in the public interest? Should the largest public utility in the state, with the obligation to provide safe, reliable, and competitively priced power be allowed to overdose on debt in an attempt to be taken private?

It also is important that the PUCT assess whether KKR/TPG are planning to be only short-term owners or long-term partners. If the latter, will they make capital investments that tangibly bolster the utility’s infrastructure, including transmission lines, generation capacity, and a strengthened distribution delivery business? If the answer is yes, then KKR/TPG might be forced to invest more money into this transaction than it had initially planned. Such a capital investment could go against the basic tenant of an LBO: to quickly pay down debt, turn a profit, take out money, and sell.

Companies such as KKR and TPG are large private-equity firms in the business of seeking profit. Is having them control a vital public good—power—appropriate? What expertise does this TXU bidder group bring to the utility, and do they have a successful track record in running power companies?

Is KKR/TPG going to focus primarily on finding creative ways to pull money out of TXU in an attempt to quickly pay down LBO debt? If the economy were to tank and TXU cash flow were not adequate to service or pay down LBO debt, would the TXU bidders be forced to sell power plants that otherwise were meant to support the future demand needs of its retail customer base?

Lastly, taking this utility private would significantly diminish the level of financial scrutiny and oversight that public investors and Securities and Exchange Commission reporting requirements tend to create. Can we then leave it up to KKR/TPG to look out for the best interest of its utility customers? Simply stated, can these TXU bidders be trusted to do the right thing? TXU and similar utilities across the United States have been given monopolistic power to serve a defined customer base in exchange for making sizable capital investments in delivery infrastructure and generation assets. These utilities have enjoyed this special relationship with the implied understanding that they have a responsibility to provide a vital public good.

In an LBO scenario, TXU will have a debt burden at higher interest rates that will decrease its financial flexibility. This potentially will have ramifications for Texas consumers in strong as well as in weak economic cycles. Critical to any LBO strategy is to pay down debt quickly using three methods: increasing revenue, decreasing costs, or selling assets. Unfortunately, all three alternatives could jeopardize the fundamental agreement between utility and customer—to provide safe, dependable, and competitively priced power, and above all else, to keep the lights on.

The last two battles over smaller but similarly proposed LBO utility buyouts, Unisource Energy in Arizona (2004) and Portland General in Oregon (2005), were not approved. The public utility commissions in both states, after asking many hard questions and evaluating the facts, viewed the increasing risk associated with junk debt as