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TXU suitors nix coal plant plans

Texas firm had eyed a site in Hazleton or Shamokin area for a new coal-burning plant.

DALLAS, Texas — Private-equity firms trying to buy TXU Corp. have agreed to drop plans for most of the utility’s proposed new coal-fired power plants in Texas if the deal goes through, according to people familiar with the situation.

The new buyers would also support a mandatory national program to cap emissions of greenhouse gases and pledge not to build coal-fired plants outside Texas, the people said. They spoke on condition of anonymity because the sale was not final.

Kohlberg Kravis Roberts & Co. and Texas Pacific Group were in advanced talks Sunday to buy TXU for about $32 billion, or about $70 per share, plus the assumption of TXU debt. It would be the largest private-equity acquisition ever.

In December it was reported that TXU was considering a site for a new coal-fired plant in Northeastern Pennsylvania near Hazleton or Shamokin. The company was interested in 300 acres for the site, and its officials had met with the state Department of Environmental Protection to ask about the permitting process. Some area environmental groups said they would oppose such a plant.

Wall Street expects TXU, the largest producer of electricity in Texas, to report this week that it earned more than $2.5 billion last year.

TXU’s board was expected to meet Sunday to consider the offer, and an announcement was possible early today, said people close to the deal.

An obstacle to a TXU sale has been the company’s controversial proposal to build 11 new coal-fired power plants in Texas. Environmentalists and civic leaders in some cities, including the mayor of Dallas, are fighting the company’s plans.

TXU has acknowledged that the new plants would produce 78 million tons of carbon dioxide each year, more than doubling the 55 million tons the company releases now.

The Natural Resources Defense Council said the new buyers have agreed to withdraw permit applications for eight of the proposed 11 coal-fired plants and decline to propose new coal plants outside Texas. The group said TXU would also support mandatory nationwide caps on emissions linked to global warming and a system of trading credits for cutting emissions, called cap and trade.

People close to the deal confirmed the outlines of the group’s claims.

KKR and Texas Pacific declined to comment. TXU officials did not return phone calls for comment.

TXU’s coal play was already in trouble. Last week, a state court judge blocked Texas Gov. Rick Perry’s order to speed up the process of gaining permits for six plants. Hearings on the proposal were delayed four months, until June 27.

According to people close to the situation, the buyout firms approached environmental groups and a few Texas legislators in the past week with a plan for making the deal palatable.

“Certainly the sponsors were conscious of a large audience beyond just the (TXU) shareholders,” said one of those with knowledge of the process.

David Hawkins, director of the Natural Resources Defense Council’s climate center, said he was approached by an old friend, William Reilly, who led the Environmental Protection Agency under President George H.W. Bush and negotiated terms of the TXU agreement for Texas Pacific Group.

The environmental terms “don’t have everything that we would have liked, and it’s not a legally binding document, but it’s a new direction for this company,” Hawkins said. He added that having the support of a large Texas-based power company could help pass global-warming legislation and “make the difference in whether hundreds of coal plants get built” in coming decades.

Even if the buyout fails, Hawkins said it would now be much harder for TXU to build new coal-fired plants in Texas because potential buyers agreed to drop most of them.

If the deal for TXU goes through, it would become the largest private buyout ever, topping the $25.1 billion that KKR paid for RJR Nabisco Inc. in 1988.

Shares of TXU soared in after-hours trading Friday, when news of the offer leaked out. The shares closed regular trading at $60.02, up $2.38, or 4.1 percent on the New York Stock Exchange.

At that price, TXU has a market value of about $27.5 billion, far higher than late 2002, when the shares sunk to about $5 apiece.

The company responded by selling off troubled units in Europe and Australia and getting out of the natural gas business to focus on producing and selling electricity to 2.3 million customers in Texas.

Besides the coal controversy, TXU has also been under attack from consumer groups and legislators over high rates and compensation paid to its chief executive, C. John Wilder, who was hired in early 2004.

In 2004, TXU lost $386 million but paid Wilder $55 million, mostly in stock-related bonuses that kicked in as the company’s shares soared. TXU returned to profitability in 2005, earning $1.72 billion.

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