Private Equity Briefcase
March 4, 2009
Green Savings
Kohlberg Kravis Roberts should be lauded for saving $16.4 million through environmental initiatives at three portfolio companies, but that doesn't mean KKR portfolio company Energy Future Holdings isn't sitting under a dark financial cloud of its own because, well, it is.
The New York private equity firm saved the money at US Foodservice, PRIMEDIA and Sealy Corp. through green energy initiatives with the Environmental Defense Fund, which is partnering with KKR on the energy-related matters. It's an achievement notable by any measure for keeping 25,000 metric tons of greenhouse gas emissions out of the atmosphere.
Yet for Energy Future, also a holding of Fort Worth, Texas-based private equity titan TPG, the financial cloud hanging over the company is dark. This week Energy Future reported a hefty $8.8 billion loss for the fourth quarter, or roughly $7.6 billion more than for the prior-year quarter.
Energy Future generates and distributes power from three divisions--TXU Energy, Luminant and Oncor--that together provide electricity service for more than 2.1 million Texas customers, including large corporations.
It would be easy to take a cheap shot at KKR by saying the firm should be focusing its efforts for Energy Future and other portfolio companies on projects other than environmental ones. Still, the New York private equity firm's green-oriented approach isn't to blame for the morass the Texas energy company now finds itself in.
The financial market fallout and recession are squarely to blame.
Energy Future attributed its quarterly loss to the goodwill impairment charge it took in connection with disrupted capital markets, which it says resulted in increased interest rate spreads (Energy Future recorded $983 million in unrealized mark-to-market net losses on interest rate swaps). In addition, the company said a decline in electricity usage by some of its commercial customers, coupled with falling sales that made up $30 million of its total fourth-quarter loss, were also to blame for the losses.
KKR, though, should give the management team of Energy Future a pat on the back for one thing. The company generated $4.4 billion in Ebitda last year, or 97% of the cash flow target outlined in its 2008 financial plan.
That's not exactly a shoddy accomplishment for a company that was carrying $40 billion of long-term debt last year, according to regulatory filings.
The relationship between KKR, TPG and The Environmental Defense Fund, meanwhile, isn't a new one. It stretches back to February 2007, when executives from KKR and TPG huddled with staffers from the environmental organization and the World Wildlife Fund at the posh San Francisco Mandarin Oriental Hotel. Together, the groups cobbled what is arguably the most green-friendly leveraged buyout ever to have been executed: the $45 billion LBO of Energy Future's predecessor, TXU.
By whittling down TXU’s planned construction of 11 new power plants to three, the KKR and TPG-led investor consortium kept 56 million tons of carbon emissions out of the atmosphere. The lungs of Texas residents have the managers of Energy Future and the buyout firms’ partners to thank.
To its credit KKR isn't stopping its green energy plans with Energy Future or other companies. It plans to launch similar initiatives at portfolio companies Accellent, Biomet, Dollar General and HCA.
The green plans suggest that buyout executives, frequently critiqued in the media for lavish lifestyles, might be a bit deeper than what the lay public is led to believe. Long heralded as pioneers in the leveraged buyout business, KKR executives could turn out to be pioneers of another sort. The deal trendsetters could potentially spur other buyout shops to follow suit, meaning private equity executives could turn out to be one of the planet's new best friends.
It's enough to make one wonder whether these firms really deserve to pay more taxes on capital gains from investment as suggested by the administration's new stimulus plan, but that's a discussion better left for another day.
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