KKR’s “green” takeover of TXU could take more green from your wallet, too

Hold the phone, there, Nellie. MSN Money’s Jim Jubak has the scoop on how folks like Kohlberg Kravis Roberts see plenty of dinero in deregulated electric utilities.

And, down below, he shows how the Natural Resources Defense Council pretty much got hoodwinked on this deal as a “front” for KKR

First, this sobering reminder from private equity company history:

The last time Wall Street applied its best minds to the electric power industry, they brought us Enron, brownouts and wholesale-price-gouging in California, not to mention higher electric bills.

Now, not even 10 years later, they're at it again: Private-equity buyout funds have set their sights on electric utilities. And the result will be? You guessed it, higher electric bills for you and me. As if inflation and the rising cost of oil and natural gas isn't pushing our bills up fast enough already.

I already warned, in an early blog post on this subject, that KKR would try to recoup the buyout price by canning people. Jubak agrees:

In the short run, making a profit on one of these buyout deals depends, first, on "restructuring" the company so that it's more profitable than it was before the buyout. Most of the time, restructuring involves spinning off money-losing operations and outsourcing some part of operations — and it always involves cutting jobs.

But that’s not all, he says;

That would be bad enough in the case of a utility, since job cuts are likely to mean a decline in utility service.

But you'll wind up paying more for less service because, second, turning those small gains in corporate profits into big profits for buyout investors rests on building the buyout deal so that borrowed money, known as leverage, multiplies those relatively modest improvements in corporate earnings.

Problem A, according to Jubak, is 75 percent of such a buyout is done by selling debt based on the acquired company’s real property, etc.

Well, TXU already has enough debt:

Even before the deal, TXU was carrying a big load of short-term ($1.5 billion) and long-term ($10.6 billion) debt, and paying a sizable interest bill of $784 million in 2006. Adding an additional $33 billion or so in debt will run that interest bill significantly higher. And that additional debt load will put pressure on the company’s credit rating, already a relatively low BB from Standard & Poor’s.

Dang, the school district I covered at my previous paper, in it’s worst days, wasn’t rated that low.

But, that’s still not all:

And that's not the limit of the debt load to be piled on the purchased company's balance sheet. Used to be that buyout funds waited until they dressed up a company and sold it back to public investors before they cashed out. In today's market, buyout funds have added a new wrinkle: While the company is still private, it issues a big cash dividend to the buyout investors, so those investors get part of their cash back in short order. How does the company pay for that dividend? Why, by issuing more debt, of course!

And how’s that debt financed? Just open that TXU envelope every month, in a deregulated market, and you’ll find out.

Jubak also explains that KKR’s promise to not build more power plans is money-green, not enviro-green, indicating the Natural Resources Defense Council, and some of us until now, have been hoodwinked.

The long-run logic of utility buyouts leads to lower investment in power lines that would eliminate price differences like those that cost consumers money in Texas (and California and the Northeast). And it leads to lower investment in new power plants, since spending cash on new, more efficient plants cuts the utility cash flow so necessary to paying all that post-buyout debt.

Nice. KKR and TXU get “green” window dressing for what was going to happen anyway.