TXU Finalized KKR-Texas-Pacific Bid: “In GOD We Trust” - Gas Oil Dollars Electric
Utility Comment, 04/19/2007
TXU Accepts KKR-Texas Pacific $32 billion Offer:
Was there ever any doubt?
It’s Texas, where the motto is: In GOD We Trust (that is, Gas Oil & Dollars).
Texas has historically been an utility friendly state—in fact, one of the first utilities I was responsible for as a rooky analyst was Texas Utilities’ credit rating. Then it was one of the last two Triple-A electric utilities in the United States. Initially, I was flattered that Standard & Poor’s had such confidence in an analyst right out of school, with no experience—that is until I realized that it was given to me by default. TXU’s credit scores were below expectations and no seasoned analyst wanted to contend with changing a AAA rating. But Texas utilities have always enjoyed rating agency privileges because the key to any successful utility is “regulation.” Today, while there is a regulatory presence, major utility “events” happen without support from political leaders and the business community. This pro-business attitude has sustained virtually all the utilities operating in Texas for the past 30-years and enabled Texas Utilities subsidiaries to hold AAA ratings well past their “doom date.” Many activities in Texas would be inconceivable elsewhere in the country—therefore, the investor would be ill-advised to consider the KKR-Texas Pacific
coup d'état the beginning of an industry-wide trend. Texas is not, nor has it ever been, quite like the rest of the U.S.—in fact, for many years,
interstate-connections were blocked because utilities did not want to be subjected to Federal regulation.
There may be other utilities under review by private equity firms, but those familiar with the industry know that regulatory possibilities ebb and flow with political power—and the reliability of a particular cycle, favorable or unfavorable, may only be as long as the political cycle. This has not been an endearing factor for potential investors. Accordingly, regulatory temperament will dictate where, when or even whether another utility will be bought by a private equity firm.
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