Investors Concerned About TXU's Aggressive Coal Strategy

Several of the nation's largest institutional investors contacted TXU Corp. this week requesting additional information about the company's plan to build 11 new pulverized coal-fired power plants in Texas at an estimated cost of $10 billion. The letter was sent in advance of the Dallas-based company's annual shareholder meeting Friday, May 19.

Noting the growing momentum in the U.S. for regulations to curb global warming pollutants, investors sent a letter to TXU Chairman and CEO C. John Wilder yesterday expressing concern about its potential financial exposure from such regulations.

The company plans to build 8,600 megawatts of new coal plant capacity - all without any controls for capturing greenhouse gas emissions. The proposal would more than double the company's carbon dioxide emissions, which totaled 55 million tons in 2004, 10th highest among all U.S. power companies.

"The future cost of carbon could alter the prudence of this large investment because the plants do not control CO2 emissions," wrote the investors, including the California and New York City public employee retirement funds, which collectively control more than $400 billion in assets. "Given the long lifespan of these plants, we believe TXU is potentially exposing itself to unprecedented compliance costs."

"In the interest of its shareholders, we ask that TXU disclose how it has accounted for the 'future cost of carbon' in its resource planning for these plants," the letter concluded.

The letter noted that even before the company's announcement last month, a Wall Street investment firm, Bernstein Research, issued a report suggesting that TXU already faces significant exposure to future greenhouse gas emissions.

Signers of the letter include:

• California Public Employees' Retirement System (CalPERS)
• California State Teachers Retirement System (CalSTRS)
• California State Treasurer Phil Angelides
• New York State Comptroller Alan G. Hevesi
• New York City Comptroller William C. Thompson Jr.
• Vermont State Treasurer Jeb Spaulding

The signers of the letter are all participants in the Investor Network on Climate Risk (INCR), a group of more than 50 institutional investors that manage nearly $3 trillion in assets. INCR is coordinated by Ceres, a national coalition of investors, environmental groups and other public interest organizations working with companies to address environmental issues such as climate change.

A growing number of U.S. states are requiring utilities to assume they will have to reduce their global warming emissions or buy credits to offset them. Similar legislation is under consideration in Congress. For TXU, which will more than double its greenhouse gas emissions if the coal plants are built, paying for such credits could easily cost hundreds of millions of dollars a year.

"Given the growing support for carbon limits in the U.S., investors are especially concerned about the long-term implications of investing new coal-fired power plants that will be burdened with these extra carbon costs for 30 to 40 years," said Mindy S. Lubber, president of Ceres and director of the Investor Network on Climate Risk, which has been active in pushing U.S. power companies to improve their disclosure about potential financial risks from climate regulations.

Lubber said that based on a report to its shareholders in fall 2004, TXU seems to be assuming that any new coal plants it builds won't be subject to new regulations - a belief that is not widely held among industry experts and policymakers.