The Time's Right for TXU

TXU now has 19 power plants in Texas -- 14 run by natural gas, four by coal, and one by nuclear power. Nuclear and coal plants typically have better profit margins than natural gas plants. According to Seitz, TXU's mix of plants is more competitive than most other companies in the sector.

Additionally, TXU generates $3 billion in free cash every year after paying dividends, leaving it in a good position to build new plants.

The proposed TXU buyout probably wouldn't be possible if the utility were based outside of Texas. An essential attribute of the deal is that Texas deregulated its utility market in 2002, opening it up to more participants, and giving utilities more freedom to raise rates.

Even though the proposed LBO is based in the largest unregulated electricity market in the country, it must still meet state and federal approval before the deal goes through later this year. One component that will be closely analyzed is TXU's financing structure. Regulators generally require that utilities maintain conservative debt levels to allow for future plant construction, according to Seitz.

TXU's debt level now rests at 78% of total financing. The company had been following a strict refinancing schedule, selling assets to buy back shares and pay down debt. Its managers were planning to reach a 40% equity ratio by 2011. However, this is unlikely to occur if KKR's buyout goes through.