April 17, 2002 – American Electric Power has reached a definitive agreement to transfer two of its Texas retail electric providers (REPs) to Centrica, a leading provider of retail energy and other essential consumer services.
The two REPs – WTU Retail Energy and CPL Retail Energy – sell electricity to more than 850 000 residential and small commercial customers in south and west Texas. These customers are served at the “price to beat,” a statutorily defined rate for customers with a peak demand of one megawatt or less who do not switch to competitive providers. Full customer choice began in the Electric Reliability Council of Texas (ERCOT) on Jan. 1, 2002.
As part of the transaction, Centrica assumes the obligation to serve those customers who choose the “price to beat” and gains the “West Texas Utilities,” “WTU,” “Central Power and Light” and “CPL” brand names. AEP will provide Centrica with a substantial power supply contract for the two REPs and all back office services related to these customers for a two-year period following closing. AEP will continue to compete for Texas retail customers with peak loads of greater than one megawatt and will fulfil its existing provider-of-last-resort (POLR) assignments.
An independent appraiser, using comparables for similar transactions involving retail energy customers, will establish a fair market value for the transaction after mid-June. This approach satisfies each company’s desire to have the transfer price reflect the actual fair market value on a date nearer to closing, and is consistent with the pooling of interests accounting limitations imposed on AEP until June 15, 2002, because of the company’s merger with Central and South West Corp. If the appraised value is outside the range of $133m to $153m, the transaction need not be completed.
In addition, AEP retains the right to share in earnings from the two REPs above a threshold amount for the next five years in the event the Texas retail market develops increased earnings opportunities. AEP will also receive an up-front payment of approximately $39m from Centrica associated with a back office service agreement which utilizes a state-of-the-art customer care services model developed by AEP.
Completion of the transaction is contingent upon regulatory approval from the Public Utility Commission of Texas (PUCT) and clearance under the Hart-Scott-Rodino Act from the Federal Trade Commission or the U.S. Department of Justice. AEP and Centrica expect to complete the regulatory approval process and conclude the transaction by the end of the year.
This transaction does not affect AEP’s ownership of its power plants in Texas and its transmission and distribution network that delivers electricity to CPL and WTU customers. AEP also will continue to meet its POLR obligations in Texas to customers of CPL and WTU with electric demand of greater than one megawatt and to certain price-to-beat customers in the service territory of TXU, another Texas electric utility.
The transaction does not affect AEP’s Texas customers in the Southwest Power Pool who are not part of the Texas competitive electricity marketplace at this time. Those customers include all of the Texas customers of AEP’s Southwestern Electric Power Company (SWEPCO) subsidiary and about 7100 WTU customers. AEP intends to serve the 7100 WTU customers through another AEP company.
The transaction also has no impact on AEP’s participation in retail energy markets outside of the ERCOT service areas in Texas.
“Our decision to sell these retail electric providers allows us to concentrate our efforts in ERCOT on areas that align closely with our strategy and expertise – generation, wholesale power and gas marketing, and operating our electricity transmission and distribution network – while maintaining our ability to participate in the commercial and industrial energy marketplace,” said Tom Shockley, AEP’s vice chairman and chief operating officer. “We are new to retail mass marketing and face a steep learning curve in an open access market like Texas. “Unlike other states with competitive electricity markets served by AEP, Texas required the transfer of all customers in ERCOT to retail electric providers when the market opened on Jan. 1, 2002,” Shockley said. “This makes Texas attractive for companies like Centrica -companies focusing on retail energy markets – since these companies see the potential to acquire REPs and immediately establish a presence in the marketplace. These types of energy companies should prosper in Texas.”
Centrica is active in competitive energy markets in the United Kingdom, Canada and the U.S. In the UK, Centrica is a leader in retail electricity and natural gas markets and also provides telecommunications services, roadside automobile assistance, credit card and other financial services.
“The change in ownership of the retail electric providers should be transparent to customers,” Shockley said. “The name of the supplier will remain the same. The price-to-beat rates and responsibilities will remain the same. AEP will still be responsible for the wires bringing electricity to customers and we will continue to be responsive to customers’ needs for service connections and restoring power after outages. We also will provide generation supply and all the back office services to Centrica for the CPL and WTU retail electric providers.
“AEP remains committed to customer choice and to ensuring that the Texas Choice program is a success,” Shockley said. “We will continue serving customers through our CPL and WTU retail electric providers until the transaction with Centrica is completed. We also will continue to be an aggressive participant in Texas wholesale markets. We want to be the wholesale electricity provider of choice to the many retail electric providers competing for Texas customers.”
American Electric Power is a multinational energy company with a balanced portfolio of energy assets. AEP, the United States’ largest electricity generator, owns and operates more than 42 000 MW of generating capacity in the U.S. and select international markets. AEP is a leading wholesale energy marketer, ranking among North America’s top providers of wholesale power and natural gas with a growing wholesale presence in European markets. In addition to electricity generation, AEP owns and operates natural gas pipeline systems, natural gas storage, coal mines, and the fourth-largest inland barge company in the U.S. AEP is also one of the largest electric utilities in the United States, with almost 5 million customers linked to AEP’s wires. The company is based in Columbus, Ohio.