American Electric Power Co. (AEP), Columbus, Ohio, completed its $4.5 billion acquisition of Central and South West Corp., Dallas, today, creating an 11-state giant stretching from Michigan to Virginia and down to Texas. The US Securities and Exchange Commission (SEC) cleared the historic acquisition late Wednesday, nearly 2� years after the companies reported plans to merge in December 1997.
"Although the approval process was a lengthy one because of the involvement of many state and federal agencies, this merger was well worth the wait," said AEP Chairman and CEO E. Linn Draper Jr. The merged company will retain the American Electric Power name.
Industry observers say SEC approval of the deal weakens the 1935 Public Utilities Holding Act by allowing mergers that once would have been automatically rejected and potentially clears the way for other utilities to merge that don't directly adjoin one another.
Under terms of the transaction, each share of CSW stock will be converted to 0.6 share of AEP stock. From the time the deal was first announced in 1997, the market has knocked about $2.1 billion in value off it.
The combined entity will own more than 38,000 Mw of US generating capacity, more than 38,000 miles of long-haul transmission lines, and more than 186,000 miles of local distribution lines. In exchange for the Federal Energy Regulatory Commission's approval of the deal, AEP agreed to surrender operational control of its huge transmission system to an independent organization that will begin operating the grid by Dec. 15, 2001.
Trading giant
The merger creates an energy trading operation ranked second only to Houston's Enron Corp. in US electricity volume. "We are already substantial players in the wholesale business and expect to continue to grow," Draper said. "People who follow our industry know that our energy trading business has quickly grown from a startup 2 years ago into the second-leading trader of electricity and a top-20 trader of natural gas today."
AEP's postmerger strategy consists of three key elements: wholesale, energy delivery, and retail, he said. "Each of these business lines has its own characteristic set of skills and capital requirements, but the two that will be most important for us initially are the wholesale and energy delivery businesses," Draper said.
He added that wholesale includes the acquisition of fuels, the conversion of fuels in power plants, selling and trading of electricity and natural gas in bulk, operating intrastate gas pipelines, and the processing and storage of natural gas.
Energy delivery includes operation of transmission and distribution networks to move electricity from the power plant to the customer. Key to the business is being the low cost operator and maintaining reliability, Draper said.
No retail decision
He said the company has yet to make a decision about the retail electricity business. As the result of deregulation, retailing power is uncharted territory for electric utilities, Draper said. Many states are permitting consumers choose electricity suppliers.
We haven't made a firm decision that retail is a business that we want to be in, but our instincts are that we probably will,'' he said.
AEP is projecting the acquisition will produce at least $2 billion in savings over 10 years. The combination creates an energy company with combined 1999 revenues of nearly $12.5 billion; combined 1999 electricity sales of almost 200 million Mw-hr; assets of more than $35 billion in the United States, Australia, Brazil, China, Mexico, and the UK; more than 4.8 million customers in 11 states; and more than 4 million customers outside the US.
Included in the merger are Appalachian Power Co., Southwestern Electric Power Co., West Texas Utilities, Indiana Michigan Power Co., Kentucky Power Co., Kingsport Power Co., Wheeling Power Co., Central Power & Light Co., Public Service Co. of Oklahoma, Columbus Southern Power Co., and Ohio Power Co.