UK-based Centrica plc is rounding up more than 850,000 Texas customers after agreeing to purchase two retail electric providers (REPs) of American Electric Power (AEP). The deal, which includes power supply and service agreements, adds customers of Corpus Christi-based CPL Retail Energy and WTU Retail Energy, based in Abilene. When the transaction is completed, Centrica will have nearly 4.5 million customers in Canada and the United States, making it the largest deregulated energy services company in North America.

The companies said in a statement that an independent appraiser, using comparables for similar transactions involving retail energy customers, will establish the fair market value for the transaction in June. “This approach satisfies the parties’ 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 $133 million to $153 million, 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 said. As part of its back office service agreement with Centrica, AEP will receive an up-front payment of approximately $39 million.

The transaction does not include AEP’s Texas customers in the Southwest Power Pool who are not currently part of the Texas competitive retail electric marketplace. Those customers include all of the Texas customers of AEP’s Southwestern Electric Power Co. subsidiary and about 7,000 WTU customers.

“Our origin is as an incumbent energy provider, and we understand the responsibilities of serving the body of customers who decide to stay with their energy provider. Those customers will still experience high levels of service,” said Deryk King, CEO of Centrica’s North American operations. “We also understand the role of a competitor, and outside the CPL and WTU areas we will continue to offer a broad range of pricing options as a competitive provider.”

AEP COO Tom Shockley said, “Our decision to sell these retail electric providers allows us to concentrate our efforts in ERCOT [Electric Reliability Council of Texas] 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. We are new to retail mass marketing and face a steep learning curve in an open access market like Texas.” AEP, based in Columbus, OH, has traditionally been a wholesale energy provider.

Texas native Don B. Whaley, president of Centrica’s Texas operations, said CPL and WTU retail customers would enjoy all the commitments made to them by AEP and that they could expect other benefits and options over time. “Our job is to provide a quality service to our new customers across South and West Texas, and we are fully focused on that goal,” he said. He noted that Texas, which is Centrica’s “cornerstone” for U.S. operations, had “created conditions in which competition can thrive while protecting the quality of service for consumers.”

Current “price to beat” rates mandated by Texas law will remain the same, and Centrica will gain the rights to the names “Central Power and Light,” “CPL,” “West Texas Utilities” and “WTU.” AEP will provide most of the REPs’ power supply and back office services to Centrica for a two-year period following closing. The transaction is subject to approval by the Public Utility Commission of Texas and appropriate federal agencies, and the transaction is expected to be completed by the end of the year.

“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.”

AEP retains ownership of its fleet of 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 provider-of-last-resort (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 of TXU, another Texas electric utility. AEP also will continue to serve CPL and WTU retail electricity customers until the transaction with Centrica is completed.

Formed in 1997, Centrica entered the North American market in 2000 with the acquisition of Canadian energy provider Direct Energy (see NGI, July 10, 2000), and moved into the Texas market late last year. It has more than 40,000 Texas customers already under its Energy America brand in the Dallas/Fort Worth and Houston metropolitan areas, and serves more than 20 million households worldwide. Through Energy America, Centrica is one of the largest multi-state providers of deregulated retail energy services in North America, with more than 400,000 U.S. customers principally located in Texas, Michigan, Ohio and Georgia.

Centrica also supplies natural gas to 900,000 customers in Ontario and Manitoba and has signed more than 600,000 electricity customers in Ontario ahead of the province’s market opening in May 2002. In January, the company announced its purchase of Enbridge Services Inc., a Canadian company that provides energy-related residential services.

Centrica has been on a buying binge in the United States, and in February, the company announced it would spend $130 million to purchase energy marketer NewPower Holdings Inc., a former Enron Corp. subsidiary. However, the agreement was terminated in late March after the New York court overseeing Enron’s bankruptcy case refused to protect Centrica from future liability related to the bankrupt trader (see NGI, April 1).

Since the agreement fell apart, NewPower has been unable to find another merger partner, and disclosed on Tuesday in its annual report filing with the Securities and Exchange Commission that since Centrica terminated its agreement, it may sell a portion of its assets or liquidate its business.

“There is a substantial chance that this may lead to no positive value for our stockholders after our liabilities are satisfied or otherwise addressed,” NewPower said in the 10-K filing.

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