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AEP marks 10th anniversary of merger with CSW

by on June 18, 2010

Ten years ago June 15, it became official.  American Electric Power and Central and South West became a single, unified company under the AEP banner, while the name of CSW faded into the history books.

But AEP’s acquisition of CSW meant considerably more than simply creating an electric utility company that stretched from the Rio Grande River to the Ohio Valley and the shores of Lake Michigan. It was a career-changing event for many, and a life-changing experience for those who moved a thousand miles or more to accept new assignments.

When the AEP-CSW merger, as it was termed, was first announced on December 22, 1997, it captured big headlines, and for good reason. The merged company, the companies said, would be the largest in the nation in three significant categories. 

Adding CSW’s 1,712,000 customers in Texas, Oklahoma, Louisiana and Arkansas to AEP’s 2,959,000 customers would create a new AEP with nearly 4.7 million customers, tops in the country at that time. 

The merged company would also rank No. 1 in generating capacity with about 37,500 megawatts, and in annual energy sales, with approximately 200 billion kilowatthours. In addition, it would be the second largest in revenues, as the two companies’ combined yearly sales totaled more than $11 billion. 

CSW’s organizational structure was similar to AEP’s, with a service corporation located in Dallas (although CSW did not serve Dallas) and four operating companies: Central Power and Light, Public Service Company of Oklahoma, Southwestern Electric Power Company (SWEPCO) and West Texas Utilities.

And although the CSW service territory had miles and miles of wide-open spaces, Tulsa would move into the No. 2 position among the largest cities in the AEP System, second only to Columbus.

“Combining CSW with AEP has given AEP much greater diversity in terms of customer mix, regional economies, climate and seasonal energy demand, and fuel sources for power generation,” said Venita McCellon-Allen, president and chief operating officer of SWEPCO, who served on the Transition Management Team during the merger process.

Traditionally, AEP’s industrial load had relied heavily on the automotive, steel and aluminum industries — merging with CSW brought oil refining and other industries into the mix. In terms of power generation, AEP relied on coal for nearly 90 percent of its generation capacity, while CSW’s power generation was balanced more evenly between coal and natural gas.

A map of the newly combined company as it was portrayed in AEP's 2000 annual report to shareholders.

“The recent recession has shown the benefits of that strategy,” said McCellon-Allen, who was senior vice president of customer relations and corporate development at CSW during the merger process.

“The recession has impacted Texas, certainly, but it probably has affected Texas less than any other state in the nation,” she said.  “Customer growth in the West is continuing — it hasn’t slowed nearly as much as customer growth in the East has.

“We had a vision to make this the best company we possibly could, and we’ve had a lot of good outcomes, although we didn’t accomplish absolutely everything we aspired to,” McCellon-Allen said of her experience on the Transition Management Team. 

“Customers of the former CSW have benefited from the merger,” she noted.  “One example is through the virtual call center approach that AEP utilizes. At CSW, an individual call center could get overwhelmed, but the interconnection of AEP’s call centers into one virtual call center means that customers get faster responses and fewer busy signals.

“I think both East and West have learned from each other, and it’s clearly been a two-way street,” McCellon-Allen said.

“However, a utility merger is a very difficult thing to effect, and especially so in our case, because it required gaining the approvals of 11 state utility commissions and several federal agencies,” she recalled.

At the outset, executives of the two companies thought the merger would be approved in 18 months, but the process ended up taking 30 months — a full year longer than had been anticipated.

“It seemed like it took forever,” McCellon-Allen said. “Keeping two organizations in transition for 30 months is very hard on the employees and very hard on the organizations. And we lost a lot of good people when we combined the two companies. The only consolation is that the job market in 2000 was pretty good — much better than it is today.”

After the merger became official, McCellon-Allen accepted a position as senior vice president of human resources for the Baylor Health Care System in Dallas, an integrated health care delivery network with 14,000 employees. Four years later, in 2004, she joined AEP as senior vice president – Shared Services.

How the companies came together

What prompted the two companies to join forces?  In his book, American Electric Power: A Century of Firsts, Luke Feck, AEP’s retired senior vice president of corporate communications, wrote that two adverse decisions from the Texas utility commission played a key role.

Both decisions related to CSW’s involvement with the South Texas Project, a nuclear plant that began commercial operation in 1988.  Originally, Central Power & Light, one of the four CSW subsidiaries, had been told it could put every dollar of its expenses for the plant into the rate base if the company accepted a reduced rate of return. Then, five years later, the company could return and request an additional 5 percent rate increase.

In the book, former CSW Chairman E. Richard “Dick” Brooks is quoted as remembering, “CPL went in and asked for the 5 percent increase.  One of the commissioners said, ‘This commission is not obligated to abide by a previous commission’s determination of prudent investment.’”

While the rate case was still going on, the commission was very interested in establishing competition in Texas. “So, in order to get the utility industry’s attention, they gave us a DECREASE!” Brooks recalled in the book. “We were there for the rate increase we thought they had promised us.”

A poster commemorating the completion of the merger featured (left to right): Tom Shockley, E.R. Brooks, E. Linn Draper and Don Clements.

Those two events — the unwillingness to be bound by previous commissions and the rate decrease — sent CSW’s stock price tumbling. “Instead of looking for an acquisition or a merger of equals, we had to look for someone that would buy us,” Brooks is quoted in the book. “There were a lot of folks who wanted to, but AEP won out head and shoulders above everybody.”

Although the transaction was actually an acquisition, AEP Chairman, President and CEO Dr. E. Linn Draper, Jr. insisted that it be referred to as a merger.

AEP and CSW had noteworthy similarities — such as their long traditions as low-cost power producers — but the employees interviewed for this two-day series of articles pointed out the companies had significant differences, as well, such as their corporate cultures.

CSW’s culture was viewed as having an open-door, highly participatory style of supervision. “The average employee was encouraged to speak up and knew that his or her opinion would be respected,” said Pattie Wilson, a 25-year AEP/CSW employee who now works as a MESH (Managing Environment, Safety and Health) coordinator in Dallas.

AEP’s culture was viewed as having more of a hierarchical, top-down style of management. In fact, AEP had become even more centralized in 1996 when it adopted a one-company organizational structure, de-emphasizing its operating companies.

“The merger teams spent a great deal of time talking about culture and how the culture of the new, combined company should be,” McCellon-Allen remembered. “I think that, under Mike Morris’ leadership, we’re making strides toward creating a common, unified culture throughout the entire AEP System.

“I think Mike has made it clear that he wants a culture with management by motivation and inspiration, not intimidation. I believe he’s shown through Open Mike and his own personal blog how much he values two-way communication,” she said.

“Mike is a champion of collaboration, mutual care, shared commitment and all the qualities that we need to ensure that our employees are valued and can contribute their full talents and abilities to the company’s operations,” McCellon-Allen concluded. “I think we’re making progress and we’re on the right track.”

From → News From AEP

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