PROSPECTUS SUPPLEMENT
(To Prospectus dated June 22, 2004)
$125,000,000
APPALACHIAN POWER COMPANY
Floating Rate Notes, Series C, due 2007
The Floating Rate Notes will bear interest payable quarterly beginning September
29, 2004. The per annum interest rate on the Floating Rate Notes for each
quarterly interest period will be reset quarterly based on the three-month LIBOR
rate plus 0.33%. The Floating Rate Notes will mature on June 29, 2007. The
Floating Rate Notes are not subject to optional redemption.
The Floating Rate Notes are unsecured and rank equally with all of our other
unsecured and unsubordinated indebtedness and will be effectively subordinated
to all of our secured debt, including $296,000,000 of outstanding first mortgage
bonds as of June 15, 2004. We will issue the Floating Rate Notes only in
registered form in multiples of $1,000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus supplement or the attached prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Investing in the Floating Rate Notes involves risks. See the Section entitled
"RISK FACTORS" beginning on page 2 of the accompanying Prospectus for more
information.
Proceeds to
Underwriting Appalachian
Price to Public Discounts Power Company
Per Floating Rate Note(1) 100% 0.35% 99.65%
Total $125,000,000 $437,500 $124,562,500
(1) Plus accrued interest, if any, from July 1, 2004, if settlement occurs after
that date.
The Floating Rate Notes should be delivered on or about July 1, 2004 through the
book-entry facilities of The Depository Trust Company.
Joint Book-Running Managers
Citigroup UBS Investment Bank
Co-Manager
BNY Capital Markets, Inc.
June 24, 2004
You should rely only on the information incorporated by reference or
provided in this Prospectus Supplement or the accompanying Prospectus. We have
not authorized anyone to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information in this Prospectus
Supplement is accurate as of any date other than the date on the front of the
document.
TABLE OF CONTENTS
Prospectus Supplement
Page
THE COMPANY............................................................... S-3
USE OF PROCEEDS........................................................... S-3
SUPPLEMENTAL DESCRIPTION OF THE FLOATING RATE NOTES....................... S-3
Principal Amount, Maturity and Interest............................... S-3
Optional Redemption................................................... S-5
Certain Definitions................................................... S-5
Limitation on Liens................................................... S-6
UNDERWRITING.............................................................. S-7
Prospectus
THE COMPANY............................................................... 2
PROSPECTUS SUPPLEMENTS.................................................... 2
RISK FACTORS.............................................................. 2
WHERE YOU CAN FIND MORE INFORMATION....................................... 13
RATIO OF EARNINGS TO FIXED CHARGES........................................ 14
USE OF PROCEEDS .......................................................... 14
DESCRIPTION OF THE NOTES ................................................. 14
General.................................................................14
Redemptions............................................................ 15
Remarketed Notes....................................................... 15
Book-Entry Notes - Registration, Transfer, and Payment of
Interest and Principal.............................................. 15
Note Certificates- Registration, Transfer, and Payment of
Interest and Principal.............................................. 17
Interest Rate.......................................................... 17
Fixed Rate Notes ................................................... 17
Floating Rate Notes................................................. 17
Events of Default...................................................... 18
Modification of Indenture.............................................. 18
Consolidation, Merger or Sale.......................................... 19
Legal Defeasance....................................................... 19
Covenant Defeasance.................................................... 19
Governing Law.......................................................... 19
Concerning the Trustee................................................. 19
PLAN OF DISTRIBUTION........................................................ 20
By Agents.............................................................. 20
By Underwriters ....................................................... 20
Direct Sales........................................................... 20
General Information ................................................... 20
LEGAL OPINIONS.............................................................. 21
EXPERTS..................................................................... 21
S-2
THE COMPANY
We generate, sell, purchase, transmit and distribute electric power. We
serve approximately 929,000 retail customers in the southwestern portion of
Virginia and southern West Virginia. We also sell and transmit power at
wholesale to other electric utilities, municipalities, electric cooperatives and
power marketers engaged in the wholesale power market. Our principal executive
offices are located at 1 Riverside Plaza, Columbus, Ohio 43215 (telephone number
614-716-1000). We are a subsidiary of American Electric Power Company, Inc.,
("AEP") a public utility holding company, and we are a part of the American
Electric Power integrated utility system. The executive offices of American
Electric Power Company, Inc. are located at 1 Riverside Plaza, Columbus, Ohio
43215 (telephone number 614-716-1000).
USE OF PROCEEDS
The net proceeds from the sale of the notes will be used to repay
short-term debt and for other general corporate purposes relating to our utility
business. At June 22, 2004, we had approximately $165,000,000 of short-term
unsecured indebtedness outstanding.
SUPPLEMENTAL DESCRIPTION OF THE FLOATING RATE NOTES
The following description of the particular terms of the Floating Rate
Notes supplements and, to the extent it is not consistent with the description
of the general terms and provisions of floating rate notes under "Description of
the Notes" in the accompanying Prospectus, supersedes such description. There
will be no additional pricing supplement relating to the Floating Rate Notes. We
will issue the Floating Rate Notes under an Indenture, dated as of January 1,
1998, between us and The Bank of New York, as Trustee, as supplemented and
amended and as to be further supplemented and amended.
Principal Amount, Maturity and Interest
The Floating Rate Notes will initially be issued in an aggregate principal
amount of $125,000,000. We may, without the consent of the holders of th
Floating Rate Notes, issue additional notes having the same ranking, interest
rate, maturity and other terms as the Floating Rate Notes. These notes, together
with the Floating Rate Notes, will be a single series of notes under the
Indenture.
The Floating Rate Notes will mature and become due and payable, together
with any accrued and unpaid interest, on June 29, 2007. We will pay interest on
the Floating Rate Notes on March 29, June 29, September 29 and December 29,
commencing on September 29, 2004, through the maturity date of June 29, 2007.
Interest will accrue from the issue date of July 1, 2004 and will be paid to
holders of record on the fifteenth calendar day before each interest payment
date. Interest payable at maturity, however, will be payable to the person to
whom principal is payable. If the scheduled interest payment date (other than
the maturity date) of the Floating Rate Notes falls on a day which is not a
Business Day, such interest payment date will be the following day that is a
Business Day, except that if such Business Day is in the next calendar month,
such interest payment date shall be the immediately preceding Business Day. If
the maturity date of the Floating Rate Notes falls on a day that is not a
Business Day, the payment of principal and interest will be made on the next
succeeding Business Day, and interest will not accrue as a result of this
delayed payment.
S-3
The Floating Rate Notes will bear interest for each quarterly Interest
Period at a per annum rate determined by the Calculation Agent, subject to the
maximum interest rate permitted by New York or other applicable state law, as
such law may be modified by United States law of general application. The
interest rate applicable during each quarterly Interest Period will be equal to
LIBOR on the Interest Determination Date for such Interest Period plus .33%;
provided, however, that in certain circumstances described below, the interest
rate will be determined without reference to LIBOR. Promptly upon such
determination, the Calculation Agent will notify the trustee for the Floating
Rate Notes, if the trustee is not then serving as the Calculation Agent, of the
interest rate for the new Interest Period. The interest rate determined by the
Calculation Agent, absent manifest error, shall be binding and conclusive upon
the beneficial owners and holders of the Floating Rate Notes, the Company and
the trustee for the Floating Rate Notes.
If the following circumstances exist on any Interest Determination Date,
the Calculation Agent shall determine the interest rate for the notes as
follows:
(1) In the event no Reported Rate (as defined below) appears on Telerate
Page 3750 (as defined below) as of approximately 11:00 a.m. London time on an
Interest Determination Date, the Calculation Agent shall request the principal
London offices of each of four major banks in the London interbank market
selected by the Calculation Agent (after consultation with the Company) to
provide a quotation of the rate (the "Rate Quotation") at which three month
deposits in amounts of not less than $1,000,000 are offered by it to prime banks
in the London interbank market, as of approximately 11:00 a.m. on such Interest
Determination Date, that is representative of single transactions at such time
(the "Representative Amounts"). If at least two Rate Quotations are provided,
the interest rate will be the arithmetic mean of the Rate Quotations obtained by
the Calculation Agent, plus .33%.
(2) In the event no Reported Rate appears on Telerate Page 3750 as of
approximately 11:00 a.m. London time on an Interest Determination Date and there
are fewer than two Rate Quotations, the interest rate will be the arithmetic
mean of the rates quoted at approximately 11:00 a.m. New York City time on such
Interest Determination Date, by three major banks in New York City selected by
the Calculation Agent (after consultation with the Company), for loans in
Representative Amounts in U. S. dollars to leading European banks, having an
index maturity of three months for a period commencing on the second London
Business Day immediately following such Interest Determination Date, plus .33%;
provided, however, that if fewer than three banks selected by the Calculation
Agent are quoting such rates, the interest rate for the applicable Interest
Period will be the same as the interest rate in effect for the immediately
preceding Interest Period.
Upon the request of a holder of the Floating Rate Notes, the Calculation
Agent will provide to such holder the interest rate in effect on the date of
such request and, if determined, the interest rate for the next Interest Period.
The accrued interest for any period is calculated by multiplying the
principal amount of a note by an accrued interest factor. The accrued interest
factor is computed by adding the interest factor calculated for each day in the
period to the date for which accrued interest is being calculated. The interest
factor (expressed as a decimal rounded upwards if necessary) is computed by
dividing the interest rate (expressed as a decimal rounded upwards if necessary)
applicable to such date by 360.
S-4
All percentages resulting from any calculation of the interest rate on
Floating Rate Notes will be rounded, if necessary, to the nearest one-hundred
thousandth of a percentage point, with five one-millionths of a percentage point
rounded upwards (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or
..0987655) and 9.876544% (or .09876544) being rounded to 9.87654% (or .0987654)),
and all dollar amounts used in or resulting from such calculation will be
rounded to the nearest cent (with one-half cent being rounded upwards).
Optional Redemption
The Floating Rate Notes are not subject to optional redemption.
Certain Definitions
The following definitions apply to the Floating Rate Notes and, to the
extent they are inconsistent with definitions appearing in the accompanying
Prospectus, supersede the definitions in the accompanying Prospectus.
"Business Day" means any day that is not a day on which banking
institutions in New York City are authorized or required by law or regulation to
close.
"Calculation Agent" means The Bank of New York, or its successor appointed
by the Company, acting as calculation agent.
"Interest Determination Date" means the second London Business Day
immediately preceding the first day of the relevant Interest Period.
"Interest Period" means the period commencing on an interest payment date
for the Floating Rate Notes (or commencing on the issue date for the Floating
Rate Notes, if no interest has been paid or duly made available for payment
since that date) and ending on the day before the next succeeding interest
payment date for the Floating Rate Notes.
"LIBOR" for any Interest Determination Date will be the offered rate for
deposits in U. S. dollars having an index maturity of three months for a period
commencing on the second London Business Day immediately following the Interest
Determination Date in amounts of not less than $1,000,000, as such rate appears
on Telerate Page 3750 or a successor reporter of such rates selected by the
Calculation Agent and acceptable to the Company, at approximately 11:00 a.m.
London time on the Interest Determination Date (the "Reported Rate").
"London Business Day" means a day other than a Saturday or Sunday that is
not a day on which banking institutions in London, England and New York, New
York are authorized or obligated by law or executive order to be closed and a
day on which dealings in deposits in U. S. dollars are transacted, or with
respect to any future date are expected to be transacted, in the London
interbank market.
"Telerate Page 3750" means the display designated on page 3750 on
Moneyline Telerate, Inc. (or such other page as may replace the 3750 page on
that service or such other service as may be nominated by the British Bankers'
Association for the purpose of displaying London interbank offered rates for
U.S. dollar deposits).
S-5
.......We will pay the principal of the Floating Rate Notes and interest payable
at maturity in immediately available funds at the office of The Bank of New
York, 101 Barclay Street, New York, New York.
Limitation on Liens
So long as any of our Floating Rate Notes issued pursuant to this
prospectus supplement are outstanding, we will not create or suffer to be
created or to exist any additional mortgage, pledge, security interest, or other
lien (collectively "Liens") on any of our utility properties or tangible assets
now owned or hereafter acquired to secure any indebtedness for borrowed money
("Secured Debt"), without providing that such Floating Rate Notes will be
similarly secured. This restriction does not apply to our subsidiaries, nor will
it prevent any of them from creating or permitting to exist Liens on their
property or assets to secure any Secured Debt. Further, this restriction on
Secured Debt does not apply to our existing first mortgage bonds that have
previously been issued under our mortgage indenture or any indenture
supplemental thereto; provided that this restriction will apply to future
issuances thereunder (other than issuances of refunding first mortgage bonds).
In addition, this restriction does not prevent the creation or existence of:
o Liens on property existing at the time of acquisition or construction of
such property (or created within one year after completion of such
acquisition or construction), whether by purchase, merger, construction or
otherwise, or to secure the payment of all or any part of the purchase
price or construction cost thereof, including the extension of any Liens
to repairs, renewals, replacements, substitutions, betterments, additions,
extensions and improvements then or thereafter made on the property
subject thereto;
o Financing of our accounts receivable for electric service;
o Any extensions, renewals or replacements (or successive extensions,
renewals or replacements), in whole or in part, of liens permitted by the
foregoing clauses; and
o The pledge of any bonds or other securities at any time issued under any
of the Secured Debt permitted by the above clauses.
In addition to the permitted issuances above, Secured Debt not otherwise
so permitted may be issued in an amount that does not exceed 15% of Net Tangible
Assets as defined below.
"Net Tangible Assets" means the total of all assets (including
revaluations thereof as a result of commercial appraisals, price level
restatement or otherwise) appearing on our balance sheet, net of applicable
reserves and deductions, but excluding goodwill, trade names, trademarks,
patents, unamortized debt discount and all other like intangible assets (which
term shall not be construed to include such revaluations), less the aggregate of
our current liabilities appearing on such balance sheet. For purposes of this
definition, our balance sheet does not include assets and liabilities of our
subsidiaries.
This restriction also will not apply to or prevent the creation or
existence of leases made, or existing on property acquired, in the ordinary
course of business.
S-6
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, we have
agreed to sell to each of the Underwriters named below and each of the
Underwriters has severally agreed to purchase from us the respective principal
amount of Floating Rate Notes set forth opposite its name below:
Principal Amount of
Underwriter Floating Rate Notes
----------- -------------------
Citigroup Global Markets Inc. $ 56,250,000
UBS Securities LLC 56,250,000
BNY Capital Markets, Inc. 12,500,000
Total $125,000,000
In the Underwriting Agreement, the Underwriters have agreed to the terms
and conditions to purchase all of the Floating Rate Notes offered if any of the
Floating Rate Notes are purchased.
The expenses associated with the offer and sale of the Floating Rate Notes
are expected to be approximately $165,000.
The Underwriters propose to offer the Floating Rate Notes to the public at
the initial public offering price set forth on the cover page of this prospectus
supplement and to certain dealers at such price less a concession not in excess
of .20% per Floating Rate Note. The Underwriters may allow, and such dealers
may reallow, a discount not in excess of .15% per Floating Rate Note to certain
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
Prior to this offering, there has been no public market for the Floating
Rate Notes. The Floating Rate Notes will not be listed on any securities
exchange. The Underwriters have advised us that they intend to make a market in
the Floating Rate Notes. The Underwriters will have no obligation to make a
market in the Floating Rate Notes, however, and may cease market making
activities, if commenced, at any time. No assurance can be given as to the
liquidity of the trading market for the Floating Rate Notes or that an active
public market for the Floating Rate Notes will develop. If an active public
trading market for the Floating Rate Notes does not develop, the market price
and liquidity of the Floating Rate Notes may be adversely affected.
We have agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or
contribute to payments that each Underwriter may be required to make in respect
thereof.
In connection with the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Floating Rate Notes. These transactions may include over-allotment and
stabilizing transactions and purchases to cover syndicate short positions
created in connection with the offering. Stabilizing transactions consist of
certain bids or purchases for the purposes of preventing or retarding a decline
in the market price of the Floating Rate Notes and syndicate short positions
involve the sale by the Underwriters of a greater number of Floating Rate Notes
than they are required to purchase from us in the offering. The Underwriters
also may impose a penalty bid, whereby selling concessions allowed to
S-7
syndicate members or other broker dealers in respect of the securities sold in
the offering for their account may be reclaimed by the syndicate if such
Floating Rate Notes are repurchased by the syndicate in stabilizing or covering
transactions. Any of these activities may cause the price of the Floating Rate
Notes to be higher than the price that might otherwise prevail in the open
market; and these activities, if commenced, may be discontinued at any time.
These transactions may be effected in the over-the-counter market or otherwise.
The Underwriters or their affiliates engage in transactions with, and have
performed services for, us and our affiliates in the ordinary course of
business.
S-8
PROSPECTUS
Appalachian Power Company
1 RIVERSIDE PLAZA
COLUMBUS, OHIO 43215
(614) 716-1000
$500,000,000
UNSECURED NOTES
TERMS OF SALE
The following terms may apply to the notes that we may sell at one or more
times. A prospectus supplement or pricing supplement will include the final
terms for each note. If we decide to list upon issuance any note or notes on a
securities exchange, a prospectus supplement or pricing supplement will identify
the exchange and state when we expect trading could begin.
- Mature 9 months to 50 years
- Fixed or floating interest rate
- Remarketing features
- Certificate or book-entry form
- Subject to redemption
- Not convertible, amortized or subject to a sinking fund - Interest paid
on fixed rate notes quarterly or semi-annually
- Interest paid on floating rate notes monthly, quarterly, semi-annually,
or annually
- Issued in multiples of a minimum denomination
INVESTING IN THESE NOTES INVOLVES RISKS. SEE THE SECTION ENTITLED
"RISK FACTORS" BEGINNING ON PAGE 2 FOR MORE INFORMATION.
The notes have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission, nor have these
organizations determined that this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
The date of this prospectus is June 22, 2004.
THE COMPANY
We generate, sell, purchase, transmit and distribute electric power. We
serve approximately 929,000 retail customers in the southwestern portion of
Virginia and southern West Virginia. We also sell and transmit power at
wholesale to other electric utilities, municipalities, electric cooperatives and
power marketers engaged in the wholesale power market. Our principal executive
offices are located at 1 Riverside Plaza, Columbus, Ohio 43215 (telephone number
614-716-1000). We are a subsidiary of American Electric Power Company, Inc.,
("AEP") a public utility holding company, and we are a part of the American
Electric Power integrated utility system. The executive offices of American
Electric Power Company, Inc. are located at 1 Riverside Plaza, Columbus, Ohio
43215 (telephone number 614-716-1000).
PROSPECTUS SUPPLEMENTS
We may provide information to you about the notes in up to three separate
documents that progressively provide more detail: (a) this prospectus provides
general information some of which may not apply to your notes; (b) the
accompanying prospectus supplement provides more specific terms of your notes;
and (c) if not included in the accompanying prospectus supplement, a pricing
supplement will provide the final terms of your notes. It is important for you
to consider the information contained in this prospectus, the prospectus
supplement and any pricing supplement in making your investment decision.
RISK FACTORS
Risks Related to Our Regulated Business and Evolving Regulation
o The laws and regulations governing restructuring of the wholesale
generation market in Virginia continue to evolve and could harm our
business, operating results and financial condition.
While the electric restructuring law in Virginia established the general
framework governing the retail electric market, the law requires us to make
compliance filings with the Virginia State Corporation Commission ("VSCC") to
implement the law. Following VSCC approval of a settlement agreement, we now
operate in Virginia as a functionally separated electric utility charging
unbundled rates. The agreement reserves potential legal separation of our assets
for later VSCC consideration. In April 2004, the Governor of Virginia signed
legislation which extends the transition period for electricity restructuring
including capped rates through December 31, 2010. The legislation provides
specified cost recovery opportunities during the capped rate period, including
two general rate changes and an opportunity for recovery of incremental
environmental and reliability costs. We cannot predict the full impact of such
developments.
o Our fuel clause recovery mechanisms have been suspended in West Virginia.
The protection afforded by fuel clause recovery mechanisms has been
suspended in West Virginia. To the extent the fuel supply needed by the
generating units supplying power in West Virginia is not under fixed price
long-term contracts we are subject to the market price risk of fuel.
o The different regional power markets in which we compete or will compete
in the future have changing transmission regulatory structures, which
could affect our performance in these regions.
Our results are likely to be affected by differences in the market and
transmission regulatory structures in various regional power markets. Problems
or delays that may arise in the formation and operation of new regional
transmission organizations, or "RTOs", may restrict our ability to sell power
produced by our generating capacity to certain markets if there is insufficient
transmission capacity otherwise available. The rules governing the various
regional power markets may also change from time to time which could affect our
costs or revenues. Because it remains unclear which companies will be
participating in the various regional power markets, or how RTOs will develop or
what regions they will cover, we are unable to assess fully the impact that
these power markets may have on our business.
In May 2002, AEP announced an agreement with the Pennsylvania-New
Jersey-Maryland RTO ("PJM") Interconnection to pursue terms for participation in
its RTO. Final agreements are expected to be negotiated. In July 2002, the
Federal Energy Regulatory Commission (the "FERC") tentatively approved the
decision of AEP's subsidiaries located in the east, including us, to join PJM
subject to certain conditions being met. The performance of these conditions is
only partially under our control. In October 2002, PJM announced that AEP's
subsidiaries located in the east, including us, and other unaffiliated utilities
planned to turn functional control of their transmission lines over to PJM
during the first quarter of 2003 and are scheduled to become full members by
October 2004.
Virginia has adopted legislation that prevents us and certain other
unaffiliated utilities operating in Virginia from joining any RTO, including
PJM, before July 2004. In April 2003, FERC approved our transfer of functional
control of the transmission systems of our utilities located in the east to PJM.
FERC also accepted our proposed rates for joining PJM, but set a number of rate
issues for resolution through settlement proceedings or FERC hearings.
Settlement discussions continue on certain rate matters.
On September 29 and 30, 2003, FERC held a public inquiry regarding RTO
formation, including delays in AEP's subsidiaries located in the east, including
us, participation in PJM. In November 2003, FERC issued an order preliminarily
finding that AEP must fulfill its CSW merger commitment to join an RTO by fully
integrating into PJM (transmission and markets) by October 1, 2004. A FERC
Administrative Law Judge has ruled that the laws, rules, or regulations of
Virginia and another state preventing AEP's subsidiaries located in the east,
including us, from joining an RTO are pre-empted by federal energy legislation.
FERC is reviewing this decision and we expect further litigation on this issue.
To the extent we are faced with conflicting state and Federal requirements
as to our participation in RTOs, it could adversely affect our ability to
operate and recover transmission costs from retail customers. Management is
unable to predict the outcome of these transmission regulatory actions and
proceedings or their impact on the timing and operation of RTOs, our
transmission operations or future results of operations and cash flows.
Risks Related to Power Trading and Wholesale Businesses
o We have significantly reduced the scope and scale of our energy trading
and marketing operations.
In October 2002, AEP announced its plans to reduce the exposure to energy
trading markets of its subsidiaries (including us) that trade energy and to
downsize the trading and wholesale marketing operations conducted on behalf of
such subsidiaries. Our power trading and marketing operations are limited to
risk management around our generation assets and those of our regulated
affiliates. Trading and marketing operations that were not limited to risk
management around such assets have contributed to our wholesale revenues and
earnings in the past. Management expects this downsizing of our trading
operations to reduce our future results of operations and cash flows. The
following risk factors appearing under this subheading should be read in light
of the announcements discussed in this paragraph.
o Our revenues and results of operations are subject to market risks that
are beyond our control.
We sell power from our generation facilities into the spot market or other
competitive power markets or on a contractual basis. We also enter into
contracts to purchase and sell electricity as part of our power marketing and
trading operations. With respect to such transactions, we are not guaranteed any
rate of return on our capital investments through regulated rates, and our
revenues and results of operations are likely to depend, in large part, upon
prevailing market prices for power in our regional markets and other competitive
markets. These market prices may fluctuate substantially over relatively short
periods of time. It is reasonable to expect that trading margins may erode as
markets mature and that there may be diminished opportunities for gain should
volatility decline. In addition, the FERC, which has jurisdiction over wholesale
power rates, as well as independent system operators that oversee some of these
markets, may impose price limitations, bidding rules and other mechanisms to
address some of the volatility in these markets. Fuel prices may also be
volatile, and the price we can obtain for power sales may not change at the same
rate as changes in fuel costs. These factors could reduce our margins and
therefore diminish our revenues and results of operations.
Volatility in market prices for fuel and power may result from:
- weather conditions;
- seasonality;
- power usage;
- illiquid markets;
- transmission or transportation constraints or inefficiencies;
- availability of competitively priced alternative energy sources;
- demand for energy commodities;
- natural gas, crude oil and refined products, and coal production levels;
- natural disasters, wars, embargoes and other catastrophic events; and
- federal, state and foreign energy and environmental regulation and
legislation.
o Our power trading (including fuel procurement and power marketing) and
risk management policies cannot eliminate the risk associated with these
activities.
Our power trading (including fuel procurement and power marketing)
activities expose us to risks of commodity price movements. We attempt to manage
our exposure through enforcement of established risk limits and risk management
procedures. These risk limits and risk management procedures may not always be
followed or may not work as planned and cannot eliminate the risks associated
with these activities. As a result, we cannot predict the impact that our power
trading and risk management decisions may have on our business, operating
results or financial position.
We routinely have open trading positions in the market, within established
guidelines, resulting from the management of our trading portfolio. To the
extent open trading positions exist, fluctuating commodity prices can improve or
diminish our financial results and financial position.
Our power trading and risk management activities, including our power
sales agreements with counterparties, rely on projections that depend heavily on
judgments and assumptions by management of factors such as the future market
prices and demand for power and other energy-related commodities. These factors
become more difficult to predict and the calculations become less reliable the
further into the future these estimates are made. Even when our policies and
procedures are followed and decisions are made based on these estimates, results
of operations may be diminished if the judgments and assumptions underlying
those calculations prove to be wrong or inaccurate.
o Our financial performance may be adversely affected if we or our
affiliates are unable to successfully operate our pooled electric
generating facilities.
Our performance depends on the successful operation of our pooled electric
generating facilities. Operating electric generating facilities involves many
risks, including:
o operator error and breakdown or failure of equipment or processes;
o operating limitations that may be imposed by environmental or other
regulatory requirements;
o labor disputes;
o fuel supply interruptions; and
o catastrophic events such as fires, earthquakes, explosions, floods or
other similar occurrences.
A decrease or elimination of revenues from power produced by our electric
generating facilities or an increase in the cost of operating the facilities
would adversely affect our results of operations.
o Parties with whom we have contracts may fail to perform their obligations,
which could harm our results of operations.
We are exposed to the risk that counterparties that owe us money or power
will breach their obligations. Should the counterparties to these arrangements
fail to perform, we may be forced to enter into alternative hedging arrangements
or honor underlying commitments at then-current market prices that may exceed
our contractual prices, which would cause our financial results to be diminished
and we might incur losses. Although our estimates take into account the expected
probability of default by a counterparty, our actual exposure to a default by a
counterparty may be greater than the estimates predict if defaults by
counterparties exceed our estimates.
o We rely on electric transmission facilities that we do not own or control.
If these facilities do not provide us with adequate transmission capacity,
we may not be able to deliver our wholesale electric power to the
purchasers of our power.
We depend on transmission facilities owned and operated by other
unaffiliated power companies to deliver the power we sell at wholesale. This
dependence exposes us to a variety of risks. If transmission is disrupted, or
transmission capacity is inadequate, we may not be able to sell and deliver our
wholesale power. If a region's power transmission infrastructure is inadequate,
our recovery of wholesale costs and profits may be limited. If restrictive
transmission price regulation is imposed, the transmission companies may not
have sufficient incentive to invest in expansion of transmission infrastructure.
The FERC has issued electric transmission initiatives that require
electric transmission services to be offered unbundled from commodity sales.
Although these initiatives are designed to encourage wholesale market
transactions for electricity, access to transmission systems may in fact not be
available if transmission capacity is insufficient because of physical
constraints or because it is contractually unavailable. We also cannot predict
whether transmission facilities will be expanded in specific markets to
accommodate competitive access to those markets.
o We are unable to predict the outcome of Enron litigation.
In December 2003, Enron filed a complaint in a bankruptcy court against
our affiliated service corporation seeking approximately $93 million plus
interest in connection with a transaction for the sale and purchase of physical
power among Enron, certain AEP affiliates, including us, and Allegheny Energy
Supply, LLC during November 2001. Enron's claim seeks to unwind the effects of
the transaction. We believe we have several defenses to the claims in the action
being brought by Enron. Management is unable to predict the outcome of this
lawsuit, our allocation of any amounts payable or its impact on results of
operations, cash flows or financial condition.
o We do not fully hedge against price changes in commodities.
As part of our power marketing and trading operations, we routinely enter
into contracts to purchase and sell electricity as part of our power marketing
and trading operations and to procure fuel. In connection with these trading
activities, we routinely enter into financial contracts, including futures and
options, over-the-counter options, swaps and other derivative contracts. These
activities expose us to risks from price movements. If the values of the
financial contracts change in a manner we do not anticipate, it could harm our
financial position or reduce the financial contribution of our trading
operations.
We manage our exposure by establishing risk limits and entering into
contracts to offset some of our positions (i.e., to hedge our exposure to
demand, market effects of weather and other changes in commodity prices).
However, we do not always hedge the entire exposure of our operations from
commodity price volatility. To the extent we do not hedge against commodity
price volatility, our results of operations and financial position may be
improved or diminished based upon our success in the market.
o We are unable to predict the course, results or impact, if any, of current
or future energy market investigations.
AEP (and, by extension, certain of its subsidiaries, including us) and
other energy market participants received data requests, subpoenas and requests
for information from the FERC, the SEC and at least one state utility commission
during 2002. Management responded to the inquiries and provided the requested
information and has continued to respond to supplemental data requests in 2003
and 2004.
In March 2003, we received a subpoena from the SEC as part of the SEC's
ongoing investigation of energy trading activities. In August 2002, we had
received an informal data request from the SEC asking that we voluntarily
provide information. The subpoena sought additional information and is part of
the SEC's formal investigation. We responded to the subpoena and will continue
to cooperate with the SEC.
Management is unable to predict the course or outcome of these or any
future energy market investigations or their impact, if any, on power commodity
trading generally, or more specifically, on our trading operations or future
results of operations and cash flows.
o Diminished liquidity in the wholesale power markets could negatively
impact our earnings.
The Enron Corp. bankruptcy and enhanced regulatory scrutiny have
contributed to more rigorous credit rating review of wholesale power market
participants. Credit downgrades and financial difficulties of certain other
market participants have significantly reduced such participants' participation
in the wholesale power and gas markets. These events have caused a decrease in
the number of significant participants in the wholesale power and gas markets,
which has resulted in decreases in transaction volumes and market liquidity.
Such decreases have had a negative impact on our results of operations, cash
flows and financial condition. Reduced liquidity in these markets makes risk
management of the assets more difficult and could also hamper our efforts to
exit transactions not related to risk management of our assets that we entered
into before reducing the scale of our power trading and marketing operations. We
are unable to predict the extent of the impact on our power marketing and
trading business if such developments continue.
o Potential for disruption exists if the delay of a FERC market power
mitigation order is lifted.
A FERC order on AEP's triennial market based wholesale power rate
authorization update required certain mitigation actions that certain AEP
subsidiaries, including us, would need to take for sales/purchases within its
control area and required AEP to post information on its website regarding its
power systems status. As a result of a request for rehearing filed by AEP and
other market participants, FERC issued an order delaying the effective date of
the mitigation plan until after a planned technical conference on market power
determination. In January 2004, the FERC held a technical conference and in
April 2004 issued two orders concerning utilities' ability to sell wholesale
electricity at market based rates. In the first order, the FERC adopted two new
interim screens for assessing potential generation market power of applicants
for wholesale market based rates, and described additional analyses and
mitigation measures that could be presented if an applicant does not pass one of
these interim screens. AEP and two unaffiliated utilities were required to
submit generation market power analyses within sixty days of the FERC's order.
In the second order, the FERC initiated a rulemaking to consider whether the
FERC's current methodology for determining whether a public utility should be
allowed to sell wholesale electricity at market-based rates should be modified
in any way. Management is unable to predict the outcome of these actions by the
FERC or their affect on future results of operations and cash flows.
Risks Related to Market or Economic Volatility
o We are subject to risks associated with a changing economic environment.
In response to the occurrence of several recent events, including the
September 11, 2001 terrorist attack on the United States, the ongoing war
against terrorism by the United States, and the bankruptcy of Enron Corp., the
financial markets have been disrupted in general, and the availability and cost
of capital for our business and that of our competitors has been at least
temporarily harmed. In addition, following the bankruptcy of Enron Corp., the
credit ratings agencies initiated a thorough review of the capital structure and
earnings power of energy companies, including us. These events could constrain
the capital available to our industry and could limit our access to funding for
our operations. Our business is capital intensive, and we are dependent upon our
ability to access capital at rates and on terms we determine to be attractive.
If our ability to access capital becomes significantly constrained, our interest
costs will likely increase and our financial condition could be harmed and
future results of operations could be adversely affected.
The insurance industry has also been disrupted by these events. As a
result, the availability of insurance covering risks we and our competitors
typically insure against may decrease. In addition, the insurance we are able to
obtain may have higher deductibles, higher premiums and more restrictive policy
terms.
o A downgrade in our credit rating or that of AEP could negatively affect
our ability to access capital and/or to operate our power trading
businesses.
Standard & Poor's and Moody's rate our senior, unsecured debt at BBB and
Baa2, respectively. If Moody's or Standard & Poor's were to downgrade our
long-term rating, particularly below investment grade, our borrowing costs would
increase, which would diminish our financial results. In addition, we would
likely be required to pay a higher interest rate in future financings, and our
potential pool of investors and funding sources could decrease.
On February 10, 2003, Moody's downgraded AEP's short-term debt rating to
P-3 (with stable outlook) from P-2. On March 7, 2003, Standard & Poor's affirmed
AEP's short-term rating of A-2 with stable outlook. As a result of the Moody's
downgrade, AEP's access to the commercial paper market may be limited and our
short-term debt borrowing costs may increase because we conduct our short-term
borrowing through AEP and on the same terms available to AEP.
Our power trading business relies on the investment grade ratings of our
senior, unsecured debt. Most of our counterparties require the creditworthiness
of an investment grade entity to stand behind transactions. If our rating were
to decline below investment grade, our ability to profitably operate our power
trading business would be diminished, because we would likely have to deposit
cash or cash related instruments, which would reduce our profits.
o The underfunding of our affiliate retirement plans may require additional
significant contributions.
We, along with other AEP affiliates, participate in defined benefit
pension plans ("Pension Plans") for our respective employees. In addition, we,
along with other AEP affiliates, participate in health care and life insurance
benefit plans for retired employees.
The recent decreases in applicable interest rates have increased the
plans' liability. The Pension Plans' liabilities based on service and pay to
date ("Accumulated Benefit Obligation") exceeded the value of the assets at
December 31, 2003. As of December 31, 2003, the fair value of the AEP Pension
Plans assets was $3.18 billion while the Accumulated Benefit Obligation was
estimated at $3.63 billion, an underfunding of approximately $450 million.
Because of the underfunded status of the Pension Plan, $65 million was
contributed to the Pension Plan in 2003. As of April 28, 2004 and based on
actuarial assumptions, AEP's cash contributions to the Pension Plan are expected
to be approximately $41 million, $74 million, and $342 million in 2004, 2005 and
2006, respectively. Our portion of the contributions made to the pension trust
account was $9 million in 2003, and may be material in 2004, 2005 and 2006,
respectively.
AEP also made contributions of $183 million to postretirement health care
and life insurance benefits trust funds in 2003, and expects to contribute
approximately $160 million, $155 million and $146 million in 2004, 2005 and
2006, respectively. Our portion of the contribution was $28 million in 2003, and
may be material in 2004, 2005 and 2006, respectively.
We cannot predict the future performance of the investment markets. A
downturn in the investment markets could have a material negative impact on the
net asset value of the plans' trust accounts and increase the underfunding of
the Pension Plan, net of benefit obligations. This may necessitate significant
cash contributions to the Pension Plan. Changes in interest rates may also
materially affect the pension and postretirement health care and life insurance
benefit liabilities and the cash contributions needed to fund those liabilities.
Changes in the laws and regulations governing the plans may increase or decrease
the required contributions.
o Our operating results may fluctuate on a seasonal and quarterly basis.
Electric power generation is generally a seasonal business. In many parts
of the country, demand for power peaks during the hot summer months, with market
prices also peaking at that time. In other areas, power demand peaks during the
winter. As a result, our overall operating results in the future may fluctuate
substantially on a seasonal basis. The pattern of this fluctuation may change
depending on the terms of power sale contracts that we enter into. In addition,
we have historically sold less power, and consequently earned less income, when
weather conditions are milder. We expect that unusually mild weather in the
future could diminish our results of operations and harm our financial
condition.
o Changes in technology may significantly affect our business by making our
power plants less competitive.
A key element of our business model is that generating power at central
power plants achieves economies of scale and produces power at relatively low
cost. There are other technologies that produce power, most notably fuel cells,
microturbines, windmills and photovoltaic (solar) cells. It is possible that
advances in technology will reduce the cost of alternative methods of producing
power to a level that is competitive with that of most central power station
electric production. If this were to happen and if these technologies achieved
economies of scale, our market share could be eroded, and the value of our power
plants could be reduced. Changes in technology could also alter the channels
through which retail electric customers buy power, thereby harming our financial
results.
o Changes in commodity prices may increase our cost of producing power or
decrease the amount we receive from selling power, harming our financial
performance.
We are heavily exposed to changes in the price and availability of coal
because most of our generating capacity is coal-fired. We have contracts of
varying durations for the supply of coal for most of our existing generation
capacity, but as these contracts end, we may not be able to purchase coal on
terms as favorable as the current contracts.
Changes in the cost of coal and changes in the relationship between such
cost and the market price of power will affect our financial results. Since the
price we obtain for power may not change at the same rate as the change in coal
costs, we may be unable to pass on the changes in costs to our customers. In
addition, the fuel clause mechanism for our sales to retail customers in West
Virginia has been suspended.
In addition, actual power prices and fuel costs will differ from those
assumed in financial projections used to initially value our trading and
marketing transactions, and those differences may be material. As a result, our
financial results may be diminished in the future as those transactions are
marked to market.
o At times, demand for power could exceed our supply capacity.
We are currently obligated to supply power to our customers. At peak
times, the demand for power required to meet this obligation will exceed our
available generation capacity. In the past, we have had little need to purchase
power in the market for our retail customers. In the future, we may be required
to buy more power on the market. We may not always have the ability to pass
these market purchase costs to our customers. For example, we are protected from
increased fuel cost charges in Virginia. In West Virginia, such increases will
affect our earnings currently because we will not be able to adjust our rates to
recover any increases.
Risks Related to Environmental Regulation
o Our costs of compliance with environmental laws are significant, and the
cost of compliance with future environmental laws could harm our cash flow
and profitability.
Our operations are subject to extensive federal, state and local
environmental statutes, rules and regulations relating to air quality, water
quality, waste management, natural resources and health and safety. Compliance
with these legal requirements requires us to commit significant capital toward
environmental monitoring, installation of pollution control equipment, emission
fees and permits at all of our facilities. These expenditures have been
significant in the past and we expect that they will increase in the future.
Costs of compliance with environmental regulations could harm our industry, our
business and our results of operations and financial position, especially if
emission and/or discharge limits are tightened, more extensive permitting
requirements are imposed, additional substances become regulated and the number
and types of assets we operate increase.
o We anticipate that we will incur considerable capital costs for
environmental compliance.
Virtually all of our generating capacity is coal burning. We plan to
install new emissions control equipment and may be required to upgrade existing
equipment, purchase emissions allowances or reduce operations to comply with the
extensive federal, state and local environmental statutes, rules and regulations
relating to air quality, water quality, waste management, natural resources and
health and safety. These expenditures have been significant in the past and we
expect that they will increase in the future. We estimate that we will invest
approximately $151 million to comply with existing federal and state regulations
designed to limit NOx emissions. We estimate that we will invest approximately
$367 million to comply with existing federal and state regulations designed to
limit SO2 emissions. We estimate that we will invest approximately $698 million
to comply with currently proposed, but as yet unadopted, federal regulations
designed to limit NOx, SO2 and mercury emissions through 2010, assuming certain
contingencies (including the adoption of EPA's preferred alternative for
reducing mercury emissions). If this preferred alternative is not adopted, we
cannot estimate at this time the costs to comply with the remaining alternative
for reducing mercury emissions. We would expect additional costs after 2010 in
amounts that cannot be estimated at this time. Costs of compliance with
environmental regulations could harm our industry, our business and our results
of operations and financial position, especially if emission and/or discharge
limits are tightened, more extensive permitting requirements are imposed,
additional substances become regulated and the number and types of assets we
operate increase.
o Governmental authorities may assess penalties on us for failures to comply
with environmental laws and regulations.
If we fail to comply with environmental laws and regulations, even if
caused by factors beyond our control, that failure may result in the assessment
of civil or criminal penalties and fines against us. Recent lawsuits by the U.S.
Environmental Protection Agency (EPA) and various states filed against us
highlight the environmental risks faced by generating facilities, in general,
and coal-fired generating facilities, in particular.
Since 1999, we and some of our affiliates have been involved in litigation
regarding generating plant emissions under the Clean Air Act. EPA and a number
of states alleged that we and eleven unaffiliated utilities modified certain
units at coal-fired generating plants in violation of the Clean Air Act. EPA
filed complaints against us and some of our affiliated public utilities in U.S.
District Court for the Southern District of Ohio. A separate lawsuit initiated
by certain special interest groups was consolidated with the EPA case. The
alleged modification of the generating units occurred over a 20-year period.
If these actions are resolved against us, substantial modifications of our
existing coal-fired power plants would be required. In addition, we could be
required to invest significantly in additional emission control equipment,
accelerate the timing of capital expenditures, pay penalties and/or halt
operations at certain plants. Moreover, our results of operations could be
reduced and our financial position could suffer due to the consequent
distraction of management and the expense of ongoing litigation.
o We may be unable to pass on the cost of environmental compliance to our
customers.
Most of our contracts with wholesale customers do not permit us to recover
additional capital and other costs incurred by us to comply with new
environmental regulations. And, while retail rate recovery for environmental
costs is permitted in Virginia and West Virginia, we cannot predict what level
of retail rate recovery, if any, will be approved in those jurisdictions.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement we filed with the SEC.
We also file annual, quarterly and special reports and other information with
the SEC. You may read and copy any document we file at the SEC's Public
Reference Room at 450 Fifth Street, N. W., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
You may also examine our SEC filings through the SEC's web site at
http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information that we file
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings made
with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Securities
Exchange Act of 1934 until we sell all the notes.
Annual Report on Form 10-K for the year ended December 31, 2003; and
Quarterly Report on Form 10-Q for the period ended March 31, 2004.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
Mr. Brian Capo
American Electric Power Service Corporation
1 Riverside Plaza
Columbus, Ohio 43215
614-716-1000
You should rely only on the information incorporated by reference or
provided in this prospectus or any supplement. We have not authorized anyone
else to provide you with different information. We are not making an offer of
these notes in any state where the offer is not permitted. You should not assume
that the information in this prospectus or any supplement is accurate as of any
date other than the date on the front of those documents.
RATIO OF EARNINGS TO FIXED CHARGES
The Ratio of Earnings to Fixed Charges for each of the periods indicated
is as follows:
Twelve Months Period Ended Ratio
December 31, 1999 2.43
December 31, 2000 2.26
December 31, 2001 2.98
December 31, 2002 3.49
December 31, 2003 3.48
March 31, 2004 3.36
For current information on the Ratio of Earnings to Fixed Charges, please
see our most recent Form 10-K and 10-Q. See Where You Can Find More Information
on page 13.
USE OF PROCEEDS
Unless otherwise stated in a prospectus supplement, the net proceeds from
the sale of the notes will be used for general corporate purposes relating to
our utility business. These purposes include redeeming or repurchasing
outstanding debt (including the repayment of advances from affiliates) or
preferred stock and replenishing working capital. If we do not use the net
proceeds immediately, we temporarily invest them in short-term, interest-bearing
obligations. We estimate that our construction costs in 2004 will approximate
$406 million.
DESCRIPTION OF THE NOTES
General
We will issue the notes under the Indenture dated January 1, 1998 (as
previously supplemented and amended) between us and the Trustee, The Bank of New
York. This prospectus briefly outlines some provisions of the Indenture. If you
would like more information on these provisions, you should review the Indenture
and any supplemental indentures or company orders that we have filed or will
file with the SEC. See Where You Can Find More Information on how to locate
these documents. You may also review these documents at the Trustee's offices at
101 Barclay Street, New York, New York.
The Indenture does not limit the amount of notes that may be issued. The
Indenture permits us to issue notes in one or more series or tranches upon the
approval of our board of directors and as described in one or more company
orders or supplemental indentures. Each series of notes may differ as to their
terms. The Indenture also gives us the ability to reopen a previous issue of a
series of notes and issue additional notes of such series.
The notes are unsecured and will rank equally with all our unsecured
unsubordinated debt. Substantially all of our fixed properties and franchises
are subject to the lien of our first mortgage bonds issued under and secured by
a Mortgage and Deed of Trust, dated as of December 1, 1940 (as previously
supplemented and amended) between us and Bankers Trust Company, now known as
Deutsche Bank Trust Company Americas, as trustee. For current information on our
debt outstanding see our most recent Form 10-K and 10-Q. See Where You Can Find
More Information.
The notes will be denominated in U.S. dollars and we will pay principal
and interest in U.S. dollars. Unless an applicable pricing or prospectus
supplement states otherwise, the notes will not be subject to any conversion,
amortization, or sinking fund. We expect that the notes will be "book-entry,"
represented by a permanent global note registered in the name of The Depository
Trust Company, or its nominee. We reserve the right, however, to issue note
certificates registered in the name of the noteholders.
In the discussion that follows, whenever we talk about paying principal on
the notes, we mean at maturity or redemption. Also, in discussing the time for
notices and how the different interest rates are calculated, all times are New
York City time and all references to New York mean the City of New York, unless
otherwise noted.
The following terms may apply to each note as specified in the applicable
pricing or prospectus supplement and the note.
Redemptions
If we issue redeemable notes, we may redeem such notes at our option
unless an applicable pricing or prospectus supplement states otherwise. The
pricing or prospectus supplement will state the terms of redemption. We may
redeem notes in whole or in part by delivering written notice to the noteholders
no more than 60, and not less than 30, days prior to redemption. If we do not
redeem all the notes of a series at one time, the Trustee selects the notes to
be redeemed in a manner it determines to be fair.
Remarketed Notes
If we issue notes with remarketing features, an applicable pricing or
prospectus supplement will describe the terms for the notes including: interest
rate, remarketing provisions, our right to redeem notes, the holders' right to
tender notes, and any other provisions.
Book-Entry Notes - Registration, Transfer, and Payment of Interest and
Principal
Unless otherwise stated in a prospectus supplement, book-entry notes of a
series will be issued in the form of a global note that the Trustee will deposit
with The Depository Trust Company, New York, New York ("DTC"). This means that
we will not issue note certificates to each holder. One or more global notes
will be issued to DTC who will keep a computerized record of its participants
(for example, your broker) whose clients have purchased the notes. The
participant will then keep a record of its clients who purchased the notes.
Unless it is exchanged in whole or in part for a note certificate, a global note
may not be transferred; except that DTC, its nominees, and their successors may
transfer a global note as a whole to one another.
Beneficial interests in global notes will be shown on, and transfers of
global notes will be made only through, records maintained by DTC and its
participants.
DTC has provided us the following information: DTC is a limited-purpose
trust company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the United States
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered under the
provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds
securities that its participants ("Direct Participants") deposit with DTC. DTC
also records the settlement among Direct Participants of securities
transactions, such as transfers and pledges, in deposited securities through
computerized records for Direct Participants' accounts. This eliminates the need
to exchange note certificates. Direct Participants include securities brokers
and dealers, banks, trust companies, clearing corporations and certain other
organizations.
Other organizations such as securities brokers and dealers, banks and
trust companies that work through a Direct Participant also use DTC's book-entry
system. The rules that apply to DTC and its participants are on file with the
SEC.
A number of its Direct Participants and the New York Stock Exchange,
Inc., The American Stock Exchange, Inc. and the National Association of
Securities Dealers, Inc. own DTC.
We will wire principal and interest payments to DTC's nominee. We and the
Trustee will treat DTC's nominee as the owner of the global notes for all
purposes. Accordingly, we, the Trustee and any paying agent will have no direct
responsibility or liability to pay amounts due on the global notes to owners of
beneficial interests in the global notes.
It is DTC's current practice, upon receipt of any payment of principal or
interest, to credit Direct Participants' accounts on the payment date according
to their respective holdings of beneficial interests in the global notes as
shown on DTC's records. In addition, it is DTC's current practice to assign any
consenting or voting rights to Direct Participants whose accounts are credited
with notes on a record date. The customary practices between the participants
and owners of beneficial interests will govern payments by participants to
owners of beneficial interests in the global notes and voting by participants,
as is the case with notes held for the account of customers registered in
"street name." However, payments will be the responsibility of the participants
and not of DTC, the Trustee or us.
According to DTC, the foregoing information with respect to DTC has been
provided to the Direct Participants and other members of the financial community
for informational purposes only and is not intended to serve as a
representation, warranty or contract modification of any kind.
Unless otherwise described in a prospectus supplement, notes represented
by a global note will be exchangeable for note certificates with the same terms
in authorized denominations only if DTC notifies us that it is unwilling or
unable to continue as depositary or if DTC ceases to be a clearing agency
registered under applicable law and a successor depositary is not appointed by
us within 90 days.
Note Certificates-Registration, Transfer, and Payment of Interest and
Principal
If we issue note certificates, they will be registered in the name of the
noteholder. The notes may be transferred or exchanged, pursuant to
administrative procedures in the indenture, without the payment of any service
charge (other than any tax or other governmental charge) by contacting the
paying agent. Payments on note certificates will be made by check.
Interest Rate
The interest rate on the notes will either be fixed or floating. The
interest paid will include interest accrued to, but excluding, the date of
maturity or redemption. Interest is generally payable to the person in whose
name the note is registered at the close of business on the record date before
each interest payment date. Interest payable at maturity or redemption, however,
will be payable to the person to whom principal is payable.
Unless an applicable pricing or prospectus supplement states otherwise, if
we issue a note after a record date but on or prior to the related interest
payment date, we will pay the first interest payment on the interest payment
date after the next record date. We will pay interest payments by check or wire
transfer, at our option.
Fixed Rate Notes
A pricing or prospectus supplement will designate the record dates,
payment dates and the fixed rate of interest payable on a note. We will pay
interest monthly, quarterly or semi-annually, and upon maturity or redemption.
Unless an applicable pricing or prospectus supplement states otherwise, if any
payment date falls on a day that is not a business day, we will pay interest on
the next business day and no additional interest will be paid. Interest payments
will be the amount of interest accrued to, but excluding, each payment date.
Interest will be computed using a 360-day year of twelve 30-day months.
Floating Rate Notes
Each floating rate note will have an interest rate formula. The applicable
pricing supplement will state the initial interest rate or interest rate formula
on each note effective until the first interest reset date. The applicable
pricing or prospectus supplement will state the method and dates on which the
interest rate will be determined, reset and paid.
Events of Default
"Event of Default" means any of the following:
- failure to pay for three business days the principal of (or premium,
if any, on) any note of a series when due and payable;
- failure to pay for 30 days any interest on any note of any series
when due and payable;
- failure to perform any other requirements in such notes, or in the
Indenture in regard to such notes, for 90 days after notice;
- certain events of bankruptcy or insolvency; or any other event of
default specified in a series of notes.
An Event of Default for a particular series of notes does not necessarily
mean that an Event of Default has occurred for any other series of notes issued
under the Indenture. If an Event of Default occurs and continues, the Trustee or
the holders of at least 33% of the principal amount of the notes of the series
affected may require us to repay the entire principal of the notes of such
series immediately ("Repayment Acceleration"). In most instances, the holders of
at least a majority in aggregate principal amount of the notes of the affected
series may rescind a previously triggered Repayment Acceleration. However, if we
cause an Event of Default because we have failed to pay (unaccelerated)
principal, premium, if any, or interest, Repayment Acceleration may be rescinded
only if we have first cured our default by depositing with the Trustee enough
money to pay all (unaccelerated) past due amounts and penalties, if any.
The Trustee must within 90 days after a default occurs, notify the holders
of the notes of the series of default unless such default has been cured or
waived. We are required to file an annual certificate with the Trustee, signed
by an officer, concerning any default by us under any provisions of the
Indenture.
Subject to the provisions of the Indenture relating to its duties in case
of default, the Trustee shall be under no obligation to exercise any of its
rights or powers under the Indenture at the request, order or direction of any
holders unless such holders offer the Trustee reasonable indemnity. Subject to
the provisions for indemnification, the holders of a majority in principal
amount of the notes of any series may direct the time, method and place of
conducting any proceedings for any remedy available to, or exercising any trust
or power conferred on, the Trustee with respect to such notes.
Modification of Indenture
Under the Indenture, our rights and obligations and the rights of the
holders of any notes may be changed. Any change affecting the rights of the
holders of any series of notes requires the consent of the holders of not less
than a majority in aggregate principal amount of the outstanding notes of all
series affected by the change, voting as one class. However, we cannot change
the terms of payment of principal or interest, or a reduction in the percentage
required for changes or a waiver of default, unless the holder consents. We may
issue additional series of notes and take other action that does not affect the
rights of holders of any series by executing supplemental indentures without the
consent of any noteholders.
Consolidation, Merger or Sale
We may merge or consolidate with any corporation or sell substantially all
of our assets as an entirety as long as the successor or purchaser expressly
assumes the payment of principal, and premium, if any, and interest on the
notes.
Legal Defeasance
We will be discharged from our obligations on the notes of any series at
any time if:
o we deposit with the Trustee sufficient cash or government securities to
pay the principal, interest, any premium and any other sums due to the
stated maturity date or a redemption date of the note of the series, and
o we deliver to the Trustee an opinion of counsel stating that the federal
income tax obligations of noteholders of that series will not change as a
result of our performing the action described above.
If this happens, the noteholders of the series will not be entitled to
the benefits of the Indenture except for registration of transfer and
exchange of notes and replacement of lost, stolen or mutilated notes.
Covenant Defeasance
We will be discharged from our obligations under any restrictive covenant
applicable to the notes of a particular series if we perform both actions
described above. See Legal Defeasance. If this happens, any later breach of that
particular restrictive covenant will not result in Repayment Acceleration. If we
cause an Event of Default apart from breaching that restrictive covenant, there
may not be sufficient money or government obligations on deposit with the
Trustee to pay all amounts due on the notes of that series. In that instance, we
would remain liable for such amounts.
Governing Law
The Indenture and notes of all series will be governed by the laws of the
State of New York.
Concerning the Trustee
We and our affiliates use or will use some of the banking services of the
Trustee and other services of its affiliates in the normal course of business.
PLAN OF DISTRIBUTION
We may sell the notes (a) through agents; (b) through underwriters or
dealers; or (c) directly to one or more purchasers.
By Agents
Notes may be sold on a continuing basis through agents designated by us.
The agents will agree to use their reasonable efforts to solicit purchases for
the period of their appointment.
Unless the prospectus supplement or any pricing supplement states
otherwise, the notes will be sold to the public at 100% of their principal
amount. Agents will receive commissions from .125% to .750% of the principal
amount per note depending on the maturity of the note they sell.
The Agents will not be obligated to make a market in the notes. We cannot
predict the amount of trading or liquidity of the notes.
By Underwriters
If underwriters are used in the sale, the underwriters will acquire the
notes for their own account. The underwriters may resell the notes in one or
more transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale. The obligations of
the underwriters to purchase the notes will be subject to certain conditions.
The underwriters will be obligated to purchase all the notes of the series
offered if any of the notes are purchased. Any initial public offering price and
any discounts or concessions allowed or re-allowed or paid to dealers may be
changed from time to time.
Direct Sales
We may also sell notes directly. In this case, no underwriters or agents
would be involved.
General Information
Underwriters, dealers, and agents that participate in the distribution of
the notes may be underwriters as defined in the Securities Act of 1933 (the
"Act"), and any discounts or commissions received by them from us and any profit
on the resale of the notes by them may be treated as underwriting discounts and
commissions under the Act.
We may have agreements with the underwriters, dealers and agents to
indemnify them against certain civil liabilities, including liabilities under
the Act or to contribute to payments that each underwriter, dealer or agent may
be required to make in respect thereto.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, us or our affiliates in the ordinary course of their
businesses.
LEGAL OPINIONS
Our counsel, Simpson Thacher & Bartlett LLP, New York, NY, and one of our
lawyers will each issue an opinion about the legality of the notes for us. Dewey
Ballantine LLP, New York, NY will issue an opinion for the agents or
underwriters. From time to time, Dewey Ballantine LLP acts as counsel to our
affiliates for some matters.
EXPERTS
The consolidated financial statements and the related consolidated
financial statement schedule incorporated in this prospectus by reference from
the Company's Annual Report on Form 10-K for the year ended December 31, 2003
have been audited by Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their reports (which reports express an
unqualified opinion and include an explanatory paragraph concerning the adoption
of new accounting pronouncements in 2003), which are incorporated herein by
reference, and have been so incorporated in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
$125,000,000
APPALACHIAN POWER COMPANY
Floating Rate Notes, Series C, due 2007
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PROSPECTUS SUPPLEMENT
June 24, 2003
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Joint Book-Running Managers
Citigroup UBS Investment Bank
Co-Manager
BNY Capital Markets, Inc.