SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the Securities Exchange
Act of 1934
Check the appropriate box:
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APPALACHIAN POWER COMPANY
-------------------------
(Name of Registrant As Specified in Its Charter)
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APPALACHIAN POWER COMPANY
1 Riverside Plaza
Columbus, Ohio 43215
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO THE STOCKHOLDERS OF
APPALACHIAN POWER COMPANY:
The annual meeting of the stockholders of Appalachian Power Company will
be held on Tuesday, April 22, 2003, at 11:00 a.m. at the principal office of
American Electric Power Service Corporation, 1 Riverside Plaza, Columbus, Ohio,
for the following purposes:
1. To elect seven directors of the Company to hold office for one year
or until their successors are elected and qualified; and
2. To transact such other business (none known as of the date of this
notice) as may legally come before the meeting or any adjournment
thereof.
Only holders of record of Common Stock and certain issues of Cumulative
Preferred Stock, no par value, at the close of business on March 10, 2003 are
entitled to notice of and to vote at the annual meeting.
THERE WILL BE NO SOLICITATION OF PROXIES BY THE BOARD OF DIRECTORS OF
THE COMPANY.
TIMOTHY A. KING,
Secretary
March 24, 2003
INFORMATION STATEMENT
This information statement is being furnished in connection with the
annual meeting of stockholders of Appalachian Power Company (the "Company"), to
be held on Tuesday, April 22, 2003 at 11:00 a.m. at the principal office of
American Electric Power Service Corporation, 1 Riverside Plaza, Columbus, Ohio.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
Voting at Meeting
On March 10, 2003, the date for determining stockholders entitled to
notice of and to vote at the meeting, there were 177,899 shares of 4-1/2%
Cumulative Preferred Stock and 13,499,500 shares of Common Stock outstanding.
Each holder of the 4-1/2% Cumulative Preferred Stock and each holder of
Common Stock has the right to one vote for each share standing in such holder's
name on the books of the Company at the close of business on March 10, 2003 for
the election of directors and on any other business which may come before the
meeting. Holders of 5.40% and 5.92% Cumulative Preferred Stock issued by the
Company are not entitled to notice of, or to vote at, the meeting.
Principal Stockholders
American Electric Power Company, Inc. ("AEP"), 1 Riverside Plaza,
Columbus, Ohio 43215, a registered public utility holding company under the
Public Utility Holding Company Act of 1935, owns all of the Company's
outstanding Common Stock. The Common Stock represents approximately 99% of the
combined voting power of the capital stock of the Company entitled to vote at
the meeting. Management of the Company does not know of any person (including
any "group" as that term is used in Section 13(d)(3) of the Securities Exchange
Act of 1934) who beneficially owns more than 5% of the Cumulative Preferred
Stock of the Company entitled to vote at the meeting.
AEP also owns, directly or indirectly, all of the common stock of the
other companies which constitute the American Electric Power System (the "AEP
System"). The AEP System is an integrated electric utility system and, as a
result, the member companies of the AEP System, including the Company, have
contractual, financial and other business relationships with the other member
companies, such as participation in the AEP System savings and retirement plans
and tax returns; sales of electricity; and sales, transportation and handling of
fuel. American Electric Power Service Corporation (the "Service Corporation"), a
wholly-owned subsidiary of AEP, renders management, advisory, engineering and
other similar services at cost to the principal operating companies of the AEP
System, including the Company.
ELECTION OF DIRECTORS
Seven directors are to be elected to hold office for one year or until
their successors are elected and qualified. The Company has been informed that
AEP will nominate, and cast the votes of all of the outstanding shares of Common
Stock for, the persons named below. In the event that any of such persons should
unexpectedly be unable to stand for election, AEP has informed the Company that
it will cast its votes for a substitute chosen by the Board of Directors of the
Company and approved by AEP.
The following brief biographies of the nominees include their ages as of
March 15, 2003, an account of their business experience and the names of certain
publicly-held corporations of which they are also directors.
Name Age Business Experience
---- --- -------------------
E. LINN DRAPER, JR. 61 Chairman of the board and chief
executive officer of the Company, chairman
of the board, president and chief executive
officer of AEP and the Service Corporation.
Joined the Service Corporation in 1992 as
president and chief operating officer and
assumed his present position in 1993.
President of AEP and vice president and
director of the Company from 1992 until
assuming his present positions in 1993.
From 1987 until 1992 was chairman of the
board, president and chief executive
officer of Gulf States Utilities Company,
an unaffiliated electric utility. A
director of the Company, AEP, certain other
AEP System companies and BCP Management,
Inc., which is the general partner of
Borden Chemicals and Plastics L.P.
HENRY W. FAYNE 56 President of the Company, vice president
of AEP and executive vice president and
director of the Service Corporation.
Joined the Service Corporation in 1974,
became assistant controller in 1978,
controller in 1984, vice president and
controller in 1988, senior vice
president in 1993, senior vice
president-corporate planning and
budgeting in 1995, executive vice
president-financial services in 1998,
executive vice president-finance and
analysis in 2000 and assumed his present
position in 2001. A director of the
Company and president and director of
certain other AEP System companies.
THOMAS M. HAGAN 58 Vice president of the Company and
executive vice president-shared services
and director of the Service
Corporation. Joined the Service
Corporation in 2000 as senior vice
president-governmental affairs and
assumed his present position in 2002.
From 1996-2000 was senior vice
president-external affairs of Central
and South West Corporation ("CSW"). A
director of the Company and vice
president and director of certain other
AEP System companies.
ARMANDO A. PENA 58 Vice president and treasurer of the
Company, treasurer of AEP and senior
vice president-finance, treasurer and
director of the Service Corporation.
Joined the Service Corporation in 1971,
became assistant vice president in 1982,
vice president-finance in 1989, senior
vice president in 1996, senior vice
president-finance, treasurer and chief
financial officer in 1998 and assumed
his present position in 2000. Became
treasurer of the Company and AEP in
1996. A director of the Company and
vice president, treasurer and director
of certain other AEP System companies.
ROBERT P. POWERS 49 Vice president of the Company and
executive vice president- generation and
director of the Service Corporation.
Joined the Service Corporation in 1998
as senior vice president-nuclear
generation, became senior vice
president-nuclear operations in 2000,
executive vice president-nuclear
generation and technical services in
2001 and assumed his present position in
2003. From 1996-1998 was vice president
of Pacific Gas & Electric and plant
manager of its Diablo Canyon Nuclear
Generating Station. A director of the
Company and vice president and director
of certain other AEP System companies.
THOMAS V. SHOCKLEY, III 57 Vice president of the Company, vice
chairman of AEP and vice chairman and
chief operating officer of the Service
Corporation. A director of the Company,
AEP and vice president and director of
certain other AEP System companies.
Joined the Service Corporation in 2000
as vice chairman and assumed his present
position in 2001. From 1997-2000 was
president and chief operating officer of
CSW and from 1990-1997 was executive
vice president of CSW.
SUSAN TOMASKY 49 Vice president of the Company, vice
president, chief financial officer and
secretary of AEP, and executive vice
president-policy, finance and strategic
planning, assistant secretary and
director of the Service Corporation. A
vice president and director of the
Company and of certain other AEP System
companies. Joined the Service
Corporation in 1998 as senior vice
president and general counsel, became
executive vice president-legal, policy
and corporate communications and general
counsel in 2000 and assumed her present
position in 2001. From 1993-1997 was
general counsel of the Federal Energy
Regulatory Commission.
Dr. Draper, Messrs. Fayne, Hagan, Pena, Powers, Shockley and Ms. Tomasky
are directors of AEP Texas Central Company, AEP Texas North Company, Columbus
Southern Power Company, Kentucky Power Company, Ohio Power Company, Public
Service Company of Oklahoma and Southwestern Electric Power Company, all of
which are direct or indirect subsidiaries of AEP and have one or more classes of
publicly held preferred stock or debt securities. Dr. Draper, Messrs. Fayne,
Hagan, Powers, Shockley and Ms. Tomasky are directors of Indiana Michigan Power
Company. Dr. Draper, Messrs. Fayne, Hagan, Pena, Powers, Shockley and Ms.
Tomasky are also directors of AEP Generating Company, another subsidiary of AEP.
OTHER BUSINESS
Management does not intend to bring any matters before the meeting other
than the election of directors and does not know of any matters that will be
brought before the meeting by others.
EXECUTIVE COMPENSATION
Certain executive officers of the Company are employees of the Service
Corporation. The salaries of these executive officers are paid by the Service
Corporation and a portion of their salaries has been allocated and charged to
the Company. The following table shows for 2002, 2001 and 2000 the compensation
earned from all AEP System companies by the chief executive officer and the four
other most highly compensated executive officers (as defined by regulations of
the Securities and Exchange Commission) of the Company at December 31, 2002.
SUMMARY COMPENSATION TABLE
Annual Long-Term
Compensation Compensation
Awards Payouts
Name and Securities LTIP All Other
Principal Salary Bonus Underlying Payouts Compensation
Position Year ($)(1) ($)(2) Options(#) ($)(3) ($)(4)
- -------- ---- ------ ------ ------------------ ------------
E. Linn Draper, Jr. - 2002 1,054,038 -0- 350,000 -0- 135,417
Chairman of the board 2001 913,500 682,090 -0- 311,253 123,217
and chief executive 2000 850,000 485,775 700,000 -0- 106,699
officer the Company;
chairman of the board,
president and chief
executive officer of
AEP and the Service
Corporation; chairman
of the board and chief
executive officer of
other AEP System
companies
Thomas V. Shockley, III - 2002 642,461 49,116 150,000 -0- 122,141
Vice president and 2001 592,269 353,788 -0- 79,781 145,400
director of the Company; 2000 304,417 140,500 250,000 824,399 9,195,374
vice chairman and chief
operating officer of the
Service Corporation;
vice chairman of AEP;
vice president and
director of other
AEP System companies(5)
Henry W. Fayne - President 2002 481,846 49,116 88,000 -0- 80,830
and director of the 2001 421,615 305,861 -0- 83,697 75,955
Company; executive vice 2000 365,000 152,972 200,000 -0- 47,074
president and director of
the Service Corporation;
vice president of AEP;
president and director of
other AEP System companies
Susan Tomasky - Vice 2002 451,731 49,116 88,000 -0- 79,373
president and director 2001 411,577 300,365 -0- 54,455 73,853
of the Company; 2000 355,000 148,780 200,000 -0- 47,946
executive vice
president-policy, finance
and strategic planning,
assistant secretary and
director of the Service
Corporation; vice
president, secretary and
chief financial officer
of AEP; vice president
and director of other AEP
System companies
Robert P. Powers - 2002 401,539 49,116 88,000 -0- 64,054
Executive vice 2001 339,682 179,773 70,800 187,894 71,281
president and director
of the Company;
executive vice president-
generation and director of
the Service Corporation;
vie president and director
of other AEP System
companies(6)
__________
(1) Amounts in the Salary column reflect an additional day of pay earned in 2001
and 2002 related to the number of calendar workdays and holidays in each year
and AEP's conversion to bi-weekly pay periods.
(2) Amounts in the Bonus column reflect awards under the Senior Officer Annual
Incentive Compensation Plan (SOIP) for 2000 and 2001, except for Mr. Shockley
as disclosed in footnote 5. No SOIP awards were made for 2002. Payments
pursuant to the SOIP are made in the first quarter of the succeeding fiscal
year for performance in the year indicated. In addition, Messrs. Fayne,
Powers and Shockley and Ms. Tomasky received payments of $49,116 each in
February 2002 in recognition of their efforts in connection with a management
reorganization.
(3) Amounts in the Long-Term Compensation -- Payouts column reflect performance
share units earned under the AEP 2000 Long-Term Incentive Plan for three-year
performance periods concluding at the end of the year shown, except for Mr.
Shockley as disclosed in footnote 5 and Mr. Powers as disclosed in footnote
6. See below under Long-Term Incentive Plans -- Awards in 2002.
(4) Amounts in the All Other Compensation column, except for the additional
compensation to Mr. Shockley as disclosed in footnote 5, include (i) AEP's
matching contributions under the AEP Retirement Savings Plan and the AEP
Supplemental Savings Plan, a non-qualified plan designed to supplement the
AEP Savings Plan; (ii) subsidiary companies director fees; (iii) vehicle
allowance; (iv) split-dollar insurance; (v) above market earnings on deferred
compensation; and (vi) imputed interest on a pay advance provided to
employees impacted by a change in payroll schedule that shifted pay one week
in arrears. Split-dollar insurance represents the present value of the
interest projected to accrue for the employee's benefit on the current year's
insurance premium paid by AEP in February 2002. Cumulative net life insurance
premiums paid are recovered by AEP at the later of retirement or 15 years.
Detail of the 2002 amounts in the All Other Compensation column is shown
below.
Item Dr. Mr. Mr. Ms. Mr.
Draper Shockley Fayne Tomasky Powers
Savings Plan Matching
Contributions.............. $ 5,307 $ 9,000 $ 6,076 $ 6,201 $ 5,392
Supplemental Savings Plan
Matching Contributions..... 42,540 35,668 25,850 24,149 16,630
Subsidiaries Directors Fees 17,450 17,450 16,200 16,500 12,000
Vehicle Allowance.......... 14,400 12,000 12,000 12,000 12,000
Split-Dollar Insurance..... 54,573 45,726 20,174 20,006 17,640
Above Market Earnings on
Deferred Compensation...... -- 2,296 -- -- --
Imputed Interest on Pay
Advance.................... 1,147 -- 529 517 391
(5) Mr. Shockley joined AEP from Central and South West Corporation and became
an executive officer when the merger with CSW was consummated on June 15,
2000. The Salary column for 2000 for Mr. Shockley shows the amount earned for
his AEP service after the date of the merger. The amounts in the Bonus and
LTIP Payouts columns for 2000 represent his prorated payment under the CSW
Annual Incentive Plan and the value of Common Stock awarded under the CSW
1992 Long-Term Incentive Plan, respectively. He also received a payment of
$9,154,924 under his change in control agreement with CSW that is included in
the All Other Compensation column for 2000.
(6) No 2000 compensation information is reported for Mr. Powers because he was
not an executive officer in this year. Mr. Powers received $140,068 under the
Nuclear Performance Long-Term Incentive Compensation Plan in 2001.
OPTION GRANTS IN 2002
Individual Grants
--------------------------------------------
Number of Percent
Securities of Total
Underlying Options Exercise Grant Date
Options Granted to or Base Present
Granted Employees Price Expiration Value
(#)(1) In 2002(2) ($/Sh) Date ($)(3)
E. L. Draper, Jr........ 350,000 12.0 27.06 09-25-2012 1,529,500
T. V. Shockley, III..... 150,000 5.1 27.06 09-25-2012 655,500
H. W. Fayne............. 88,000 3.0 27.06 09-25-2012 384,560
S. Tomasky.............. 88,000 3.0 27.06 09-25-2012 384,560
R. P. Powers............ 88,000 3.0 27.06 09-25-2012 384,560
__________
(1) Options were granted on September 25, 2002 to the executive officers named
in the Summary Compensation Table, pursuant to the AEP 2000 Long-Term
Incentive Plan. All options granted on September 25, 2002 have an exercise
price equal to the closing price of AEP Common Stock on the New York Stock
Exchange Composite Transactions Tape on that date. All options granted in
2002 will vest annually in equal amounts over a three-year period beginning
on January 1, 2004. Options also fully vest upon termination due to
retirement after one year from the grant date or due to disability or death
and expire five years thereafter, or on their scheduled expiration date if
earlier. Options may also vest as the result of a change-in-control of AEP
(see discussion of the Change-in-Control Agreements on page 10). Options
expire upon termination of employment for reasons other than retirement,
disability or death, unless the Human Resources Committee determines that
circumstances warrant continuation of the options for up to five years.
Options are nontransferable.
(2) A total of 2,922,860 options were granted in 2002.
(3) Value was calculated using the Black-Scholes option valuation model. The
actual value, if any, ultimately realized depends on the market value of
AEP's Common Stock at a future date. Significant assumptions for the grants
are shown below:
Stock Price Volatility 29.47% Dividend Yield 6.13%
Risk-Free Rate of Return 3.51% Option Term 7 years
AGGREGATED OPTION EXERCISES IN 2002 AND YEAR-END OPTION VALUES
Shares
Acquired
on Value Number of Securities Value of Unexercised
Exercise Realized Underlying Unexercised In-The-Money
Name (#) ($) Options at 12-31-02(#) Options at 12-31-02($)
- ---- -------- -------- ---------------------- ----------------------
Exercisable Unexercisable Exercisable Unexercisable
E. L.
Draper, Jr. -- -- 233,333 816,667 -0- 94,500
T. V.
Shockley, III -- -- 83,333 316,667 -0- 40,500
H. W. Fayne -- -- 66,666 221,334 -0- 23,760
S. Tomasky -- -- 66,666 221,334 -0- 23,760
R. P. Powers -- -- 20,833 200,467 -0- 23,760
__________
* Based on the difference between the closing price of AEP Common Stock on the
New York Stock Exchange Composite Transactions Tape on December 31, 2002
($27.33) and the option exercise price. "In-the-money" means the market price
of the stock is greater than the exercise price of the option on the date
indicated.
LONG-TERM INCENTIVE PLANS -- AWARDS IN 2002
The performance share units set forth in the table below were awarded in
2002 pursuant to the Company's 2000 Long-Term Incentive Plan. Performance share
units are equivalent to shares of AEP Common Stock. Dividends are reinvested at
the closing price of the AEP Common Stock on the dividend payment date and
produce additional performance share units for the same performance period. The
value of performance share unit awards is dependent on the Company's total
shareholder return for the 3-year performance period relative to the S&P
electric utilities, the market price of AEP Common Stock at the end of the
performance period, the value of dividends paid during the performance period
and the AEP Common Stock price on each dividend payment date. The number of
performance share units earned can vary between 0% and 200% of the initial award
plus reinvested dividends.
The number of common stock equivalent units that may be earned at
threshold, target and maximum performance levels, excluding any reinvested
dividends, is shown in the table below. The Human Resources Committee may, at
its discretion, reduce the number of performance share unit targets otherwise
earned. In accordance with the performance goals established for the periods set
forth below, the threshold, target and maximum awards are equal to 20%, 100% and
200%, respectively, of the performance share unit awards. No payment will be
made for performance below the threshold.
Deferral of earned performance share units into phantom stock units
(equivalent to shares of AEP Common Stock) is mandatory until the officer has
met his or her stock ownership target discussed in the Human Resources Committee
Report. Once this target is met, officers may elect to continue to defer earned
performance share units or to receive subsequently earned awards in cash and/or
Common Stock.
Estimated Future Payouts of
Performance Share Units Under
Non-Stock Price-Based Plan
--------------------------------------
Performance
Number of Period Until
Performance Maturation Threshold Target Maximum
Name Share Units or Payout (#) (#) (#)
---- ----------- ----------- --- --- ---
E.L. Draper, Jr. 18,590 2002-2004 3,718 18,590 37,180
T.V. Shockley, III 9,820 2002-2004 1,964 9,820 19,640
H.W. Fayne 6,799 2002-2004 1,360 6,799 13,598
S. Tomasky 6,380 2002-2004 1,276 6,380 12,760
R.P. Powers 5,665 2002-2004 1,133 5,665 11,330
RETIREMENT BENEFITS
AEP maintains qualified and nonqualified defined benefit ERISA pension
plans for eligible employees. The tax-qualified plans are the American Electric
Power System Retirement Plan (AEP Retirement Plan) and the Central and South
West Corporation Cash Balance Retirement Plan (CSW Cash Balance Plan). The
nonqualified plans are the American Electric Power System Excess Benefit Plan
(AEP Excess Benefit Plan) (together with the AEP Retirement Plan, the AEP Plans)
and the Central and South West Corporation Special Executive Retirement Plan
(CSW SERP) (together with the CSW Cash Balance Plan, the CSW Plans), each of
which provides (i) benefits that cannot be payable under the respective
tax-qualified plans because of maximum limitations imposed on such plans by the
Internal Revenue Code and (ii) benefits pursuant to individual agreements with
certain AEP employees. The CSW Plans continue as separate plans for those AEP
System employees who were participants in the CSW Cash Balance Plan as of
December 31, 2000. Each of the executive officers named in the Summary
Compensation Table (other than Mr. Shockley) participates in the AEP Plans. Mr.
Shockley participates in the CSW Plans.
The benefit formula generally used for all plan participants (including
the executive officers named in the Summary Compensation Table) to calculate
benefit additions under the pension plans is a cash balance formula. When the
cash balance formula was added to each plan, an opening balance was established
for employees then participating under each plan's prior benefit formula (as
further described below), using a number of factors as set forth in the
appropriate plan. Under the cash balance formula, each participant has an
account established (for record keeping purposes only) to which dollar amount
credits are allocated each year based on a percentage of the participant's
eligible pay not in excess of $1,000,000. The applicable percentage is
determined by the participant's age and years of vesting service as of December
31 of each year (or as of the participant's termination date, if earlier). The
following table shows the applicable percentage used to determine the annual
dollar amount credits based on the sum of age and years of service indicated:
Sum of Age Plus Applicable
Years of Service Percentage
Less than 30 3.0%
30-39 3.5%
40-49 4.5%
50-59 5.5%
60-69 7.0%
70 or more 8.5%
All dollar amount balances in the cash balance accounts of participants
earn a fixed rate of interest that is also credited annually. The interest rate
for a particular year is the average rate of return of the 30-year Treasury Rate
for November of the prior year. For 2002, the interest rate was 5.12%. Interest
continues to be credited as long as the participant's balance remains in the
plan.
Under the cash balance formula, an amount equal to the vested balance
(including tax-qualified and nonqualified benefits) then credited to the account
is payable to the participant in the form of an immediate or deferred lump-sum
or an annuity or, with respect to the nonqualified benefits, in installments.
Benefits (both from the tax-qualified plans and the nonqualified plans) under
the cash balance formula are not subject to reduction for Social Security
benefits or other offset amounts. The estimated annual benefit that would be
payable under the cash balance formula to each of the executive officers named
in the Summary Compensation Table as a single life annuity at age 65 is:
Annual
Name Benefit
---- --------
E. L. Draper,Jr. $666,100
T. V. Shockley, III 213,700
H. W. Fayne 255,400
S. Tomasky 281,600
R. P. Powers 184,200
These amounts are based on the following assumptions:
o Salary amounts shown in the Salary column for calendar year 2002 are used for
the period from 2003 through the participant's age 65, with no subsequent
adjustments in future years, plus annual incentive awards at the 2002 target
level (as further described in the AEP Board Human Resources Committee Report
on Executive Compensation under the heading Annual Incentive on page 12).
o Conversion of the lump-sum cash balance to a single life annuity at age 65,
based on an interest rate of 4.96% and the 1994 Group Annuity Reserving
Table.
o Dr. Draper, Ms. Tomasky, Mr. Powers and Mr. Shockley have individual
agreements with AEP that credit them with years of service in addition to
their years of service with AEP as follows: Dr. Draper, 24 years; Ms.
Tomasky, 20 years; and Mr. Powers, 17 years. Mr. Shockley has an agreement
entered into with CSW prior to the merger with AEP under which he is entitled
to a retirement benefit that will bring his credited years of service to 30
if he remains employed with AEP until age 60 or thereafter. The agreement for
Dr. Draper provides that his supplemental retirement benefits are reduced by
pension entitlements, if any, from plans sponsored by prior employers.
In addition, certain employees who met certain defined criteria conditions
continue to earn a benefit using the pension formula that had been maintained
under their plans before the cash balance formula was implemented. Under the AEP
Plans, the pension formula had been based upon a participant's final average
pay. That final average pay benefit accrual formula will terminate on December
31, 2010. Only employees who have continuously participated in the AEP Plans
since December 31, 2000 accrue retirement benefits under both the cash balance
and final average pay formulas. Employees accruing benefits under both formulas
whose employment has terminated may choose to receive their benefits in any of
the forms permitted under the AEP Plans, and their benefits will be provided
under the formula that provides the greater amount for the chosen form. The
accrued benefit earned by an employee under the final average pay formula as of
December 31, 2010 (the date the final average pay formula will be discontinued)
is the minimum benefit an employee can receive from the AEP Plans after that
time.
The final average pay formula under the AEP Plans uses compensation for
the executive officers named in the Summary Compensation Table above (other than
Mr. Shockley) consisting of the average of the 36 consecutive months of the
officer's highest aggregate salary and Senior Officer Annual Incentive
Compensation Plan awards, shown in the Salary and Bonus columns, respectively,
of the Summary Compensation Table, out of the officer's most recent 10 years of
service.
The following table shows the approximate annual annuities that would be
payable to employees in certain higher salary classifications under the final
average pay formula provided through the AEP Plans, assuming termination of
employment on December 31, 2002 after various periods of service and with
benefits commencing at age 65.
PENSION PLAN TABLE
Years of Accredited Service
-----------------------------------------------------------
-----------------------------------------------------------
Highest Average
Annual Earnings 15 20 25 30 35 40
- --------------- -----------------------------------------------------------
$ 300,000 $ 69,030 $ 92,040 $115,050 $138,060 $ 161,070 $ 181,020
400,000 93,030 124,040 155,050 186,060 217,070 243,670
500,000 117,030 156,040 195,050 234,060 273,070 306,320
600,000 141,030 188,040 235,050 282,060 329,070 368,970
700,000 165,030 220,040 275,050 330,060 385,070 431,620
1,000,000 237,030 316,040 395,050 474,060 553,070 619,570
1,200,000 285,030 380,040 475,050 570,060 665,070 744,870
2,000,000 447,030 636,040 795,050 954,060 1,113,070 1,246,020
The amounts shown in the table are the straight life annuities payable
under the AEP Plans' final average pay formula without reduction for the joint
and survivor annuity. Retirement benefits listed in the table are not subject to
any further deduction for Social Security or other offset amounts. The
retirement annuity is reduced 3% per year in the case of a termination of
employment if an employee commences benefits between ages 55 and 62. If an
employee terminates employment and commences benefits at or after age 62, there
is no reduction in the retirement annuity.
As of December 31, 2002, for the executive officers named in the Summary
Compensation Table (except for Mr. Shockley as discussed below in connection
with the CSW Plans), the number of years of service applicable for the final
average pay formula were as follows: Dr. Draper, 34.9 years; Mr. Fayne, 28.1
years; Ms. Tomasky, 24.5 years; and Mr. Powers, 21.5 years. The years of service
for Dr. Draper, Ms. Tomasky and Mr. Powers include years of service provided by
their respective agreements with AEP as described above in connection with the
cash balance formula. The agreement for Dr. Draper provides that his
supplemental retirement benefits are reduced by pension entitlements, if any,
from plans sponsored by prior employers.
Under the CSW Plans, certain employees who were 50 or over and had
completed at least 10 years of service as of July, 1997, continued to earn a
benefit under prior benefit formulas that are based on career average pay and
final average pay. Of the executive officers named in the Summary Compensation
Table, only Mr. Shockley is an eligible participant under the CSW Plans and has
a choice following the termination of his employment to elect his benefit based
on the cash balance formula or the prior pension formulas.
Under the CSW Plans, the estimated annual annuity payable to Mr. Shockley
at age 65 under the final average pay formula computed as of December 31, 2002,
is $183,600. The annual normal retirement benefit payable to Mr. Shockley under
the final average pay formula is based on 1.67% of "Average Compensation" times
the number of years of credited service (reduced by no more than 50 percent of
his age 62 or later Social Security benefit), provided that the annual benefit
would be increased annually based upon percentage increases in the consumer
price index. "Average Compensation" equals the average annual compensation,
reported as Salary in the Summary Compensation Table, during the 36 consecutive
months of highest pay during the 120 months prior to retirement. Mr. Shockley
has an agreement entered into with CSW prior to the merger with AEP under which
he is entitled to a retirement benefit that will bring his credited years of
service to 30 if he remains employed with AEP until age 60 or thereafter. Mr.
Shockley's years of credited service and age, as of December 31, 2002, are 19
and 57.
In addition to the benefits described above, Mr. Fayne is the only
executive officer named in the Summary Compensation Table who is eligible for
certain supplemental retirement benefits if his pension benefits are adversely
affected by amendments to the AEP Retirement Plan made as a result of the Tax
Reform Act of 1986. Such benefits, if any, will be equal to any reduction
occurring because of such amendments. If Mr. Fayne's employment would have
terminated by December 31, 2002, he would not be eligible for any additional
annual supplemental benefit.
AEP also made available a voluntary deferred-compensation program in 1986,
which permitted certain members of AEP System management to defer receipt of a
portion of their salaries. Under this program, a participant was able to
annually defer up to 10% of his or her salary over a four-year period, and
receive supplemental retirement or survivor benefit payments over a 15-year
period. The amount of supplemental retirement payments received is dependent
upon the amount deferred, age at the time the deferral election was made, and
number of years until the participant retires. Mr. Fayne was the only executive
officer named in the Summary Compensation Table who participated in this
program. He deferred $9,000 of his salary annually over a four-year period and
therefore qualified for supplemental retirement payments of $95,400 per year for
fifteen years assuming he would retire at age 65.
SEVERANCE PLAN AND CHANGE-IN-CONTROL AGREEMENTS
Severance Plan. In connection with the merger with Central and South West
Corporation, AEP's Board of Directors adopted a severance plan on February 24,
1999, effective March 1, 1999, that included Mr. Fayne and Ms. Tomasky. The
severance plan provided for payments and other benefits if, at any time before
June 15, 2002 (the second anniversary of the merger consummation date), the
officer's employment was terminated (i) by AEP without "cause" or (ii) by the
officer because of a detrimental change in responsibilities or a reduction in
salary or benefits. Both Mr. Fayne and Ms. Tomasky remained employed with AEP
after June 15, 2002, such that the severance plan did not take effect for them.
Under the severance plan, the officer would have received:
o A lump sum payment equal to three times the officer's annual base salary his
or her plus target annual incentive under the Senior Officer Annual Incentive
Compensation Plan.
o Maintenance for a period of three additional years of all medical and dental
insurance benefits substantially similar to those benefits to which the
officer was entitled immediately prior to termination, reduced to the extent
comparable benefits are otherwise received.
o Outplacement services not to exceed a cost of $30,000 or use of an office and
secretarial services for up to one year.
AEP's obligation for the payments and benefits under the severance plan
was subject to the waiver by the officer of any other severance benefits that
may have been provided by AEP. In addition, the officer would have agreed to
refrain from the disclosure of confidential information relating to AEP.
Change-in-Control Agreements. AEP has change-in-control agreements with
its executives, including all of the executive officers named in the Summary
Compensation Table. If there is a "change-in-control" of AEP and the executive
officer's employment is terminated (i) by AEP without "cause" or (ii) by the
officer because of a detrimental change in responsibilities, a required
relocation or a reduction in salary or benefits, these agreements provide for
substantially the same payments and benefits as the severance plan with the
following additions:
o Three years of service credited for purposes of determining non-qualified
retirement benefits, with such credited service proportionately reduced to
zero if termination occurs between ages 62 and 65.
o Payment, if required, to make the officer whole for any excise tax imposed by
Section 4999 of the Internal Revenue Code.
Under these agreements, "change-in-control" means:
o The acquisition by any person of the beneficial ownership of securities
representing 25% or more of AEP's voting stock;
o A change in the composition of a majority of the Board of Directors under
certain circumstances within any two-year period; or
o Approval by the shareholders of the liquidation of AEP, disposition of all or
substantially all of the assets of AEP or, under certain circumstances, a
merger of AEP with another corporation.
In addition to the severance plan and the change-in-control agreements
described above, the American Electric Power System 2000 Long-Term Incentive
Plan authorizes the Human Resources Committee to include change-in-control
provisions in an award agreement (defined in a manner similar to the
change-in-control agreements described above). Such provisions may include one
or more of the following: (1) the acceleration or extension of time periods for
purposes of exercising, vesting in or realizing gains from any award; (2) the
waiver or modification of performance or other conditions related to the payment
or other rights under an award; (3) provision for the cash settlement of an
award for an equivalent cash value; and (4) modification or adjustment to the
award as the Committee deems appropriate to protect the interests of
participants upon or following a change-in-control. The outstanding award
agreements issued to the executive officers contain provisions that accelerate
the vesting and exercise dates of unexercised options and that offer a cash
settlement upon a change-in-control.
The AEP Excess Benefit Plan also provides that all accrued supplemental
retirement benefits become fully vested upon a change-in-control.
AEP BOARD HUMAN RESOURCES COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Human Resources Committee of the Board of Directors regularly reviews
executive compensation policies and practices and evaluates the performance of
management in the context of AEP's performance. None of the members of the
Committee is or has been an officer or employee of any AEP System company or
receives remuneration from any AEP System company in any capacity other than as
a director.
The Human Resources Committee recognizes that the executive officers are
charged with managing a large and diverse energy company with a balanced
portfolio of energy assets during extremely challenging and difficult times for
the industry.
AEP's executive compensation program is designed to maximize shareholder
value, to support the implementation of AEP's business strategy and to improve
both corporate and personal performance. The Committee's compensation policies
supporting this program are:
o To pay in a manner that motivates both short- and long-term performance,
focuses on meeting specified corporate goals and promotes the long-term
interests of shareholders.
o To place a significant amount of compensation for senior executives at risk
in the form of variable incentive compensation instead of fixed or base pay,
with much of this risk similar to the risk experienced by other AEP
shareholders.
o To establish compensation opportunities that enhance AEP's ability to
attract, retain, reward, motivate and encourage the development of
exceptionally knowledgeable, highly qualified and experienced executives.
o To target compensation levels that are reflective of current market practices
in order to maintain a stable, successful management team.
In carrying out its responsibilities, the Committee utilizes a nationally
recognized independent consultant to provide information on current trends in
executive compensation and benefits within the energy services industry and
among U.S. industrial companies in general, and to provide recommendations to
the Committee regarding AEP's compensation and benefits programs and practices.
The Committee annually reviews AEP's executive compensation program and
practices relative to a Compensation Peer Group comprised of companies that
represent the talent markets from which AEP must compete to attract and retain
executives. The Committee annually reviews and adjusts the composition of the
Compensation Peer Group to ensure that it provides appropriate compensation
comparisons. For 2002, the Compensation Peer Group consists of 12 large and
diversified energy services companies, plus 13 Fortune 500 companies, which,
taken as a whole, approximately reflect AEP's size, scale, business complexity
and diversity. The Committee generally uses the median pay range of the
Compensation Peer Group as its benchmark but does consider other comparisons,
such as industry-specific compensation surveys, when setting pay levels.
Stock Ownership Guidelines
The Committee believes that linking a significant portion of an
executive's current and potential future net worth to AEP's success, as
reflected in the stock price and dividends paid, gives the executive a stake
similar to that of AEP's shareholders and further encourages long-term
management strategies for the benefit of shareholders. Therefore, the Committee
maintains stock ownership guidelines for senior management participants who
receive performance share awards, described below, in order to further align
executive and shareholder interests.
Under the guidelines, the target ownership of AEP Common Stock is directly
related to the officer's corporate position, with the greatest ownership target
for the chief executive officer. The current stock ownership targets for the
executive officers named in the Summary Compensation Table are as follows: Chief
Executive Officer (CEO), 45,000 shares; Chief Operating Officer (COO), 20,000
shares; and other executive officers, 15,000 shares each. Those officers are
expected to achieve their ownership target within a five-year period. Common
Stock equivalents resulting from deferred compensation and contributions to the
AEP System Retirement Savings Plan and the AEP System Supplemental Retirement
Savings Plan are included in determining compliance with the ownership targets.
Dr. Draper, Mr. Fayne and Mr. Shockley have met their stock ownership guidelines
and all of the other executive officers named in the Summary Compensation Table
are on target to meet their ownership guidelines within the specified time
period. See the table on page 14 for actual ownership amounts.
Components of Executive Compensation
Base Salary. When reviewing base salaries, the Committee considers the pay
practices of its Compensation Peer Group; the responsibilities, performance, and
experience of each executive officer; reporting relationships; management
recommendations; and the relationship of the base salaries of executive officers
to the base salaries of other AEP employees. Base salaries are reviewed annually
and adjusted, when and as appropriate, to reflect individual and corporate
performance and changes within the Compensation Peer Group.
Base salary levels in 2002 for the CEO and the other executive officers of
AEP named in the Summary Compensation Table approximated the median of AEP's
Compensation Peer Group consistent with our policy to target the salaries of
executive officers at that level and to place more emphasis on incentive
compensation. For 2002, fixed base salary represented only about 30% of total
compensation for executive vice presidents and less than 25% for the CEO,
presuming target performance levels were achieved.
Annual Incentive. The primary purpose of annual incentive compensation is
to motivate senior management to meet and exceed annual objectives that are part
of the long-term strategic plan of AEP for maximizing shareholder value.
The annual Senior Officer Incentive Compensation Plan (SOIP) provides a
variable, performance-based portion of the executive officers' total
compensation.
SOIP participants are assigned an annual target award expressed as a
percentage of their base salary for the period. In January 2002, the Committee
established targets as follows: Dr. Draper, 75%; Mr. Shockley, 65%; and the
other executive officers named in the compensation table, 60%.
SOIP awards for 2002 were based on the following pre-established
performance measures:
o Earnings Per Share (1/3),
o Relative return on stockholder equity (1/3), and
o Annual strategic objectives (1/3), which include:
o Safety,
o Workplace Diversity, and
o Credit Quality.
Actual awards for 2002 could have varied from 0% to 216.7% of the target
award based on performance. The maximum award was based on a maximum payout of
200% of target for each of the performances measures described above, except for
Earnings Per Share, which had a maximum payout of 250% of target. Annual
incentive payments are subject to reduction at the discretion of the Committee.
Despite performance that would have resulted in a 40%-50% payout, the
Committee elected not to make Senior Officer Incentive Compensation Plan
payments for 2002 due to AEP's overall financial performance.
Long-Term Incentive. The primary purpose of longer-term, equity-based,
incentive compensation is to motivate senior managers to maximize shareholder
value by linking a portion of their compensation directly to shareholder return.
Long-term incentive awards to executive officers are made under the
shareholder-approved American Electric Power System 2000 Long-Term Incentive
Plan. This plan provides various types of long-term incentives and performance
measures from which the Committee may select to provide the most effective
incentives to Company management for achievement of AEP's strategies and goals.
In 2002, the Committee awarded long-term incentive compensation to executive
officers as described below.
Stock Options
The Committee considers stock options to be an integral component of AEP's
total compensation package for executive officers and anticipates that it will
continue to make prudent use of stock options for executive officers and other
selected employees in the future.
The Committee periodically establishes guidelines for stock option awards
for each executive officer level. These guidelines are established at levels
that, in combination with the other components of AEP's executive compensation
program, provide compensation that approximates the median of AEP's Compensation
Peer Group for each officer level. For 2002, these guidelines were set as annual
grant targets rather than two- to three-year grant targets as had been the case
in past years. The Committee also considers each executive officer's current
performance and potential future contribution to AEP in determining the number
of stock options to grant to each executive officer. Accordingly, in September
2002, the Committee granted the number of stock options to the executive
officers shown in the Summary Compensation Table on page 5.
Performance Shares
The Committee has annually granted target performance share awards to
senior AEP management for the three-year performance period beginning January
1st of the current year. Performance share awards are earned based on AEP's
subsequent three-year total shareholder return measured relative to the S&P
electric utility index with at least median performance required to earn the
target award. The value of performance share awards ultimately earned for a
performance period can range from 0%-200% of the target value plus accumulated
dividends. In January 2002, the Committee established targets equal to the same
percentages of base salaries as those for the SOIP, as previously described.
Payments of earned performance share awards are initially deferred in the
form of phantom stock units (equivalent to shares of AEP Common Stock) until the
participant has met his or her stock ownership target. Such deferrals continue
until at least their termination of employment. Once participants reach their
respective stock ownership target, they may then elect either to defer
subsequent awards into AEP's deferred compensation plan, which offers returns
equivalent to various market based investment options including AEP stock
equivalents, or to receive further earned performance share awards in cash
and/or Common Stock. The performance share targets and a further description of
performance share awards are shown under Long-Term Incentive Plans - Awards in
2002.
AEP's total shareholder return for the 2000-2002 performance period ranked
20th relative to the S&P peer utilities, which falls below the minimum level
required for an award payout. Therefore, no performance shares were awarded for
the three-year period ending December 31, 2002.
Tax Policy on Deductibility of Compensation
The Committee has considered the impact of Section 162(m) of the Internal
Revenue Code, which provides a limit on the deductibility of compensation in
excess of $1,000,000 paid in any year to AEP's chief executive officer or any of
its other four executive officers named in the Summary Compensation Table who
are serving as such at the end of the year. It is the Committee's intention to
qualify incentive compensation for tax deductibility under Section 162 (m) to
the extent that this objective is consistent with sound executive compensation
principles.
Award payments under the AEP 2000 Long-Term Incentive Plan have been
structured to be exempt from the deduction limit because they are made pursuant
to a shareholder-approved, performance-driven plan.
Award payments under the SOIP are not eligible for the performance-based
exemption and the deduction limit does apply to such awards. However, because
Dr. Draper is contributing to the savings program and has elected to defer his
annual incentive awards to dates past his retirement from AEP (providing an
exemption from the deduction limit), the Committee has not deemed it necessary
at this time to qualify compensation paid pursuant to the SOIP for deductibility
under Section 162(m). The Committee may decide to do so in the future.
No executive officer named in the Summary Compensation Table had taxable
compensation paid in 2002 in excess of the deduction limit and all such
compensation was fully deductible. The Committee intends to continue to evaluate
the impact of this Code restriction.
Human Resources Committee Members
John P. DesBarres, Chair William R. Howell
Robert W. Fri Donald G. Smith
SHARE OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the beneficial ownership of AEP Common
Stock and stock-based units as of January 1, 2003 for all directors as of the
date of this Information Statement, each of the persons named in the Summary
Compensation Table and all directors and executive officers as a group. Unless
otherwise noted, each person had sole voting and investment power over the
number of shares of AEP Common Stock and stock-based units of AEP set forth
across from his or her name. Fractions of shares and units have been rounded to
the nearest whole number.
Options
Exercisable
Stock Within
Name Shares Units(a) 60 Days Total
---- ------ -------- ------- -----
E. L. Draper, Jr............ 5,368(b)(c) 117,803 466,666 589,837
H. W. Fayne................. 6,454(b)(d) 12,362 133,333 152,149
T. M. Hagan................. 12,725(b) 140 41,666 54,531
A. A. Pena.................. 6,528(b) 6,188 41,666 54,382
R. P. Powers................ 596(b) 1,293 65,266 67,155
T. V. Shockley, III......... 44,401(b)(d)(e) -- 166,666 211,067
S. Tomasky.................. 1,116(b) 6,126 133,333 140,575
All directors, nominees and
executive officers as a group
(7 persons).............. 162,419(d)(f) 143,912 1,048,596 1,354,927
__________
(a) This column includes amounts deferred in stock units and held under AEP's
various director and officer benefit plans.
(b) Includes the following numbers of share equivalents held in the AEP
Retirement Savings Plan: Dr. Draper, 4,659; Mr. Fayne, 5,804; Mr. Hagan,
2,515; Mr. Pena, 4,820; Mr. Powers, 596; Mr. Shockley, 7,104; Ms. Tomasky,
1,116; and all directors and executive officers, 26,614.
(c) Includes the following numbers of shares held in joint tenancy with a family
member: Dr. Draper, 661.
(d) Does not include, for Messrs. Fayne and Shockley and Ms. Tomasky, 85,231
shares in the American Electric Power System Educational Trust Fund over
which Messrs. Fayne and Shockley share voting and investment power as
trustees (they disclaim beneficial ownership). The amount of shares shown
for all directors and executive officers as a group includes these shares.
(e) Includes the following numbers of shares held by family members over which
beneficial ownership is disclaimed: Mr. Shockley, 496.
(f) Represents less than 1% of the total number of shares outstanding.
MEETINGS OF THE BOARD OF DIRECTORS
Regular meetings of the Board of Directors were held once each month
during the year. In addition, the Board of Directors holds special meetings from
time to time as required. During 2002, the Board held twelve regular meetings.
Directors of the Company receive a fee of $50 for each meeting of the
Board of Directors attended in addition to their salaries.
The Board of Directors of the Company has no committees.
INDEPENDENT AUDITORS
The public accounting firm of Deloitte & Touche LLP has been selected as
the independent auditors of the Company for the year 2003.
A representative of Deloitte & Touche LLP will not be present at the
meeting unless prior to the day of the meeting the Secretary of the Company has
received written notice from a stockholder addressed to the Secretary at 1
Riverside Plaza, Columbus, Ohio 43215, that such stockholder will attend the
meeting and wishes to ask questions of a representative of the firm.
TIMOTHY A. KING,
Secretary
March 24, 2003