[RED HERRING LEGEND]
This prospectus supplement and the accompanying prospectus relate to an
effective registration statement under the Securities Act of 1933, but are not
complete and may be changed. This prospectus supplement and the accompanying
prospectus are not an offer to sell these securities and are not soliciting an
offer to buy these securities in any jurisdiction where the offer and sale is
not permitted.
SUBJECT TO COMPLETION, DATED APRIL 30, 2003
PROSPECTUS SUPPLEMENT
(To prospectus dated April 29, 2003)
$ ,000,000
APPALACHIAN POWER COMPANY
$ % Senior Notes, Series G, due 20
$ % Senior Notes, Series H, due 20
Interest on the Series G Notes and Series H Notes (collectively, the
"Senior Notes") is payable semi-annually on and of each year, beginning , 2003.
The Series G Notes will mature on , 20 . The Series H Notes will mature on , 20
.. We may redeem the Senior Notes at our option at any time either as a whole or
in part at a redemption price equal to 100% of the principal amount of the
Senior Notes being redeemed plus a make-whole premium, together with accrued and
unpaid interest to the redemption date. The Senior Notes do not have the benefit
of any sinking fund.
The Senior Notes are unsecured and rank equally with all of our other
unsecured and unsubordinated indebtedness from time to time outstanding and will
be effectively subordinated to all of our secured debt from time to time
outstanding, including $491,237,000 of outstanding first mortgage bonds as of
March 31, 2003. We will issue the Senior Notes only in registered form in
multiples of $1,000.
Per Per
Series Series
G Note Total H Note Total
Total
Public offering price(1) % $ % $
Underwriting discount % $ % $
Proceeds, before expenses,
to Appalachian Power Company % $ % $
(1)Plus accrued interest, if any, from , 2003.
INVESTING IN THESE NOTES INVOLVES RISKS. SEE THE SECTION ENTITLED "RISK
FACTORS" BEGINNING ON PAGE 2 OF THE ACCOMPANYING PROSPECTUS FOR MORE
INFORMATION.
Neither the U.S. Securities and Exchange Commission nor any state
securities commission has approved or disapproved of the Senior Notes or
determined that this prospectus supplement or the accompanying prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
The Senior Notes will be ready for delivery in book-entry form only
through The Depository Trust Company on or about , 2003.
Joint Book-Running Managers
Banc One Capital Markets, Inc. Credit Suisse First Boston
----------
BNP Paribas McDonald Investments Inc. TD Securities
The date of this prospectus supplement is , 2003.
Page
TABLE OF CONTENTS
Prospectus Supplement
USE OF PROCEEDS............................................... S-3
SUPPLEMENTAL DESCRIPTION OF THE SENIOR NOTES.................. S-3
UNDERWRITING.................................................. S-6
NOTICE TO CANADIAN RESIDENTS.................................. S-8
Prospectus
THE COMPANY....................................................... 2
RISK FACTORS...................................................... 2
PROSPECTUS SUPPLEMENTS............................................12
RATIO OF EARNINGS TO FIXED CHARGES................................12
WHERE YOU CAN FIND MORE INFORMATION...............................12
USE OF PROCEEDS ..................................................13
DESCRIPTION OF THE NOTES .........................................13
PLAN OF DISTRIBUTION..............................................19
LEGAL OPINIONS....................................................20
EXPERTS...........................................................20
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.
USE OF PROCEEDS
The Company proposes to use the net proceeds from the sale of the Senior
Notes to redeem or repurchase certain of its outstanding debt, to fund its
construction program and for other corporate purposes. Proceeds may be
temporarily invested in short-term instruments pending their application to the
foregoing purposes.
Certain first mortgage bonds, totaling approximately $120,000,000, may be
redeemed using the net proceeds of the sale of the Senior Notes. The following
series of the Company's first mortgage bonds, designated medium term notes, may
be redeemed at 100% of the principal amount outstanding: the 8.50% series, due
2022 and the 7.15% series, due 2023. The Company's 7.80% series, due 2023 may be
redeemed at 103.90% of the principal amount outstanding.
The Company has estimated that its consolidated construction costs
(inclusive of allowance for funds used during construction) for 2003 will be
approximately $247,900,000.
SUPPLEMENTAL DESCRIPTION OF THE SENIOR NOTES
The following description of the particular terms of the Senior Notes
supplements and in certain instances replaces the description of the general
terms and provisions of the Senior Notes under "Description of the Notes" in the
accompanying prospectus. We will issue the Senior 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 Series G Notes and Series H Notes will initially be issued in an
aggregate principal amount of $ ,000,000 and $ ,000,000, respectively. We may,
without consent of the holders of either series of the Senior Notes, issue
additional notes having the same ranking, interest rate, maturity and other
terms as the applicable Senior Notes. These notes, together with the applicable
Senior Notes, will be a single series of notes under the Indenture.
The Series G Notes will mature and become due and payable, together with
any accrued and unpaid interest, on , 20 and will bear interest at the rate of %
per year from , 2003 until , 20 . The Series G Notes are not subject to any
sinking fund provision.
The Series H Notes will mature and become due and payable, together with
any accrued and unpaid interest, on , 20 and will bear interest at the rate of %
per year from , 2003 until , 20 . The Series H Notes are not subject to any
sinking fund provision.
Interest on each Senior Note will be payable semi-annually in arrears on
each and and at redemption, if any, or maturity. The initial interest payment
date is , 2003. Each payment of interest shall include interest accrued through
the day before such interest payment date. Interest on the Senior Notes will be
computed on the basis of a 360-day year consisting of twelve 30-day months.
We will pay interest on the Senior Notes (other than interest payable at
redemption, if any, or maturity) in immediately available funds to the owners of
the Senior Notes as of the Regular Record Date (as defined below) for each
interest payment date.
We will pay the principal of the Senior Notes and any premium and interest
payable at redemption, if any, or at maturity in immediately available funds at
the office of The Bank of New York, 101 Barclay Street in New York, New York.
If any interest payment date, redemption date or the maturity is not a
Business Day (as defined below), we will pay all amounts due on the next
succeeding Business Day and no additional interest will be paid.
"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.
The "Regular Record Date" will be the or pior to the relevant
interest payment date.
Optional Redemption
We may redeem the Senior Notes at our option at any time, upon no more
than 60 and not less than 30 days' notice by mail. We may redeem the Senior
Notes either as a whole or in part at a redemption price equal to the greater of
(1) 100% of the principal amount of the Senior Notes being redeemed and (2) the
sum of the present values of the remaining scheduled payments of principal and
interest on the Senior Notes being redeemed (excluding the portion of any such
interest accrued to the date of redemption) discounted (for purposes of
determining present value) to the redemption date on a semi-annual basis
(assuming a 360-day year consisting of twelve 30-day months) at the Treasury
Rate (as defined below) plus basis points for the Series G Notes and basis
points for the Series H Notes, plus, in each case, accrued interest thereon to
the date of redemption.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the Senior Notes that would be utilized, at the time of
selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the remaining term
of the Senior Notes.
"Comparable Treasury Price" means, with respect to any redemption date,
(1) the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
Business Day preceding such redemption date, as set forth in the daily
statistical release (or any successor release) published by the Federal Reserve
Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities" or (2) if such release (or any successor release) is not
published or does not contain such prices on such third Business Day, the
Reference Treasury Dealer Quotation for such redemption date.
"Independent Investment Banker" means one of the Reference Treasury
Dealers appointed by us and reasonably acceptable to the Trustee.
"Reference Treasury Dealer" means a primary U.S. Government Securities
Dealer selected by us and reasonably acceptable to the Trustee.
"Reference Treasury Dealer Quotation" means, with respect to the Reference
Treasury Dealer and any redemption date, the average, as determined by the
Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by such Reference Treasury Dealer at or before 5:00 p.m.,
New York City time, on the third Business Day preceding such redemption date.
"Treasury Rate" means, with respect to any redemption date, the rate per
year equal to the semi-annual equivalent yield to maturity of the Comparable
Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as
a percentage of its principal amount) equal to the Comparable Treasury Price for
such redemption date.
Limitations on Liens
So long as any of our Senior 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 Senior 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.
UNDERWRITING
Banc One Capital Markets, Inc. and Credit Suisse First Boston LLC are
acting as representatives of the underwriters named below. 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 and not
jointly agreed to purchase from us the respective principal amount of Senior
Notes set forth opposite its name below:
Principal Amount Principal Amount
Underwriter of Series G Notes of Series H Notes
----------- ------------------- -------------------
Banc One Capital Markets, Inc. $ $
Credit Suisse First Boston LLC
BNP Paribas Securities Corp.
McDonald Investments Inc.
TD Securities (USA) Inc.
$ ,000,000 $ ,000,000
=============== ===============
In the underwriting agreement, the underwriters have agreed to the terms
and conditions to purchase all of the Senior Notes offered if any of the Senior
Notes are purchased.
The expenses associated with the offer and sale of the Senior Notes are
expected to be approximately $ for the Series G Notes and $ for the Series H
Notes.
The underwriters propose to offer the Senior 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 % per Series G Note and % per Series H Note. The underwriters may allow, and
such dealers may reallow, a discount not in excess of % per Series G Note and %
per Series H 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 Senior
Notes. The Senior Notes will not be listed on any securities exchange. Certain
of the underwriters have advised us that they intend to make a market in the
Senior Notes. The underwriters will have no obligation to make a market in the
Senior Notes, however, and may cease market making activities, if commenced, at
any time. There can be no assurance of a secondary market for the Senior Notes,
or that the Senior Notes may be resold.
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 purchase and sell
the Senior Notes in the open market. 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 Senior Notes and syndicate
short positions involve the sale by the underwriters of a greater number of
Senior 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 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
Senior Notes are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Senior Notes, which may 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.
Some of the underwriters or their affiliates engage in transactions with,
and have performed services for, us and our affiliates in the ordinary course of
business.
Credit Suisse First Boston LLC will make the Senior Notes available for
distribution on the Internet through a proprietary Web site and/or third-party
system operated by Market Axess Inc., an Internet-based communications
technology provider. Market Axess Inc. is providing the system as a conduit for
communications between Credit Suisse First Boston LLC and its customers and is
not a party to any transactions. We do not believe that Market Axess Inc. will
function as an underwriter or agent of the issuer nor do we believe that Market
Axess Inc. will act as a broker for any customer of Credit Suisse First Boston
LLC. Market Axess Inc., a registered broker-dealer, will receive compensation
from Credit Suisse First Boston LLC based on transactions the underwriters
conduct through the system. Credit Suisse First Boston LLC will make the Senior
Notes available to its customers through the Internet distributions, whether
made through a proprietary or third-party system, on the same terms as
distributions made through other channels.
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the Senior Notes in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of Senior Notes are made. Any resale of the Senior Notes in Canada must
be made under applicable securities laws, which will vary depending on the
relevant jurisdiction, and which may require resales to be made under available
statutory exemptions or under a discretionary exemption granted by the
applicable Canadian securities regulatory authority. Purchasers are advised to
seek legal advice prior to any resale of the Senior Notes.
Representation of Purchasers
By purchasing Senior Notes in Canada and accepting a purchase confirmation
a purchaser is representing to us and the dealer from whom the purchase
confirmation is received that
o the purchaser is entitled under applicable provincial securities laws to
purchase the Senior Notes without the benefit of a prospectus qualified
under those securities laws,
o where required by law, that the purchaser is purchasing as principal and
not as agent, and
o the purchaser has reviewed the text above under Resale Restrictions.
Rights of Action - Ontario Purchasers Only
Under Ontario securities legislation, a purchaser who purchases a security
offered by this prospectus during the period of distribution will have a
statutory right of action for damages, or while still the owner of the Senior
Notes, for rescission against us in the event that this prospectus contains a
misrepresentation. A purchaser will be deemed to have relied on the
misrepresentation. The right of action for damages is exercisable not later than
the earlier of 180 days from the date the purchaser first had knowledge of the
facts giving rise to the cause of action and three years from the date on which
payment is made for the Senior Notes. The right of action for rescission is
exercisable not later than 180 days from the date on which payment is made for
the Senior Notes.
If a purchaser elects to exercise the right of action for rescission, the
purchaser will have no right of action for damages against us. In no case will
the amount recoverable in any action exceed the price at which the Senior Notes
were offered to the purchaser and if the purchaser is shown to have purchased
the securities with knowledge of the misrepresentation, we will have no
liability. In the case of an action for damages, we will not be liable for all
or any portion of the damages that are proven not to represent the depreciation
in value of the Senior Notes as a result of the misrepresentation relied upon.
These rights are in addition to, and without derogation from, any other rights
or remedies available at law to an Ontario purchaser. The foregoing is a summary
of the rights available to an Ontario purchaser. Ontario purchasers should refer
to the complete text of the relevant statutory provisions.
Enforcement of Legal Rights
All of our directors and officers as well as the experts named herein may
be located outside of Canada and, as a result, it may not be possible for
Canadian purchasers to effect service of process within Canada upon us or those
persons. All or a substantial portion of our assets and the assets of those
persons may be located outside of Canada and, as a result, it may not be
possible to satisfy a judgment against us or those persons in Canada or to
enforce a judgment obtained in Canadian courts against us or those persons
outside of Canada.
Taxation and Eligibility for Investment
Canadian purchasers of Senior Notes should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Senior
Notes in their particular circumstances and about the eligibility of the Senior
Notes for investment by the purchaser under relevant Canadian legislation.
PROSPECTUS
APPALACHIAN POWER COMPANY
1 Riverside Plaza
Columbus, Ohio 43215
614-716-1000
$450,000,000
UNSECURED NOTES
TERMS OF SALE
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. The following terms
may apply to the notes that we may sell at one or more times.
- 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
- Issued with original issue discount
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 April 29, 2003.
THE COMPANY
We generate, sell, purchase, transmit and distribute electric power. We
serve approximately 925,000 retail customers in southwestern Virginia and
southern West Virginia. We also sell and transmit power at wholesale to other
electric utilities, municipalities, electric cooperatives and non-utility
entities 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 AEP are
located at 1 Riverside Plaza, Columbus, Ohio 43215 (telephone number
614-716-1000).
RISK FACTORS
RISKS RELATED TO OUR POWER TRADING
AND WHOLESALE BUSINESSES
o We have significantly reduced the scope and scale of our power trading and
marketing operations.
In October 2002 AEP announced its plans to reduce the exposure to energy
trading markets of its subsidiaries that trade power (including us) and to
downsize the trading and wholesale marketing operations conducted on behalf of
such subsidiaries. It is expected that in the future AEP's power trading and
marketing operations will be 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 is unable to predict
the effect this downsizing of our trading operations will have on 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 mandated 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 Federal Energy Regulatory Commission (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 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.
Certain FERC 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 do not fully hedge against price changes in commodities.
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 (which AEP recently
lowered as part of its announced effort to reduce the degree and scale of our
trading and marketing operations) 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.
In February 2002, the FERC issued an order directing its Staff to conduct
a fact-finding investigation into whether any entity, including Enron Corp.,
manipulated short-term prices in electric energy or natural gas markets in the
West or otherwise exercised undue influence over wholesale prices in the West,
for the period January 1, 2000, forward. In April 2002, AEP furnished certain
information to the FERC in response to their related data request.
Pursuant to the FERC's February order, on May 8, 2002, the FERC issued
further data requests, including requests for admissions, with respect to
certain trading strategies engaged in by Enron Corp. and, allegedly, traders of
other companies active in the wholesale electricity and ancillary services
markets in the West, particularly California, during the years 2000 and 2001.
This data request was issued to AEP as part of a group of over 100 entities
designated by the FERC as all sellers of wholesale electricity and/or ancillary
services to the California Independent System Operator and/or the California
Power Exchange.
The May 8, 2002 FERC data request required senior management to conduct an
investigation into AEP's trading activities during 2000 and 2001 and to provide
an affidavit as to whether AEP engaged in certain trading practices that the
FERC characterized in the data request as being potentially manipulative. AEP's
senior management complied with the order and denied its involvement with those
trading practices.
On May 21, 2002, the FERC issued a further data request with respect to
this matter to AEP and over 100 other market participants requesting information
for the years 2000 and 2001 concerning "wash", "round trip" or "sale/buy back"
trading in the Western System Coordinating Council ("WSCC"), which involves the
sale of an electricity product to another company together with a simultaneous
purchase of the same product at the same price (collectively, "wash sales").
Similarly, on May 22, 2002, the FERC issued an additional data request with
respect to this matter to AEP and other market participants requesting similar
information for the same period with respect to the sale of natural gas products
in the WSCC and Texas. After reviewing its records, AEP responded to the FERC
that it did not participate in any "wash sale" transactions involving power or
gas in the relevant market. AEP further informed the FERC that certain of its
traders did engage in trades on the Intercontinental Exchange, an electronic
electricity trading platform owned by a group of electricity trading companies,
including AEP, on September 21, 2001, the day on which all brokerage commissions
for trades on that exchange were donated to charities for the victims of the
September 11, 2001 terrorist attacks, which do not meet the FERC criteria for a
"wash sale" but do have certain characteristics in common with such sales. In
response to a request from the California attorney general for a copy of AEP's
responses to the FERC inquiries, AEP provided the pertinent information.
The Public Utilities Commission of Texas, which has jurisdiction over
several of our affiliates, also issued similar data requests to AEP and other
power marketers. AEP responded to such data request by the July 2, 2002 response
date. We understand that the SEC and US Commodity Futures Trading Commission
("CFTC") are also looking into "wash sale" trading practices. The CFTC issued a
subpoena to AEP on June 17, 2002 requesting information with respect to these
matters. AEP responded to CFTC. In addition, the US Department of Justice made a
civil investigation demand to AEP and other electric generating companies
concerning their investigation of the Intercontinental Exchange. In August 2002,
AEP received an informal data request from the SEC asking it to voluntarily
provide documents related to "round-trip" or "wash" trades and AEP has provided
the requested information to the SEC. In March 2003, AEP received a subpoena
from the SEC. The subpoena seeks additional information and is part of the SEC's
formal investigative process.
AEP recently completed a review of its trading activities in the United
States for the last three years involving sequential trades with the same terms
and counterparties. The revenue from such trading is not material to either our
financial statements or AEP's. We believe that substantially all these
transactions involve economic substance and risk transference and do not
constitute "wash sales".
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 Our financial performance may be adversely affected if we are unable to
successfully operate our electric generating facilities.
Our performance depends on the successful operation of our electric generating
facilities. Operating electric generating facilities involves many risks,
including:
operator error and breakdown or failure of equipment or processes;
operating limitations that may be imposed by environmental or
other regulatory requirements;
labor disputes;
fuel supply interruptions; and
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 operation.
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 markets. These events are causing a decrease in the
number of significant participants in the wholesale power markets, at least
temporarily, which could result in a decrease in the volume and liquidity in the
wholesale power markets. Such decreases have had a negative impact on our
results of operations, cash flows and financial condition. Reduced liquidity in
these markets 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 Uncertainty regarding FERC proposed security standards
In July 2002, the FERC published for comment its proposed security
standards as part of the Standards for Market Design ("SMD"). These security
standards are intended to ensure all market participants have a basic security
program that effectively protects the electric grid and related market
activities and require compliance by January 1, 2004. The impact of these
proposed standards is far-reaching and has significant penalties for
non-compliance. These standards apply to marketers, transmission owners, and
power producers, including us. Compliance with these standards would represent a
significant effort that will impact us. Unless the cost of compliance can be
recovered from customers, results of operations and cash flows would be
adversely affected.
o Potential for disruption 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. No such conference has been held and management is unable to
predict the timing of any further action by the FERC or its affect on future
results of our operations and cash flows.
RISKS RELATED TO OUR REGULATED
BUSINESS AND EVOLVING REGULATION
o The laws and regulations governing restructuring of the wholesale
generation market in Virginia and West Virginia have not yet been
interpreted or adopted 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. Our compliance filing is pending but we are unable to predict
the outcome of the VSCC's review of our filing. It is possible that the VSCC
could limit our ability to transfer generation assets in connection with
corporate separation. The West Virginia legislature has approved electricity
restructuring; however, the West Virginia Public Service Commission ("WVPSC")
cannot implement the restructuring plan until the legislature makes tax law
changes necessary to preserve the revenues of state and local governments. We
cannot predict the timing of the passage of such legislation. It is also
possible that the legislation could be revisited. We cannot predict the impact
of such a development.
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.
Certain AEP subsidiaries, including us, participated in the formation of
the Alliance RTO. The Alliance RTO filed with the FERC seeking permission to
form and operate. The FERC expressed its opinion that large RTOs will better
support competitive, reliable electric service and rejected the Alliance RTO's
filing. In May 2002 AEP announced an agreement with the Pennsylvania-New
Jersey-Maryland RTO (the "PJM") Interconnection to pursue terms for
participation in its RTO. In July 2002 the FERC tentatively approved the
decision of certain AEP subsidiaries, including us, to join PJM subject to
certain conditions being met. The performance of these conditions is only
partially under AEP's control. In October 2002, PJM announced that our east
subsidiaries 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 May 2003. Virginia has adopted legislation
that prevents us and certain other unaffiliated utilities operating in Virginia
from joining any RTO, including PJM, until at least July 2004.
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 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 significantly harmed.
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 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, S&P 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 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 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 price we can charge our retail customers in West Virginia is
currently frozen.
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 may 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
compliance.
Most 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. We expect to spend
approximately $445 million (of which $234 million had been expended as of
December 31, 2002) in connection with the installation of emission control
equipment at our facilities to comply with the new NOx rule and the Section 126
Rule. Moreover, environmental laws are subject to change, which may materially
increase our costs of compliance or accelerate the timing of these capital
expenditures. Our compliance strategy, although reasonably based on the
information available to us today, may not successfully address the relevant
standards and interpretations of the future.
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 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. Federal 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.
Federal EPA filed complaints against us and some of our affiliated public
utility subsidiaries in U.S. District Court for the Southern District of Ohio. A
separate lawsuit initiated by certain special interest groups was consolidated
with the Federal 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. 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. Other parties have settled similar
lawsuits.
o We are unlikely to be able 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. Due to the deregulation of generation in Virginia, we
cannot recover through rates additional capital and other costs incurred by us
to comply with new environmental regulations with respect to our generation
previously regulated in Virginia.
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 in the accompanying prospectus supplement, the 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 the
pricing supplement in making your investment decision.
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, 1998 2.07
December 31, 1999 2.43
December 31, 2000 2.26
December 31, 2001 2.98
December 31, 2002 3.49
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.
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 Room.
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 document 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, 2002.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
Mr. R. Todd Rimmer
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.
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 short-term debt, 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 2003 will approximate
$247,900,000. We had no advances from affiliates outstanding as of March 31,
2003.
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, 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.
Notes represented by a global note will be exchangeable for note
certificates with the same terms in authorized denominations only if:
o 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; or
o we determine not to require all of the notes of a series to be
represented by a global note and notify the Trustee of our decision.
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.
Original Issue Discount
We may issue the notes at an original issue discount, bearing no interest
or bearing interest at a rate that, at the time of issuance, is below market
rate, to be sold at a substantial discount below their stated principal amount.
Generally speaking, if the notes are issued at an original issue discount and
there is an event of default or acceleration of their maturity, holders will
receive an amount less than their principal amount. Tax and other special
considerations applicable to original issue discount debt will be described in
the prospectus supplement in which we offer those notes.
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.
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.
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, 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, 2002
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports, 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.
[back cover]
$ ,000,000
APPALACHIAN POWER COMPANY
$ % Senior Notes, Series G, due 20
$ % Senior Notes, Series H, due 20
---------------------------
PROSPECTUS SUPPLEMENT
, 2003
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----------
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