PROSPECTUS SUPPLEMENT
(To prospectus dated January 18, 2005)
$200,000,000
APPALACHIAN POWER COMPANY
4.95% Senior Notes, Series I, due 2015
-------------------------
Interest on the Series I Notes (the "Senior Notes") is payable
semi-annually on February 1 and August 1 of each year, beginning August 1, 2005.
The Senior Notes will mature on February 1, 2015. 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 $225,000,000 of outstanding first mortgage bonds as of
December 31, 2004. We will issue the Senior Notes only in registered form in
multiples of $1,000.
Per Note Total
Public offering price(1) . . . . . . . . . . . . 99.857% $199,714,000
Underwriting discount . . . . . . . . . . . . . . 0.650% $ 1,300,000
Proceeds, before expenses,
to Appalachian Power Company . . . . . . . . . 99.207% $198,414,000
(1)Plus accrued interest, if any, from January 21, 2005.
-------------------------
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 January 21, 2005.
-------------------------
Joint Book-Running Managers
BNP PARIBAS UBS Investment Bank
----------
Co-Managers
ABN AMRO Incorporated RBS Greenwich Capital
The date of this prospectus supplement is January 18, 2005.
TABLE OF CONTENTS
Prospectus Supplement
Page
USE OF PROCEEDS......................................................... S-3
SUPPLEMENTAL DESCRIPTION OF THE SENIOR NOTES............................ S-3
Principal Amount, Maturity and Interest............................. S-3
Optional Redemption................................................. S-4
Limitation on Liens................................................. S-5
Additional Information.............................................. S-6
UNDERWRITING............................................................ S-6
Prospectus
THE COMPANY............................................................. 2
PROSPECTUS SUPPLEMENTS.................................................. 2
RISK FACTORS............................................................ 2
WHERE YOU CAN FIND MORE INFORMATION..................................... 12
RATIO OF EARNINGS TO FIXED CHARGES...................................... 13
USE OF PROCEEDS......................................................... 13
DESCRIPTION OF THE NOTES................................................ 13
PLAN OF DISTRIBUTION.................................................... 20
LEGAL OPINIONS.......................................................... 21
EXPERTS................................................................. 21
You should rely only on the information incorporated by reference or
provided in this prospectus supplement or the accompanying prospectus. We have
not, and the underwriters 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 net proceeds from the sale of the Senior Notes will be used to repay
short-term debt (including the repayment of advances from affiliates) and for
other general corporate purposes relating to our utility business. We had
approximately $197,000,000 of short-term debt outstanding at January 11, 2005.
Proceeds may be temporarily invested in short-term instruments pending their
application to the foregoing purposes.
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 Senior Notes will initially be issued in an aggregate principal amount
of $200,000,000. We may, without consent of the holders 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 Senior Notes will mature and become due and payable, together with any
accrued and unpaid interest, on February 1, 2015 and will bear interest at the
rate of 4.95% per year from January 21, 2005 until February 1, 2015. The Senior
Notes are not subject to any sinking fund provision.
Interest on each Senior Note will be payable semi-annually in arrears on
each February 1 and August 1 and at redemption, if any, or maturity. The initial
interest payment date is August 1, 2005. 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 fifteenth day prior 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 15 basis points, plus 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.
Additional Information
For additional important information about the Senior Notes, see
"Description of the Notes" in the accompanying prospectus, including: (i)
additional information about the terms of the Senior Notes, (ii) general
information about the Indenture and the trustee, and (iii) a description of
events of default under the Indenture.
UNDERWRITING
BNP Paribas Securities Corp. and UBS Securities LLC are acting as
representatives of the underwriters named below (the "Representatives"). Subject
to the terms and conditions of an underwriting agreement dated the date hereof
between us and the underwriters, 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
Underwriter of Senior Notes
- ----------- -----------------
BNP Paribas Securities Corp.................... $ 90,000,000
UBS Securities LLC............................. $ 90,000,000
ABN AMRO Incorporated.......................... $ 10,000,000
Greenwich Capital Markets, Inc................. $ 10,000,000
-------------
$ 200,000,000
=============
In the underwriting agreement, the underwriters have agreed, subject to
the terms and conditions set forth therein, 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 $225,000.
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 0.40% per Senior Note. The underwriters may allow, and such dealers may
reallow, a discount not in excess of 0.25% per Senior 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. The
Representatives have advised us that they intend to make a market in the Senior
Notes. The Representatives will have no obligation to make a market in the
Senior Notes, however, and may cease market making activities, if commenced, at
any time. No assurance can be given as to the liquidity of the trading market
for the Senior Notes or that an active public market for the Senior Notes will
develop. If an active public trading market for the Senior Notes does not
develop, the market price and liquidity of the Senior Notes may be adversely
affected.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or
contribute to payments that each underwriter may be required to make in respect
thereof.
In connection with the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Senior Notes. These transactions may include over-allotment and stabilizing
transactions and purchases to cover syndicate short positions created in
connection with the offering. Stabilizing transactions consist of certain bids
or purchases for the purposes of preventing or retarding a decline in the market
price of the 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. Any of these activities may
cause the price of the Senior Notes to be higher than the price that might
otherwise prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected in the
over-the-counter market or otherwise.
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.
Certain of the underwriters will make securities available for
distribution on the Internet through a proprietary Web site and/or a third-party
system operated by MarketAxess Inc., an Internet-based communications technology
provider. MarketAxess Inc. is providing the system as a conduit for
communications between such underwriters and their customers and is not a party
to this offering. MarketAxess Inc., a registered broker-dealer, will receive
compensation from such underwriters based on transactions conducted through the
system. Such underwriters will make securities available to their customers
through Internet distributions, whether made through proprietary or a third
party system, on the same terms as distributions made through other channels.
PROSPECTUS
Appalachian Power Company
1 RIVERSIDE PLAZA
COLUMBUS, OHIO 43215
(614) 716-1000
$500,000,000
UNSECURED NOTES
TERMS OF SALE
The following terms may apply to the notes that we may sell at one or more
times. A prospectus supplement or pricing supplement will include the final
terms for each note. If we decide to list upon issuance any note or notes on a
securities exchange, a prospectus supplement or pricing supplement will identify
the exchange and state when we expect trading could begin.
- Mature 9 months to 50 years
- Fixed or floating interest rate
- Remarketing features
- Certificate or book-entry form
- Subject to redemption
- Not convertible, amortized or subject to a sinking fund
- Interest paid on fixed rate notes quarterly or semi-annually
- Interest paid on floating rate notes monthly, quarterly, semi-annually, or
annually
- Issued in multiples of a minimum denomination
INVESTING IN THESE NOTES INVOLVES RISKS. SEE THE SECTION ENTITLED "RISK FACTORS"
BEGINNING ON PAGE 2 FOR MORE INFORMATION.
The notes have not been approved or disapproved by the Securities and Exchange
Commission or any state securities commission, nor have these organizations
determined that this prospectus is accurate or complete. Any representation to
the contrary is a criminal offense.
The date of this prospectus is January 18, 2005.
THE COMPANY
We generate, sell, purchase, transmit and distribute electric power. We serve
approximately 929,000 retail customers in the southwestern portion of Virginia
and southern West Virginia. We also sell and transmit power at wholesale to
other electric utilities, municipalities, electric cooperatives and power
marketers engaged in the wholesale power market. Our principal executive offices
are located at 1 Riverside Plaza, Columbus, Ohio 43215 (telephone number
614-716-1000). We are a subsidiary of American Electric Power Company, Inc.,
("AEP") a public utility holding company, and we are a part of the American
Electric Power integrated utility system. The executive offices of American
Electric Power Company, Inc. are located at 1 Riverside Plaza, Columbus, Ohio
43215 (telephone number 614-716-1000).
PROSPECTUS SUPPLEMENTS
We may provide information to you about the notes in up to three separate
documents that progressively provide more detail: (a) this prospectus provides
general information some of which may not apply to your notes; (b) the
accompanying prospectus supplement provides more specific terms of your notes;
and (c) if not included in the accompanying prospectus supplement, a pricing
supplement will provide the final terms of your notes. It is important for you
to consider the information contained in this prospectus, the prospectus
supplement and any pricing supplement in making your investment decision.
RISK FACTORS
Risks Related to Our Regulated Business and Evolving Regulation
o The laws and regulations governing restructuring of the wholesale
generation market in Virginia continue to evolve and could harm our
business, operating results and financial condition.
While the electric restructuring law in Virginia established the general
framework governing the retail electric market, the law requires us to make
compliance filings with the Virginia State Corporation Commission ("VSCC") to
implement the law. Following VSCC approval of a settlement agreement, we now
operate in Virginia as a functionally separated electric utility charging
unbundled rates. The agreement reserves potential legal separation of our assets
for later VSCC consideration. In April 2004, the Governor of Virginia signed
legislation which extends the transition period for electricity restructuring
including capped rates through December 31, 2010. The legislation provides
specified cost recovery opportunities during the capped rate period, including
two general rate changes and an opportunity for recovery of incremental
environmental and reliability costs. We cannot predict the full impact of such
developments.
o Our fuel clause recovery mechanisms have been suspended in West Virginia.
The protection afforded by fuel clause recovery mechanisms has been suspended in
West Virginia. To the extent the fuel supply needed by the generating units
supplying power in West Virginia is not under fixed price long-term contracts we
are subject to the market price risk of fuel.
o The different regional power markets in which we compete or will compete
in the future have changing transmission regulatory structures, which
could affect our performance in these regions.
Our Transmission and Distribution Business' 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, our Transmission and
Distribution Business is unable to assess fully the impact that these power
markets may have on its business.
To the extent we are faced with conflicting state and Federal requirements as to
our participation in RTOs, it could adversely affect our ability to operate and
recover transmission costs from retail customers. Management is unable to
predict the outcome of these transmission regulatory actions and proceedings or
their impact on the timing and operation of RTOs, our transmission operations or
future results of operations and cash flows.
o Federal Energy Regulatory Commission rules governing Regional Through and
Out Rates could affect our revenue and results of operations.
In July 2003, the Federal Energy Regulatory Commission ("FERC") issued an order
directing Pennsylvania-New Jersey-Maryland ("PJM") Interchange and the Midwest
Independent System Operator ("ISO") to make compliance filings for their
respective Open Access Transmission Tariffs to eliminate the transaction-based
charges for through and out ("T&O") transmission service on transactions where
the energy is delivered within the proposed Midwest ISO and PJM regions
("Combined Footprint"). The elimination of the T&O rates will reduce the
transmission service revenues collected by the RTOs and thereby reduce the
revenues received by transmission owners under the RTOs' revenue distribution
protocols.
AEP and several other utilities in the Combined Footprint have filed a proposal
for new rates to become effective December 1, 2004. AEP's utilities in PJM ("AEP
East Companies") (including us) received approximately $157 million of T&O rate
revenues for the twelve months ended December 31, 2003. In November 2004, FERC
eliminated the T&O rates and replaced the rates through March 2006 with seams
elimination cost adjustment fees. Effective April 2006, all transmission costs
that would otherwise be defrayed by T&O rates in the Combined Footprint will be
subject to recovery from native load customers of the AEP East Companies. At
this time, management is unable to predict whether any increase in our costs
will be recoverable on a timely basis from our retail customers. Unless new
replacement rates compensate us for our lost revenues and unless any increase in
our transmission expenses from these new rates are fully recovered in retail
rates on a timely basis, future results of operations, cash flows and financial
condition will be adversely affected.
Risks Related to Power Trading and Wholesale Businesses
o Our revenues and results of operations are subject to market risks that
are beyond our control.
We sell power from our generation facilities into the spot market or other
competitive power markets or on a contractual basis. We also enter into
contracts to purchase and sell electricity as part of our power marketing and
trading operations. With respect to such transactions, we are not guaranteed any
rate of return on our capital investments through regulated rates, and our
revenues and results of operations are likely to depend, in large part, upon
prevailing market prices for power in our regional markets and other competitive
markets. These market prices may fluctuate substantially over relatively short
periods of time. It is reasonable to expect that trading margins may erode as
markets mature and that there may be diminished opportunities for gain should
volatility decline. In addition, the FERC, which has jurisdiction over wholesale
power rates, as well as independent system operators that oversee some of these
markets, may impose price limitations, bidding rules and other mechanisms to
address some of the volatility in these markets. Fuel prices may also be
volatile, and the price we can obtain for power sales may not change at the same
rate as changes in fuel costs. These factors could reduce our margins and
therefore diminish our revenues and results of operations.
Volatility in market prices for fuel and power may result from:
- weather conditions;
- seasonality;
- power usage;
- illiquid markets;
- transmission or transportation constraints or inefficiencies;
- availability of competitively priced alternative energy sources;
- demand for energy commodities;
- natural gas, crude oil and refined products, and coal production levels;
- natural disasters, wars, embargoes and other catastrophic events; and
- federal, state and foreign energy and environmental regulation and
legislation.
o Our power trading (including fuel procurement and power marketing) and
risk management policies cannot eliminate the risk associated with these
activities.
Our power trading (including fuel procurement and power marketing) activities
expose us to risks of commodity price movements. We attempt to manage our
exposure through enforcement of established risk limits and risk management
procedures. These risk limits and risk management procedures may not always be
followed or may not work as planned and cannot eliminate the risks associated
with these activities. As a result, we cannot predict the impact that our power
trading and risk management decisions may have on our business, operating
results or financial position.
We routinely have open trading positions in the market, within established
guidelines, resulting from the management of our trading portfolio. To the
extent open trading positions exist, fluctuating commodity prices can improve or
diminish our financial results and financial position.
Our power trading and risk management activities, including our power sales
agreements with counterparties, rely on projections that depend heavily on
judgments and assumptions by management of factors such as the future market
prices and demand for power and other energy-related commodities. These factors
become more difficult to predict and the calculations become less reliable the
further into the future these estimates are made. Even when our policies and
procedures are followed and decisions are made based on these estimates, results
of operations may be diminished if the judgments and assumptions underlying
those calculations prove to be wrong or inaccurate. Our policies and procedures
do not typically require us to hedge the new trading positions that we enter
into daily.
o Our financial performance may be adversely affected if we or our
affiliates are unable to successfully operate our pooled electric
generating facilities.
Our performance depends on the successful operation of our pooled electric
generating facilities. Operating electric generating facilities involves many
risks, including:
- 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 operations.
o Parties with whom we have contracts may fail to perform their obligations,
which could harm our results of operations.
We are exposed to the risk that counterparties that owe us money or power will
breach their obligations. Should the counterparties to these arrangements fail
to perform, we may be forced to enter into alternative hedging arrangements or
honor underlying commitments at then-current market prices that may exceed our
contractual prices, which would cause our financial results to be diminished and
we might incur losses. Although our estimates take into account the expected
probability of default by a counterparty, our actual exposure to a default by a
counterparty may be greater than the estimates predict.
o We rely on electric transmission facilities that we do not own or control.
If these facilities do not provide us with adequate transmission capacity,
we may not be able to deliver our wholesale electric power to the
purchasers of our power.
We depend on transmission facilities owned and operated by other unaffiliated
power companies to deliver the power we sell at wholesale. This dependence
exposes us to a variety of risks. If transmission is disrupted, or transmission
capacity is inadequate, we may not be able to sell and deliver our wholesale
power. If a region's power transmission infrastructure is inadequate, our
recovery of wholesale costs and profits may be limited. If restrictive
transmission price regulation is imposed, the transmission companies may not
have sufficient incentive to invest in expansion of transmission infrastructure.
The FERC has issued electric transmission initiatives that require electric
transmission services to be offered unbundled from commodity sales. Although
these initiatives are designed to encourage wholesale market transactions for
electricity, access to transmission systems may in fact not be available if
transmission capacity is insufficient because of physical constraints or because
it is contractually unavailable. We also cannot predict whether transmission
facilities will be expanded in specific markets to accommodate competitive
access to those markets.
o We are unable to predict the outcome of Enron litigation.
In December 2003, Enron filed a complaint in a bankruptcy court against our
affiliated service corporation seeking approximately $93 million plus interest
in connection with a transaction for the sale and purchase of physical power
among Enron, certain AEP affiliates, including us, and Allegheny Energy Supply,
LLC during November 2001. Enron's claim seeks to unwind the effects of the
transaction. We believe we have several defenses to the claims in the action
being brought by Enron. The parties are currently in nonbinding court-sponsored
mediation. Management is unable to predict the outcome of this lawsuit, our
allocation of any amounts payable or its impact on results of operations, cash
flows or financial condition.
o We do not fully hedge against price changes in commodities.
We routinely enter into contracts to purchase and sell electricity as part of
our power marketing and trading operations and to procure fuel. In connection
with these trading activities, we routinely enter into financial contracts,
including futures and options, over-the-counter options, swaps and other
derivative contracts. These activities expose us to risks from price movements.
If the values of the financial contracts change in a manner we do not
anticipate, it could harm our financial position or reduce the financial
contribution of our trading operations.
We manage our exposure by establishing risk limits and entering into contracts
to offset some of our positions (i.e., to hedge our exposure to demand, market
effects of weather and other changes in commodity prices). However, we do not
always hedge the entire exposure of our operations from commodity price
volatility. To the extent we do not hedge against commodity price volatility,
our results of operations and financial position may be improved or diminished
based upon our success in the market.
o Diminished liquidity in the wholesale power markets could negatively
impact our earnings.
The Enron Corp. bankruptcy and enhanced regulatory scrutiny have contributed to
more rigorous credit rating review of wholesale power market participants.
Credit downgrades and financial difficulties of certain other market
participants have significantly reduced such participants' participation in the
wholesale power and gas markets. These events have caused a decrease in the
number of significant participants in the wholesale power and gas markets, which
has resulted and could continue to result in a decrease in the volume and
liquidity on 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 makes risk management of the assets more difficult
and could also hamper our efforts to exit transactions not related to risk
management of our assets that we entered into before reducing the scale of our
power trading and marketing operations. We are unable to predict the extent of
the impact of such developments on our power marketing and trading business.
o Potential for disruption exists if the delay of a FERC market power
mitigation order is lifted.
A FERC order issued in November 2001 on AEP's triennial market-based wholesale
power rate authorization update (which permits us to sell wholesale power at
market-based rates) required certain mitigation actions that AEP would need to
take for sales/purchases within its control area and required AEP to post
information on its website regarding its power system's status. As a result of a
request for rehearing filed by AEP and other market participants, FERC issued an
order delaying the effective date of the mitigation plan until after a planned
technical conference on market power determination. In December 2003, the FERC
issued a staff paper discussing alternatives and held a technical conference in
January 2004. In April 2004, the FERC issued two orders concerning utilities'
ability to sell wholesale electricity at market-based rates. In the first order,
the FERC adopted two new interim screens for assessing potential generation
market power of applicants for wholesale market based rates, and described
additional analyses and mitigation measures that could be presented if an
applicant does not pass one of these interim screens. In July 2004, the FERC
issued an order on rehearing affirming its conclusions in the April order and
directing AEP and two unaffiliated utilities to file generation market power
analyses within 30 days. In the second order, the FERC initiated a rulemaking to
consider whether the FERC's current methodology for determining whether a public
utility should be allowed to sell wholesale electricity at market-based rates
should be modified in any way. AEP presented evidence to FERC to demonstrate
that we do not possess market power in geographic areas where we sell wholesale
power. In a December 2004 order, FERC found that AEP passed the screens in PJM
and Electric Reliability Council of Texas, but not in the Southwest Power Pool
("SPP") area. AEP has sixty (60) days from publication of the order to
demonstrate that it does not possess market power in SPP or to propose
mitigation measures. 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 Market or Economic Volatility
o A downgrade in our credit rating or that of AEP could negatively affect
our ability to access capital and/or to operate our power trading
businesses.
Standard & Poor's and Moody's rate our senior, unsecured debt at BBB and Baa2,
respectively. If Moody's or Standard & Poor's were to downgrade our long-term
rating, particularly below investment grade, our borrowing costs would increase,
which would diminish our financial results. In addition, we would likely be
required to pay a higher interest rate in future financings, and our potential
pool of investors and funding sources could decrease.
On February 10, 2003, Moody's downgraded AEP's short-term debt rating to P-3
(with stable outlook) from P-2 and on August 2, 2004, Moody's changed this
outlook from stable to positive. On March 7, 2003, Standard & Poor's affirmed
AEP's short-term rating of A-2 with stable outlook. As a result of the Moody's
downgrade, AEP's access to the commercial paper market may be limited and our
short-term debt borrowing costs may increase because we conduct our short-term
borrowing through AEP and on the same terms available to AEP.
Our power trading business relies on the investment grade ratings of our senior,
unsecured debt. Most of our counterparties require the creditworthiness of an
investment grade entity to stand behind transactions. If our rating were to
decline below investment grade, our ability to profitably operate our power
trading business would be diminished, because we would likely have to deposit
cash or cash related instruments, which would reduce our profits.
o The underfunding of our affiliate retirement plans may require additional
significant contributions.
We, along with other AEP affiliates, participate in defined benefit pension
plans ("Pension Plans") for our respective employees. In addition, we, along
with other AEP affiliates, participate in health care and life insurance benefit
plans for retired employees.
The recent decreases in applicable interest rates have increased the plans'
liability. The Pension Plans' liabilities based on service and pay to date
("Accumulated Benefit Obligation") exceed the value of the assets. Because of
the underfunded status of the Pension Plan, material amounts were contributed to
the Pension Plan in 2004 and based on current actuarial assumptions, AEP's cash
contributions to the Pension Plan may be material in the future. Our portion of
the contributions made to the pension trust account may be material in the
future.
AEP also made contributions to postretirement health care and life insurance
benefits trust funds in 2004, and such contributions may be material in the
future. Our portion of the contribution may be material in the future.
We cannot predict the future performance of the investment markets. A downturn
in the investment markets could have a material negative impact on the net asset
value of the plans' trust accounts and increase the underfunding of the Pension
Plan, net of benefit obligations. This may necessitate significant cash
contributions to the Pension Plan. Changes in interest rates may also materially
affect the pension and postretirement health care and life insurance benefit
liabilities and the cash contributions needed to fund those liabilities. Changes
in the laws and regulations governing the plans may increase or decrease the
required contributions.
o Our operating results may fluctuate on a seasonal and quarterly basis
reflecting, in part, weather conditions.
Electric power generation is generally a seasonal business. In many parts of the
country, demand for power peaks during the hot summer months, with market prices
also peaking at that time. In other areas, power demand peaks during the winter.
As a result, our overall operating results in the future may fluctuate
substantially on a seasonal basis. The pattern of this fluctuation may change
depending on the terms of power sale contracts that we enter into. In addition,
we have historically sold less power, and consequently earned less income, when
weather conditions are milder. We expect that unusually mild weather in the
future could diminish our results of operations and harm our financial
condition.
o Changes in technology may significantly affect our business by making our
power plants less competitive.
A key element of our business model is that generating power at central power
plants achieves economies of scale and produces power at relatively low cost.
There are other technologies that produce power, most notably fuel cells,
microturbines, windmills and photovoltaic (solar) cells. It is possible that
advances in technology will reduce the cost of alternative methods of producing
power to a level that is competitive with that of most central power station
electric production. If this were to happen and if these technologies achieved
economies of scale, our market share could be eroded, and the value of our power
plants could be reduced. Changes in technology could also alter the channels
through which retail electric customers buy power, thereby harming our financial
results.
o Changes in commodity prices may increase our cost of producing power or
decrease the amount we receive from selling power, harming our financial
performance.
We are heavily exposed to changes in the price and availability of coal because
most of our generating capacity is coal-fired. We have contracts of varying
durations for the supply of coal for most of our existing generation capacity,
but as these contracts end, we may not be able to purchase coal on terms as
favorable as the current contracts.
Changes in the cost of coal and changes in the relationship between such cost
and the market price of power will affect our financial results. Since the price
we obtain for power may not change at the same rate as the change in coal costs,
we may be unable to pass on the changes in costs to our customers. In addition,
the fuel clause mechanism for our sales to retail customers in West Virginia has
been suspended.
In addition, actual power prices and fuel costs will differ from those assumed
in financial projections used to initially value our trading and marketing
transactions, and those differences may be material. As a result, our financial
results may be diminished in the future as those transactions are marked to
market.
o At times, demand for power could exceed our supply capacity.
We are currently obligated to supply power to our customers. At peak times, the
demand for power required to meet this obligation will exceed our available
generation capacity. In the past, we have had little need to purchase power in
the market for our retail customers. In the future, we may be required to buy
more power on the market. We may not always have the ability to pass these
market purchase costs to our customers. For example, we are protected from
increased fuel cost charges in Virginia. In West Virginia, such increases will
affect our earnings currently because we will not be able to adjust our rates to
recover any increases.
Risks Related to Environmental Regulation
o Our costs of compliance with environmental laws are significant, and the
cost of compliance with future environmental laws could harm our cash
flows 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. Additionally, in July 2004 attorneys general of
eight states and others sued AEP and other utilities alleging that carbon
dioxide emissions from power generating facilities such as ours constitute a
public nuisance under federal common law. The suits seek injunctive relief in
the form of specific emission reduction commitments from the defendants. While
we believe the claims are without merit, the costs associated with reducing
carbon dioxide emissions could harm our business and our results of operations
and financial position.
o We anticipate that we will incur considerable capital costs for
environmental compliance.
Virtually all of our generating capacity is coal burning. We plan to install new
emissions control equipment and may be required to upgrade existing equipment,
purchase emissions allowances or reduce operations to comply with the extensive
federal, state and local environmental statutes, rules and regulations relating
to air quality, water quality, waste management, natural resources and health
and safety. These expenditures have been significant in the past and we expect
that they will increase in the future. We estimate that we will invest
approximately $151 million to comply with existing federal and state regulations
designed to limit NOx emissions. We estimate that we will invest approximately
$367 million to comply with existing federal and state regulations designed to
limit SO2 emissions. We estimate that we will invest approximately $698 million
to comply with currently proposed, but as yet unadopted, federal regulations
designed to limit NOx, SO2 and mercury emissions through 2010, assuming certain
contingencies (including the adoption of EPA's preferred alternative for
reducing mercury emissions). If this preferred alternative is not adopted, we
cannot estimate at this time the costs to comply with the remaining alternative
for reducing mercury emissions. We would expect significant additional costs
after 2010. Costs of compliance with environmental regulations could harm our
industry, our business and our results of operations and financial position,
especially if emission and/or discharge limits are tightened, more extensive
permitting requirements are imposed, additional substances become regulated and
the number and types of assets we operate increase.
o Governmental authorities may assess penalties on us for failures to comply
with environmental laws and regulations.
If we fail to comply with environmental laws and regulations, even if caused by
factors beyond our control, that failure may result in the assessment of civil
or criminal penalties and fines against us. Recent lawsuits by the U.S.
Environmental Protection Agency ("EPA") and various states filed against us
highlight the environmental risks faced by generating facilities, in general,
and coal-fired generating facilities, in particular.
Since 1999, we and some of our affiliates have been involved in litigation
regarding generating plant emissions under the Clean Air Act. EPA and a number
of states alleged that we and eleven unaffiliated utilities modified certain
units at coal-fired generating plants in violation of the Clean Air Act. EPA
filed complaints against us and some of our affiliated public utilities in U.S.
District Court for the Southern District of Ohio. A separate lawsuit initiated
by certain special interest groups was consolidated with the EPA case. The
alleged modification of the generating units occurred over a 20-year period.
If these actions are resolved against us, substantial modifications of our
existing coal-fired power plants would be required. In addition, we could be
required to invest significantly in additional emission control equipment,
accelerate the timing of capital expenditures, pay penalties and/or halt
operations at certain plants. Moreover, our results of operations could be
reduced and our financial position could suffer due to the consequent
distraction of management and the expense of ongoing litigation.
o We may be unable to pass on the cost of environmental compliance to our
customers.
Most of our contracts with wholesale customers do not permit us to recover
additional capital and other costs incurred by us to comply with new
environmental regulations. And, while retail rate recovery for environmental
costs is permitted in Virginia and West Virginia, we cannot predict what level
of retail rate recovery, if any, will be approved in those jurisdictions.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement we filed with the SEC. We
also file annual, quarterly and special reports and other information with the
SEC. You may read and copy any document we file at the SEC's Public Reference
Room at 450 Fifth Street, N. W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. You may
also examine our SEC filings through the SEC's web site at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus, and later information that we file with the SEC
will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934
until we sell all the notes.
o Annual Report on Form 10-K for the year ended December 31, 2003;
o Quarterly Reports on Form 10-Q for the periods ended March 31, 2004,
June 30, 2004 and September 30, 2004; and
o Current Report on Form 8-K dated July 1, 2004.
You may request a copy of these filings, at no cost, by writing or telephoning
us at the following address:
Financial Reporting
American Electric Power Service Corporation
1 Riverside Plaza
Columbus, Ohio 43215
614-716-1000
You should rely only on the information incorporated by reference or provided in
this prospectus or any supplement. We have not authorized anyone else to provide
you with different information. We are not making an offer of these notes in any
state where the offer is not permitted. You should not assume that the
information in this prospectus or any supplement is accurate as of any date
other than the date on the front of those documents.
RATIO OF EARNINGS TO FIXED CHARGES
The Ratio of Earnings to Fixed Charges for each of the periods indicated is as
follows:
Twelve Months Period Ended Ratio
December 31, 1999 2.43
December 31, 2000 2.26
December 31, 2001 2.98
December 31, 2002 3.49
December 31, 2003 3.48
September 30, 2004 3.55
For current information on the Ratio of Earnings to Fixed Charges, please see
our most recent Form 10-K and 10-Q. See Where You Can Find More Information on
page 13.
USE OF PROCEEDS
Unless otherwise stated in a prospectus supplement, the net proceeds from the
sale of the notes will be used for general corporate purposes relating to our
utility business. These purposes include redeeming or repurchasing outstanding
debt (including the repayment of advances from affiliates) or preferred stock
and replenishing working capital. We had approximately $211,000,000 of
short-term debt outstanding at December 31, 2004. If we do not use the net
proceeds immediately, we temporarily invest them in short-term, interest-bearing
obligations.
DESCRIPTION OF THE NOTES
General
We will issue the notes under the Indenture dated January 1, 1998 (as previously
supplemented and amended) between us and the Trustee, The Bank of New York. This
prospectus briefly outlines some provisions of the Indenture. If you would like
more information on these provisions, you should review the Indenture and any
supplemental indentures or company orders that we have filed or will file with
the SEC. See Where You Can Find More Information on how to locate these
documents. You may also review these documents at the Trustee's offices at 101
Barclay Street, New York, New York.
The Indenture does not limit the amount of notes that may be issued. The
Indenture permits us to issue notes in one or more series or tranches upon the
approval of our board of directors and as described in one or more company
orders or supplemental indentures. Each series of notes may differ as to their
terms. The Indenture also gives us the ability to reopen a previous issue of a
series of notes and issue additional notes of such series.
The notes are unsecured and will rank equally with all our unsecured
unsubordinated debt. Substantially all of our fixed properties and franchises
are subject to the lien of our first mortgage bonds issued under and secured by
a Mortgage and Deed of Trust, dated as of December 1, 1940 (as previously
supplemented and amended) between us and Bankers Trust Company, now known as
Deutsche Bank Trust Company Americas, as trustee. For current information on our
debt outstanding see our most recent Form 10-K and 10-Q. See Where You Can Find
More Information.
The notes will be denominated in U.S. dollars and we will pay principal and
interest in U.S. dollars. Unless an applicable pricing or prospectus supplement
states otherwise, the notes will not be subject to any conversion, amortization,
or sinking fund. We expect that the notes will be "book-entry," represented by a
permanent global note registered in the name of The Depository Trust Company, or
its nominee. We reserve the right, however, to issue note certificates
registered in the name of the noteholders.
In the discussion that follows, whenever we talk about paying principal on the
notes, we mean at maturity or redemption. Also, in discussing the time for
notices and how the different interest rates are calculated, all times are New
York City time and all references to New York mean the City of New York, unless
otherwise noted.
The following terms may apply to each note as specified in the applicable
pricing or prospectus supplement and the note.
Redemptions
If we issue redeemable notes, we may redeem such notes at our option unless an
applicable pricing or prospectus supplement states otherwise. The pricing or
prospectus supplement will state the terms of redemption. We may redeem notes in
whole or in part by delivering written notice to the noteholders no more than
60, and not less than 30, days prior to redemption. If we do not redeem all the
notes of a series at one time, the Trustee selects the notes to be redeemed in a
manner it determines to be fair.
Remarketed Notes
If we issue notes with remarketing features, an applicable pricing or prospectus
supplement will describe the terms for the notes including: interest rate,
remarketing provisions, our right to redeem notes, the holders' right to tender
notes, and any other provisions.
Book-Entry Notes - Registration, Transfer, and Payment of Interest and Principal
Unless otherwise stated in a prospectus supplement, the Depository Trust Company
("DTC"), New York, New York, will act as securities depository for the notes.
The notes will be issued as fully-registered securities registered in the name
of Cede & Co. (DTC's partnership nominee) or such other name as may be requested
by an authorized representative of DTC. One fully-registered note certificate
will be issued for each issue of the notes, each in the aggregate principal
amount of such issue, and will be deposited with DTC.
DTC, the world's largest depository, 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 Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered pursuant to the provisions of Section
17A of the Securities Exchange Act of 1934. DTC holds and provides asset
servicing for over 2 million issues of U.S. and non-U.S. equity issues,
corporate and municipal debt issues, and money market instruments from over 85
countries that DTC's participants ("Direct Participants") deposit with DTC. DTC
also facilitates the post-trade settlement among Direct Participants of sales
and other securities transactions in deposited securities, through electronic
computerized book-entry transfers and pledges between Direct Participants'
accounts. This eliminates the need for physical movement of securities
certificates. Direct Participants include both U.S. and non-U.S. securities
brokers and dealers, banks, trust companies, clearing corporations, and certain
other organizations. DTC is a wholly-owned subsidiary of The Depository Trust &
Clearing Corporation ("DTCC"). DTCC , in turn, is owned by a number of Direct
Participants of DTC and Members of the National Securities Clearing Corporation,
Government Securities Clearing Corporation, MBS Clearing Corporation, and
Emerging Markets Clearing Corporation, (NSCC, GSCC, MBSCC and EMCC, also
subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the
American Stock Exchange LLC and the National Association of Securities Dealers,
Inc. Access to the DTC system is also available to others such as both U.S. and
non-U.S. securities brokers and dealers, banks, trust companies and clearing
corporations that clear through or maintain a custodial relationship with a
Direct Participant, either directly or indirectly ("Indirect Participants"). DTC
has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its
Participants are on file with the Securities and Exchange Commission. More
information about DTC can be found at http://www.dtcc.com.
Purchases of notes under the DTC system must be made by or through Direct
Participants, which will receive a credit for the notes on DTC's records. The
ownership interest of each actual purchaser of each note ("Beneficial Owner") is
in turn to be recorded on the Direct and Indirect Participants' records.
Beneficial Owners will not receive written confirmation from DTC of their
purchase. Beneficial Owners are, however, expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the Direct or Indirect Participant through
which the Beneficial Owner entered into the transaction. Transfers of ownership
interests in the notes are to be accomplished by entries made on the books of
Direct and Indirect Participants acting on behalf of Beneficial Owners.
Beneficial Owners will not receive certificates representing their ownership
interests in notes, except in the event that use of the book-entry system for
the notes is discontinued.
To facilitate subsequent transfers, all notes deposited by Direct Participants
with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or
such other name as may be requested by an authorized representative of DTC. The
deposit of notes with DTC and their registration in the name of Cede & Co. or
such other DTC nominee do not effect any change in beneficial ownership. DTC has
no knowledge of the actual Beneficial Owners of the notes; DTC's records reflect
only the identity of the Direct Participants to whose accounts such notes are
credited, which may or may not be the Beneficial Owners. The Direct and Indirect
Participants will remain responsible for keeping account of their holdings on
behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants, by
Direct Participants to Indirect Participants, and by Direct Participants and
Indirect Participants to Beneficial Owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time. Beneficial Owners of notes may wish to take certain
steps to augment the transmission to them of notices of significant events with
respect to the notes, such as redemptions, tenders, defaults and proposed
amendments to the note documents. For example, Beneficial Owners of notes may
wish to ascertain that the nominee holding the notes for their benefit has
agreed to obtain and transmit notices to Beneficial Owners. In the alternative,
Beneficial Owners may wish to provide their names and addresses to the registrar
and request that copies of notices by provided directly to them.
Redemption notices shall be sent to DTC. If less than all of the notes within an
issue are being redeemed, DTC's practice is to determine by lot the amount of
the interest of each Direct Participant in such issue to be redeemed.
Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with
respect to notes unless authorized by a Direct Participant in accordance with
DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to us
as soon as possible after the record date. The Omnibus Proxy assigns Cede &
Co.'s consenting or voting rights to those Direct Participants to whose accounts
notes are credited on the record date (identified in a listing attached to the
Omnibus Proxy).
Principal and interest payments on the notes will be made to Cede & Co., or such
other nominee as may be requested by an authorized representative of DTC. DTC's
practice is to credit Direct Participants' accounts upon DTC's receipt of funds
and corresponding detail information from us or our agent on the payable date in
accordance with their respective holdings shown on DTC's records. Payments by
Participants to Beneficial Owners will be governed by standing instructions and
customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name", and will be the
responsibility of such Participant and not of DTC, our agent or us, subject to
any statutory or regulatory requirements as may be in effect from time to time.
Payment of principal and interest payments to Cede & Co. (or such other nominee
as may be requested by an authorized representative of DTC) is our or our
agent's responsibility, disbursement of such payments to Direct Participants
will be the responsibility of DTC, and disbursement of such payments to the
Beneficial Owners will be the responsibility of Direct and Indirect
Participants.
A Beneficial Owner shall give notice to elect to have its notes purchased or
tendered, through its Participant, to the Tender/Remarketing Agent, and shall
effect delivery of such notes by causing the Direct Participant to transfer the
Participant's interest in the notes, on DTC's records, to the Tender/Remarketing
Agent. The requirement for physical delivery of notes in connection with an
optional tender or a mandatory purchase will be deemed satisfied when the
ownership rights in the notes are transferred by Direct Participants on DTC's
records and followed by a book-entry credit of tendered notes to the
Tender/Remarketing Agent's DTC account.
DTC may discontinue providing its services as depository with respect to the
notes at any time by giving reasonable notice to our agent or us. Under such
circumstances, in the event that a successor depository is not obtained, note
certificates are required to be printed and delivered.
We may decide to discontinue use of the system of book-entry transfers through
DTC (or a successor securities depository). In that event, note certificates
will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry system has
been obtained from sources that we believe to be reliable, but we take no
responsibility for the accuracy thereof.
Note Certificates-Registration, Transfer, and Payment of Interest and Principal
If we issue note certificates, they will be registered in the name of the
noteholder. The notes may be transferred or exchanged, pursuant to
administrative procedures in the indenture, without the payment of any service
charge (other than any tax or other governmental charge) by contacting the
paying agent. Payments on note certificates will be made by check.
Interest Rate
The interest rate on the notes will either be fixed or floating. The interest
paid will include interest accrued to, but excluding, the date of maturity or
redemption. Interest is generally payable to the person in whose name the note
is registered at the close of business on the record date before each interest
payment date. Interest payable at maturity or redemption, however, will be
payable to the person to whom principal is payable.
Unless an applicable pricing or prospectus supplement states otherwise, if we
issue a note after a record date but on or prior to the related interest payment
date, we will pay the first interest payment on the interest payment date after
the next record date. We will pay interest payments by check or wire transfer,
at our option.
Fixed Rate Notes
A pricing or prospectus supplement will designate the record dates, payment
dates and the fixed rate of interest payable on a note. We will pay interest
monthly, quarterly or semi-annually, and upon maturity or redemption. Unless an
applicable pricing or prospectus supplement states otherwise, if any payment
date falls on a day that is not a business day, we will pay interest on the next
business day and no additional interest will be paid. Interest payments will be
the amount of interest accrued to, but excluding, each payment date. Interest
will be computed using a 360-day year of twelve 30-day months.
Floating Rate Notes
Each floating rate note will have an interest rate formula. The applicable
pricing supplement will state the initial interest rate or interest rate formula
on each note effective until the first interest reset date. The applicable
pricing or prospectus supplement will state the method and dates on which the
interest rate will be determined, reset and paid.
Events of Default
"Event of Default" means any of the following:
- failure to pay for three business days the principal of (or premium,
if any, on) any note of a series when due and payable;
- failure to pay for 30 days any interest on any note of any series
when due and payable;
- failure to perform any other requirements in such notes, or in the
Indenture in regard to such notes, for 90 days after notice;
- certain events of bankruptcy or insolvency; or any other event of
default specified in a series of notes.
An Event of Default for a particular series of notes does not necessarily mean
that an Event of Default has occurred for any other series of notes issued under
the Indenture. If an Event of Default occurs and continues, the Trustee or the
holders of at least 33% of the principal amount of the notes of the series
affected may require us to repay the entire principal of the notes of such
series immediately ("Repayment Acceleration"). In most instances, the holders of
at least a majority in aggregate principal amount of the notes of the affected
series may rescind a previously triggered Repayment Acceleration. However, if we
cause an Event of Default because we have failed to pay (unaccelerated)
principal, premium, if any, or interest, Repayment Acceleration may be rescinded
only if we have first cured our default by depositing with the Trustee enough
money to pay all (unaccelerated) past due amounts and penalties, if any.
The Trustee must within 90 days after a default occurs, notify the holders of
the notes of the series of default unless such default has been cured or waived.
We are required to file an annual certificate with the Trustee, signed by an
officer, concerning any default by us under any provisions of the Indenture.
Subject to the provisions of the Indenture relating to its duties in case of
default, the Trustee shall be under no obligation to exercise any of its rights
or powers under the Indenture at the request, order or direction of any holders
unless such holders offer the Trustee reasonable indemnity. Subject to the
provisions for indemnification, the holders of a majority in principal amount of
the notes of any series may direct the time, method and place of conducting any
proceedings for any remedy available to, or exercising any trust or power
conferred on, the Trustee with respect to such notes.
Modification of Indenture
Under the Indenture, our rights and obligations and the rights of the holders of
any notes may be changed. Any change affecting the rights of the holders of any
series of notes requires the consent of the holders of not less than a majority
in aggregate principal amount of the outstanding notes of all series affected by
the change, voting as one class. However, we cannot change the terms of payment
of principal or interest, or a reduction in the percentage required for changes
or a waiver of default, unless the holder consents. We may issue additional
series of notes and take other action that does not affect the rights of holders
of any series by executing supplemental indentures without the consent of any
noteholders.
Consolidation, Merger or Sale
We may merge or consolidate with any corporation or sell substantially all of
our assets as an entirety as long as the successor or purchaser expressly
assumes the payment of principal, and premium, if any, and interest on the
notes.
Legal Defeasance
We will be discharged from our obligations on the notes of any series at any
time if:
o we deposit with the Trustee sufficient cash or government securities to
pay the principal, interest, any premium and any other sums due to the
stated maturity date or a redemption date of the note of the series, and
o we deliver to the Trustee an opinion of counsel stating that the federal
income tax obligations of noteholders of that series will not change as a
result of our performing the action described above.
If this happens, the noteholders of the series will not be entitled to the
benefits of the Indenture except for registration of transfer and exchange of
notes and replacement of lost, stolen or mutilated notes.
Covenant Defeasance
We will be discharged from our obligations under any restrictive covenant
applicable to the notes of a particular series if we perform both actions
described above. See Legal Defeasance. If this happens, any later breach of that
particular restrictive covenant will not result in Repayment Acceleration. If we
cause an Event of Default apart from breaching that restrictive covenant, there
may not be sufficient money or government obligations on deposit with the
Trustee to pay all amounts due on the notes of that series. In that instance, we
would remain liable for such amounts.
Governing Law
The Indenture and notes of all series will be governed by the laws of the State
of New York.
Concerning the Trustee
We and our affiliates use or will use some of the banking services of the
Trustee and other services of its affiliates in the normal course of business.
PLAN OF DISTRIBUTION
We may sell the notes (a) through agents; (b) through underwriters or dealers;
or (c) directly to one or more purchasers.
By Agents
Notes may be sold on a continuing basis through agents designated by us. The
agents will agree to use their reasonable efforts to solicit purchases for the
period of their appointment.
Unless the prospectus supplement or any pricing supplement states otherwise, the
notes will be sold to the public at 100% of their principal amount. Agents will
receive commissions from .125% to .750% of the principal amount per note
depending on the maturity of the note they sell.
The Agents will not be obligated to make a market in the notes. We cannot
predict the amount of trading or liquidity of the notes.
By Underwriters
If underwriters are used in the sale, the underwriters will acquire the notes
for their own account. The underwriters may resell the notes in one or more
transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale. The obligations of
the underwriters to purchase the notes will be subject to certain conditions.
The underwriters will be obligated to purchase all the notes of the series
offered if any of the notes are purchased. Any initial public offering price and
any discounts or concessions allowed or re-allowed or paid to dealers may be
changed from time to time.
Direct Sales
We may also sell notes directly. In this case, no underwriters or agents would
be involved.
General Information
Underwriters, dealers, and agents that participate in the distribution of the
notes may be underwriters as defined in the Securities Act of 1933 (the "Act"),
and any discounts or commissions received by them from us and any profit on the
resale of the notes by them may be treated as underwriting discounts and
commissions under the Act.
We may have agreements with the underwriters, dealers and agents to indemnify
them against certain civil liabilities, including liabilities under the Act or
to contribute to payments that each underwriter, dealer or agent may be required
to make in respect thereto.
Underwriters, dealers and agents may engage in transactions with, or perform
services for, us or our affiliates in the ordinary course of their businesses.
LEGAL OPINIONS
One of our lawyers will 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 Appalachian
Power Company and subsidiaries' Annual Report on Form 10-K for the year ended
December 31, 2003 have been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their reports which are
incorporated herein by reference (which reports express an unqualified opinion
and include an explanatory paragraph concerning the adoption of new accounting
pronouncements in 2003), and have been so incorporated in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
APPALACHIAN POWER COMPANY
4.95 % Senior Notes, Series I, due 2015
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PROSPECTUS SUPPLEMENT
January 18, 2005
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Joint Book-Running Managers
BNP PARIBAS UBS Investment Bank
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Co-Managers
ABN AMRO Incorporated RBS Greenwich Capital