SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the Securities Exchange
Act of 1934
Check the appropriate box:
[ ] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
[X] Definitive Information Statement
APPALACHIAN POWER COMPANY
-------------------------
(Name of Registrant As Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
1) Title of each class of securities to which transaction
applies:______________________________________________
2) Aggregate number of securities to which transaction
applies:______________________________________________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
______________________________________________________
4) Proposed maximum aggregate value of transaction:
______________________________________________________
5) Total fee paid:
______________________________________________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:_______________________________
2) Form, Schedule or Registration Statement No.:_________
3) Filing Party:_________________________________________
4) Date Filed:___________________________________________
APPALACHIAN POWER COMPANY
1 Riverside Plaza
Columbus, Ohio 43215
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO THE STOCKHOLDERS OF
APPALACHIAN POWER COMPANY:
The annual meeting of the stockholders of Appalachian Power Company will
be held on Tuesday, April 26, 2005, at 11:00 a.m. at the principal office of
American Electric Power Service Corporation, 1 Riverside Plaza, Columbus, Ohio,
for the following purposes:
1. To elect eight directors of the Company to hold office for one
year or until their successors are elected and qualified; and
2. To transact such other business (none known as of the date of
this notice) as may legally come before the meeting or any
adjournment thereof.
Only holders of record of Common Stock and certain issues of Cumulative
Preferred Stock, no par value, at the close of business on March 9, 2005 are
entitled to notice of and to vote at the annual meeting.
THERE WILL BE NO SOLICITATION OF PROXIES BY THE BOARD OF DIRECTORS OF
THE COMPANY.
HEATHER L. GEIGER,
Secretary
March 30, 2005
INFORMATION STATEMENT
This information statement is being furnished in connection with the annual
meeting of stockholders of Appalachian Power Company (the Company), to be held
on Tuesday, April 26, 2005 at 11:00 a.m. at the principal office of American
Electric Power Service Corporation, 1 Riverside Plaza, Columbus, Ohio.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
Voting at Meeting
On March 9, 2005, the date for determining stockholders entitled to notice of
and to vote at the meeting, there were 177,836 shares of 4-1/2% Cumulative
Preferred Stock and 13,499,500 shares of Common Stock outstanding.
Each holder of the 4-1/2% Cumulative Preferred Stock and each holder of
Common Stock has the right to one vote for each share outstanding in such
holder's name on the books of the Company at the close of business on March 9,
2005 for the election of directors and on any other business which may come
before the meeting. Holders of 5.40% and 5.92% Cumulative Preferred Stock issued
by the Company are not entitled to notice of, or to vote at, the meeting.
Principal Stockholders
American Electric Power Company, Inc. (AEP), 1 Riverside Plaza, Columbus,
Ohio 43215, a registered public utility holding company under the Public Utility
Holding Company Act of 1935, owns all of the Company's outstanding Common Stock.
The Common Stock represents approximately 99% of the combined voting power of
the capital stock of the Company entitled to vote at the meeting. As a result,
the Company is a "controlled company" as defined by the New York Stock Exchange
(NYSE) listing standards. The Company lists only preferred stock on the NYSE.
The Company does not have standing audit, nominating or compensation committees.
AEP also owns, directly or indirectly, all of the common stock of the other
companies which constitute the American Electric Power System (the AEP System).
The AEP System is an integrated electric utility system and, as a result, the
member companies of the AEP System, including the Company, have contractual,
financial and other business relationships with the other member companies, such
as participation in the AEP System savings and retirement plans and tax returns;
sales of electricity; and sales, transportation and handling of fuel. American
Electric Power Service Corporation (the Service Corporation), a wholly-owned
subsidiary of AEP, renders management, advisory, engineering and other similar
services at cost to the principal operating companies of the AEP System,
including the Company.
ELECTION OF DIRECTORS
Eight directors are to be elected to hold office for one year or until their
successors are elected and qualified. The Company has been informed that AEP
will nominate, and cast the votes of all of the outstanding shares of Common
Stock for, the persons named below. In the event that any of such persons should
unexpectedly be unable to stand for election, AEP has informed the Company that
it will cast its votes for a substitute chosen by the Board of Directors of the
Company and approved by AEP.
The following brief biographies of the nominees include their ages as of
March 1, 2005, an account of their business experience and the names of certain
publicly-held corporations of which they are also directors.
Name Age Business Experience
---- --- -------------------
MICHAEL G. MORRIS 58 Elected president and chief executive officer of
AEP in January 2004, chairman of the board in
February 2004 and chairman, president and chief
executive officer of all of its major
subsidiaries, including the Company, in January
2004. A director of certain subsidiaries of AEP
with one or more classes of publicly held
preferred stock or debt securities and other
subsidiaries of AEP. From 1997 to 2003 was
chairman of the board, president and chief
executive officer of Northeast Utilities, an
unaffiliated electric utility. A director of
Cincinnati Bell, Inc. and The Hartford Financial
Services Group, Inc.
CARL L. ENGLISH 58 Vice president and director of the Company.
Joined AEP in 2004 as president-utility group
and president-utility group and director of the
Service Corporation. From 1999-2004 was
president and chief executive officer of
Consumers Energy gas division. A vice president
and director of certain other AEP System
companies.
JOHN B. KEANE 58 Vice president and director of the Company.
Joined AEP in 2004 as senior vice president,
general counsel and secretary and senior vice
president, general counsel, assistant secretary
and director of the Service Corporation. Was
president of Bainbridge Crossing Advisors from
2003-2004 and vice president-administration-
Northeast Utilities from 1998-2002. A vice
president and director of certain other AEP
System companies.
HOLLY K. KOEPPEL 46 Vice chairman, vice president and director of
the Company. Joined AEP as vice president-new
ventures in 2000, became senior vice president-
corporate development in 2002, executive vice
president-commercial operations of the Service
Corporation in 2002, executive vice president of
AEP in 2002 and assumed her present position in
2004. Was regional vice president of Asia-
Pacific Operations, for Consolidated Natural Gas
International from 1996-2000. Vice chairman,
vice president and director of certain other AEP
System companies.
VENITA MCCELLON-ALLEN 45 Vice president and director of the Company.
Joined AEP in 2004 as senior vice president-
shared services and director of the Service
Corporation. Was senior vice president-human
resources for Baylor Health Care System from
2000-2004 and senior vice president-customer
services and corporate development of CSW from
1996-2000. A vice president and director of
certain other AEP System companies.
ROBERT P. POWERS 51 Vice president and director of the Company
and executive vice president-generation and
director of the Service Corporation. Joined the
Service Corporation in 1998 as senior vice
president-nuclear generation, became senior vice
president-nuclear operations in 2000, executive
vice president-nuclear generation and technical
services in 2001 and assumed his present
position in 2003. A vice president and director
of certain other AEP System companies.
STEPHEN P. SMITH 44 Vice president, treasurer and director of the
Company and senior vice president-corporate
accounting, planning and strategy, treasurer and
director of the Service Corporation. Joined the
Service Corporation in 2003 as senior vice
president-corporate accounting, planning and
strategy, became treasurer of the Service
Corporation and certain other AEP System
companies in 2003. From November 2000 to January
2003 was president and chief operating officer-
corporate services for NiSource. Was senior vice
president and deputy chief financial officer of
Columbia Energy Group from 1999 to 2000. A
director of Natural Resource Partners L.P. A
vice president and director of certain other AEP
System companies.
SUSAN TOMASKY 51 Vice president and director of the Company,
executive vice president and chief financial
officer of AEP and the Service Corporation.
Joined the Service Corporation in 1998 as senior
vice president, general counsel and secretary,
became executive vice president-legal, policy
and corporate communications in 2000, vice
president and chief financial officer of AEP and
executive vice president-policy finance and
strategic planning of the Service Corporation in
2001 and assumed her present position in 2004. A
vice president and director of certain other AEP
System companies.
Messrs. Morris, English, Keane, Powers and Smith and Ms. Koeppel, Ms.
McCellon-Allen and Ms. Tomasky are directors of AEP Texas Central Company, AEP
Texas North Company, Columbus Southern Power Company, Kentucky Power Company,
Ohio Power Company, Public Service Company of Oklahoma and Southwestern Electric
Power Company, all of which are direct or indirect subsidiaries of AEP and have
one or more classes of publicly held preferred stock or debt securities. Messrs.
Morris, English, Powers and Ms. Koeppel, Ms. McCellon-Allen and Ms. Tomasky are
directors of Indiana Michigan Power Company. Messrs. Morris, Keane, Powers and
Smith and Ms. Tomasky are also directors of AEP Generating Company, another
subsidiary of AEP.
NEW GOVERNANCE POLICIES AND PROCESSES
The Company has reviewed the provisions of the Sarbanes-Oxley Act of 2002
(Sarbanes-Oxley Act), the proposed and final rules of the Securities and
Exchange Commission (SEC) and the final listing standards of the NYSE relating
to corporate governance. Based on the SEC's Final Rule, Standards Relating to
Listed Company Audit Committees, the Company is exempt from the audit committee
requirements set forth in Section 301 of the Sarbanes-Oxley Act and therefore is
not required to have an audit committee or an audit committee report on whether
it has an audit committee financial expert. The Company is also exempt from a
majority of the NYSE's listing standards relating to corporate governance. The
Company has voluntarily complied with certain of the NYSE's listing standards
relating to corporate governance where such compliance is in the best interest
of the Company's shareholders.
DIRECTOR NOMINATION PROCESS
The Company does not have a Nominating Committee. The full board identifies
director nominees. AEP owns all of the Common Stock, and, as a result, AEP's
affirmative vote is sufficient to elect director nominees. Consequently, the
board does not accept proposals from preferred stockholders regarding potential
candidates for director nominees.
COMMUNICATIONS TO THE BOARD
Stockholders interested in communicating directly with the Company's board of
directors can contact them by writing c/o Corporate Secretary, Appalachian Power
Company, 1 Riverside Plaza, Columbus, Ohio 43215. The Corporate Secretary will
forward the correspondence to the individual director or directors to whom the
correspondence is directed.
BOARD ATTENDANCE AT ANNUAL MEETING OF STOCKHOLDERS
The Company does not have a policy relating to attendance at the Company's
annual meeting of stockholders by directors. The Company does not solicit
proxies for the election of directors because the affirmative vote of AEP is
sufficient to elect the nominees and, therefore, holders of the Company's
preferred stock rarely attend the annual meeting. Consequently, a policy
encouraging directors to attend the annual meeting of stockholders is not
necessary.
CODE OF ETHICS
All of the Company's directors and officers, including its principal
executive, financial and accounting officers are subject to AEP's Code of
Conduct. The AEP Code of Conduct is available on AEP's website: www.AEP.com.
OTHER BUSINESS
Management does not intend to bring any matters before the meeting other than
the election of directors and does not know of any matters that will be brought
before the meeting by others.
EXECUTIVE COMPENSATION
Certain executive officers of the Company are employees of the Service
Corporation. The salaries of these executive officers are paid by the Service
Corporation and a portion of their salaries has been allocated and charged to
the Company. The following table shows for 2004, 2003 and 2002 the compensation
earned from all AEP System companies by the chief executive officer and the four
other most highly compensated executive officers (as defined by regulations of
the SEC) of the Company at December 31, 2004 and Mr. Fayne, who ceased being an
executive officer in July, 2004 and resigned on December 31, 2004. The AEP Human
Resources Committee (HR Committee) is responsible for the oversight and
administration of the Service Corporation's executive compensation.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------------------ -------------------------------
Restricted
Name and Other Annual Stock Securities LTIP All Other
Principal Salary Bonus Compensation Award Underlying Payouts Compensation
Position Year ($)(1) ($)(2) ($)(3) ($)(4) Options(#) ($)(3) ($)(4)
- -------- ---- ------ ------ ------------ ------ ---------- ------- ------------
Michael G. 2004 1,123,577 1,250,000 607,553 9,228,000 149,000 -0- 178,058
Morris -
chairman of
the board and
chief
executive
officer of the
Company;
chairman of
the board,
president and
chief
executive
officer of AEP
and the
Service
Corporation;
chairman of
the board and
chief
executive
officer of
other AEP
System
companies(7)
Susan Tomasky 2004 503,846 350,000 -0- -0- -0- -0- 50,791
- - vice 2003 476,827 256,137 -0- -0- 25,000 -0- 37,208
president and 2002 451,731 49,116 -0- -0- 88,000 -0- 79,373
director of
the Company;
executive vice
president and
chief
financial
officer of AEP
and the
Service
Corporation;
vice president
and director of
other AEP
System companies
Thomas M. 2004 443,385 241,684 58,330 -0- -0- -0- 141,398
Hagan - 2003 421,615 237,850 -0- -0- 25,000 -0- 29,326
executive vice 2002 345,517 -0- -0- -0- 88,000 -0- 59,976
president-AEP
Utilities West
and director of
the Service
Corporation;
vice president
and director of
other AEP
System companies
Holly K. 2004 443,385 267,217 2,404 -0- -0- -0- 37,304
Koeppel - vice 2003 426,635 175,000 -0- -0- 25,000 -0- 25,451
chairman, vice 2002 267,279 250,000 -0- -0- 88,000 -0- 109,751
president and
director of
the Company;
executive vice
president-AEP
Utilities East
and director of
the Service
Corporation;
vice chairman,
vice president
and director
of other AEP
System companies
Robert P. 2004 433,308 275,000 -0- -0- -0- -0- 34,879
Powers - vice 2003 416,596 300,000 -0- -0- 25,000 -0- 29,007
president and 2002 401,539 49,116 -0- -0- 88,000 -0- 68,853
director of
the Company;
executive vice
president-
generation
and director
of the Service
Corporation;
vice president
and director
of other AEP
System companies
Henry W. Fayne 2004 517,961 309,000 -0- -0- -0- -0- 970,895
- - (retired) 2003 501,923 256,225 -0- -0- 25,000 -0- 39,150
executive vice 2002 481,846 49,116 -0- -0- 88,000 -0- 80,830
president and
director of
the Service
Corporation;
vice president
and director
of other AEP
System
companies(8)
(1) Amounts in the Salary column are composed of executive salaries and
additional days of pay earned for years with more than the standard 260
calendar workdays and holidays.
(2) Amounts in the Bonus column reflect awards under the Senior Officer Annual
Incentive Compensation Plan (SOIP) for 2003 and 2004, except for Mr. Fayne,
whose 2004 bonus was paid as part of a severance agreement. Payments pursuant
to the SOIP are made in the first quarter of the succeeding fiscal year for
performance in the year indicated. No SOIP awards were made for 2002, but
Messrs. Powers and Fayne and Ms. Tomasky received payments of $49,116 each in
February 2002 in recognition of their efforts in connection with a management
reorganization. The amount in the Bonus column for Ms. Koeppel in 2002
represents a payment for successfully completing the sale of certain
international investments.
(3) Amounts shown in Other Annual Compensation include perquisites if the
aggregate amount of such benefits exceeds $50,000. For Mr. Morris, the amount
shown for 2004 includes the incremental cost associated with his personal use
of AEP's airplane of $250,487 and premiums for life insurance that AEP funds
on his behalf of $141,403. The Other Annual Compensation also includes tax
gross-up payments for Mr. Morris and the other named executive officers.
(4) Mr. Morris received an award of 300,000 restricted shares granted under the
AEP 2000 Long-Term Incentive Plan upon his employment with AEP. The
award was made on January 2, 2004. 50,000 shares vested on January 1, 2005
and 50,000 shares vest on January 1, 2006. The remaining 200,000 shares of
restricted stock were granted as a replacement for certain long-term
compensation that Mr. Morris forfeited from his prior employer in order to
accept his position at AEP. These shares vest, subject to his continued
employment, in three equal components on November 30, 2009, November 30, 2010
and November 30, 2011, respectively. The value of the restricted stock as of
December 31, 2004 ($10,302,000) is determined by multiplying the total number
of shares held by the closing price of AEP Common Stock on the NYSE on
December 31, 2004. Dividends are paid on all restricted shares at
the same rate as paid on AEP's Common Stock.
(5) Amounts in the Long-Term Compensation -- Payouts column generally reflect
phantom stock units resulting from performance share units issued under the
AEP 2000 Long-Term Incentive Plan. However, no shares were earned under this
or any other plan in the periods shown. The December 10, 2003 through
December 31, 2004 performance period did result in an award score of 123.1%
of the target award and accrued dividends. However, these shares have not
vested and will not generally vest until December 31, 2006, subject to the
participant's continued employment. Therefore, the payout for these
performance shares will be reported for 2006 if and when they vest. See below
under Long-Term Incentive Plans -- Awards in 2004 on page 7 for additional
information.
(6) Amounts in the All Other Compensation column for 2004, except for additional
compensation to Messrs. Morris and Fayne disclosed in footnotes (7) and (8),
include (i) AEP's matching contributions under the AEP Retirement Savings
Plan and the AEP Supplemental Retirement Savings Plan, a non-qualified plan
designed to supplement the AEP Retirement Savings Plan; (ii) relocation and
temporary living expenses; and (iii) subsidiary companies' director fees.
Detail of the 2004 amounts included in the All Other Compensation column is
shown below.
Mr. Ms. Mr. Ms. Mr. Mr.
Item Morris Tomasky Hagan Koeppel Powers Fayne
- ---- ------ ------- ----- ------- ------ -----
Savings Plan Matching
Contributions........... $ 6,534 $ 6,888 $ 8,850 $ 9,225 $ 7,283 $ 6,793
Supplemental Savings Plan
Matching Contributions.. 41,712 27,103 21,626 18,429 16,546 27,892
Relocation and Temporary
Living Expenses......... 27,250 -0- 101,972 -0- -0- -0-
Subsidiary Director Fees 17,400 16,800 8,950 9,650 11,050 16,200
(7) No 2002 or 2003 compensation information is reported for Mr. Morris because
he was not an executive officer in those years. Club initiation fees of
$85,163 were included in the All Other Compensation column for Mr. Morris.
(8) In July 2004, AEP realigned its management team and Mr. Fayne ceased being
an executive officer of AEP and was assigned other responsibilities. He left
active employment on December 31, 2004 with 31 years of service and, as a
result, was paid severance compensation of $814,039 and accrued vacation pay
of $105,971 that is included in the All Other Compensation column. He also
received a bonus of $309,000, which is included in the Bonus column.
OPTION GRANTS IN 2004
Individual Grants
-------------------------------------------
Number of Percent
Securities of Total
Underlying Options Exercise Grant Date
Options Granted to or Base Present
Granted Employees Price Expiration Value
(#)(1) In 2004 ($/Sh) Date ($)(2)
---------- ---------- -------- ---------- -----------
M. G. Morris.......... 149,000 100% $30.76 1-2-2014 902,940
S. Tomasky............ -0- -0- -- -0- -0-
T. M. Hagan........... -0- -0- -- -0- -0-
H. K. Koeppel......... -0- -0- -- -0- -0-
R. P. Powers.......... -0- -0- -- -0- -0-
H. W. Fayne........... -0- -0- -- -0- -0-
(1) Mr. Morris is the only executive officer named in the Summary Compensation
Table who was granted options in 2004. Upon his hire, the HR Committee
granted 149,000 stock options to Mr. Morris pursuant to his employment
agreement. All other executives named in the Summary Compensation Table were
granted options in December 2003. Mr. Morris' options were granted on
January 2, 2004 and have an exercise price of $30.76, which is equal to the
closing price of AEP Common Stock on the NYSE on that date. Mr. Morris'
options will vest in three approximately equal annual amounts beginning on
January 1, 2005. These options also fully vest upon termination due to
retirement, death or for such other circumstances as the HR Committee
determines warrant vesting and continuation of these options. In the above
circumstances, these options will expire on the earlier of five years from
the date of termination or death, or the original expiration date. All AEP
stock options may also vest as the result of a change-in-control of AEP (see
discussion of the Change-in-Control Agreements on page 12) and expire upon
termination of employment for reasons other than retirement, disability or
death, unless the HR Committee determines that circumstances warrant
continuation of the options for up to five years. Options are
nontransferable.
(2) Value was calculated using the Black-Scholes option valuation model. The
actual value, if any, ultimately realized depends on the market value of AEP
Common Stock at a future date.
Significant assumptions for the grant on January 2, 2004 are shown below:
Stock Price Volatility 28.17% Dividend Yield 4.84%
Risk-Free Rate of Return 4.14% Option Term 7 years
AGGREGATED OPTION EXERCISES IN 2004 AND YEAR-END OPTION VALUES
Shares
Acquired
on Value Number of Securities Value of Unexercised
Exercise Realized Underlying Unexercised In-The-Money
Name (#) ($) Options at 12-31-04(#) Options at 12-31-04($)
- ---- -------- -------- ---------------------- ----------------------
Exercisable Unexercisable Exercisable Unexercisable
M.G. Morris -- -- -- 149,000 -0- $ 533,420
S.Tomasky 29,333 206,130 200,000 83,667 -0- $ 586,846
T.M. Hagan -- -- 91,833 83,667 213,544 $ 586,846
H.K. Koeppel 29,332 182,357 23,700 83,668 -0- $ 586,853
R.P. Powers -- -- 139,033 107,267 213,544 $ 586,846
H.W. Fayne 29,333 211,178 283,667 -- 586,846 $ --
* Based on the difference between the closing price of AEP Common Stock on the
NYSE on December 31, 2004 ($34.34) and the option exercise price. "In-the-
money" means the market price of the stock is greater than the exercise
price of the option on the date indicated.
LONG-TERM INCENTIVE PLANS -- AWARDS IN 2004
Mr. Morris is the only executive officer named in the Summary Compensation
Table who received awards in 2004. Pursuant to his employment contract, Mr.
Morris was awarded performance share units in January 2004, pursuant to the AEP
2000 Long-Term Incentive Plan. All other executives named in the Summary
Compensation Table received awards for the same period of performance in
December 2003, which were previously reported in AEP's 2004 Proxy Statement.
Although Mr. Morris' individual performance period was less than one year, the
performance period measured exceeded one year. Mr. Morris' award is described
here and in footnote 5 to the Summary Compensation Table under LTIP Payouts for
consistency with the other named executive officers. Performance share units are
generally equivalent to shares of AEP Common Stock. Dividends are reinvested in
additional performance share units for the same performance and vesting period
using the closing price of the AEP Common Stock on the dividend payment date.
The value of the performance share unit awards is dependent on AEP's total
shareholder return for the applicable performance period relative to the S&P
electric utilities, the market price of AEP Common Stock at the end of the
performance period, the value of dividends paid during the performance period,
the AEP Common Stock price on each dividend payment date and AEP's earnings per
share versus a target established by the HR Committee.
The number of common stock equivalent units that may be earned at threshold,
target and maximum performance levels, excluding any reinvested dividends, is
shown in the table below. The HR Committee may, in its discretion, reduce the
number of performance share unit targets otherwise earned. In accordance with
the performance goals established for the periods set forth below, the
threshold, target and maximum awards are equal to 20%, 100% and 200%,
respectively, of the performance share unit awards.
Deferral of earned performance share units into phantom AEP Stock Units
(equivalent to shares of AEP Common Stock) is mandatory until the officer has
met his or her stock ownership requirements discussed in the AEP Human Resources
Committee Report on Executive Compensation. Once their stock ownership
requirement is met, officers may elect to continue to defer earned performance
share units or to receive subsequently earned awards in cash and/or AEP Common
Stock.
Estimated Future Payouts of
Performance Share Units Under
Non-Stock Price-Based Plan
--------------------------------------
Performance
Number of Period Until
Performance Maturation Threshold Target Maximum
Name Share Units or Payout (#) (#) (#)
---- ----------- ----------- --------- ------ -------
M. G. Morris 119,000 12/10/03- 23,800 119,000 238,000
12/31/04
T. M. Hagan -0- -0- -0- -0-
S. Tomasky -0- -0- -0- -0-
H. K. Koeppel -0- -0- -0- -0-
R. P. Powers -0- -0- -0- -0-
H. W. Fayne -0- -0- -0- -0-
The December 10, 2003 through December 31, 2004 performance period did result
in an award score of 123.1% of the target award and accrued dividends. These
performance shares will generally vest, subject to the participant's continued
employment, on December 31, 2006 and, upon vesting, will be reported in the LTIP
Payouts column. As of December 31, 2004, the performance shares awarded for Mr.
Morris and the other named executive officers (other than Mr. Fayne) had an
estimated value of $5,247,770 and $934,872, respectively. The number of
performance shares held by Mr. Fayne for this performance period was reduced by
approximately two-thirds upon his retirement. The estimated value of Mr. Fayne's
performance shares was $311,601 as of December 31, 2004.
RETIREMENT BENEFITS
AEP maintains qualified and nonqualified defined benefit ERISA pension plans
for eligible employees. The tax-qualified plans are the American Electric Power
System Retirement Plan (AEP Retirement Plan) and the Central and South West
Corporation Cash Balance Retirement Plan (CSW Cash Balance Plan). The
nonqualified plans are the American Electric Power System Excess Benefit Plan
(AEP Excess Benefit Plan) (together with the AEP Retirement Plan, the AEP Plans)
and the Central and South West Corporation Special Executive Retirement Plan
(CSW SERP) (together with the CSW Cash Balance Plan, the CSW Plans), each of
which provides (i) benefits that cannot be payable under the respective
tax-qualified plans because of maximum limitations imposed on such plans by the
Internal Revenue Code and (ii) benefits pursuant to individual agreements with
certain AEP employees. The CSW Plans continue as separate plans for those AEP
System employees who were participants in the CSW Cash Balance Plan as of
December 31, 2000. Each of the executive officers named in the Summary
Compensation Table (other than Mr. Hagan) participates in the AEP Plans. Mr.
Hagan participates in the CSW Plans.
The benefit formula generally used to calculate benefit additions under the
pension plans for all plan participants (including the executive officers named
in the Summary Compensation Table) is a cash balance formula. When the cash
balance formula was added to each plan, an opening balance was established for
employees then participating under each plan's prior benefit formula (as further
described below), using a number of factors as set forth in the appropriate
plan. Under the cash balance formula, each participant has an account
established (for record keeping purposes only) to which dollar amount credits
are allocated each year based on a percentage of the participant's eligible pay.
The amount of pay taken into account for the executive officers named in the
Summary Compensation Table has been capped at $1,000,000. Effective January 1,
2004, that cap on eligible pay was increased to the greater of $1,000,000 or two
times the participant's annual base rate of pay as of the last day of a given
year (or, if the participant's employment was terminated during the year, as of
the date of such termination of employment). The applicable percentage of
eligible pay credited to a participant's account is determined each year by
reference to the participant's age and years of vesting service as of December
31 of that year (or as of the participant's termination date, if earlier). The
following table shows the applicable percentage used to determine the annual
dollar amount credits based on the sum of age and years of service indicated:
Sum of Age Plus Applicable
Years of Service Percentage
---------------- ----------
Less than 30 3.0%
30-39 3.5%
40-49 4.5%
50-59 5.5%
60-69 7.0%
70 or more 8.5%
All dollar amount balances in the cash balance accounts of participants earn
a fixed rate of interest that is also credited annually. The interest rate for a
particular year is the Applicable Interest Rate set in accordance with Section
417(e)(3)(A)(ii) of the Internal Revenue Code and is currently the average
interest rate on 30-year Treasury securities for the month of November of the
prior year. For 2004, the interest rate was 5.12%. Interest continues to be
credited as long as the participant's balance remains in the plan.
The CSW SERP also includes a final average pay cash balance formula which
provides that the cash balance account of participants who at termination of
employment hold the office of Vice President or higher of an employer
participating in the CSW Plans will be no less than (i) the sum of the
Applicable Percentages from the foregoing table generally for each year that the
participant earned credited service under the CSW Cash Balance Plan, multiplied
by (ii) the participant's final average pay. "Final average pay" for executive
officers generally is the average annual compensation (consisting of the
following amounts when paid: wages as reported in the Salary column of the
Summary Compensation Table and that the portion of the Bonus column attributable
to the Senior Officer Annual Incentive Compensation Plan, which is described in
the AEP Human Resources Committee Report on Executive Compensation under the
heading Annual Incentive) during the 36 consecutive months of highest pay during
the 120 months prior to retirement.
Under the cash balance formula, an amount equal to the vested balance
(including tax-qualified and nonqualified benefits) then credited to the account
is payable to the participant in the form of an immediate or deferred lump-sum
or an annuity or, with respect to the nonqualified benefits, in installments.
Benefits under the AEP Plans and the CSW Plans generally do not become vested
until the participant has been credited with at least 5 years of service. Mr.
Morris has an individual agreement with AEP that provides that Mr. Morris will
become vested in the amount credited to his cash balance account at a rate of
20% per year as of each of the first five anniversaries of his commencement date
(January 1, 2004).
Benefits (from both the tax-qualified and nonqualified plans) under the cash
balance formula are not subject to reduction for Social Security benefits or
other offset amounts, except that Ms. Koeppel and Mr. Powers each have an
individual agreement which provides that their supplemental retirement benefits
are reduced by pension entitlements, if any, from plans sponsored by prior
employers. The estimated annual benefit that would be payable as a single life
annuity under the cash balance formula (or, with respect to Mr. Hagan, under the
CSW Plans' final average pay cash balance formula) to each of the executive
officers named in the Summary Compensation Table (other than Mr. Fayne) at age
65 is:
Annual
Name Benefit
---- --------
M. G. Morris $397,600
S. Tomasky 297,000
T. M. Hagan 117,100
H. K. Koeppel 194,500
R. P. Powers 192,300
These amounts are based on the following assumptions and agreements:
o The amounts shown in the Salary column of the Summary Compensation Table
are used for calendar year 2004 and all subsequent years, assuming no
salary changes. The portion of the Bonus column attributable to the
Senior Officer Annual Incentive Compensation Plan is used for 2005 and
annual incentive awards at the 2004 target level (as further described
in the AEP Human Resources Committee Report on Executive Compensation
under the heading Annual Incentive on page 14) are used for all subsequent
years beyond 2005.
o Conversion of the lump-sum cash balance to a single life annuity at age
65, based on an interest rate of 4.89% (the Applicable Interest Rate being
used by the Plans for 2005) and the 1994 Group Annuity Reserving Table
published by the Internal Revenue Service.
o Mr. Morris has an individual agreement with AEP that provides for an
opening cash balance account of $2,100,000 as of January 1, 2004 (his
employment commencement date) and annual credits at the maximum rate
provided under the AEP Plans (currently 8.5%).
o Ms. Tomasky, Ms. Koeppel and Mr. Powers have individual agreements with
AEP that credit them with years of service in addition to their years of
service with AEP as follows: Ms. Tomasky, 20 years; Ms. Koeppel, 15.25
years; and Mr. Powers, 17 years. That service credit was taken into
account in calculating their accrued benefit under the AEP Plans as of
December 31, 2000, and therefore was reflected in the amount credited to
their opening cash balance account as of January 1, 2001, the date the
cash balance formula first became effective. As mentioned above, the
agreements for Ms. Koeppel and Mr. Powers provide that their respective
supplemental retirement benefits are reduced by pension entitlements, if
any, from plans sponsored by prior employers.
Henry Fayne's employment with AEP terminated as of December 31, 2004 and he
commenced payment of his retirement benefits as of January 1, 2005. His
retirement benefits that became payable from the AEP Plans were determined under
the final average pay formula, which is described in the following paragraphs.
In addition, employees who have continuously participated in the AEP Plans
since December 31, 2000 remain eligible for a pension benefit using the final
average pay formula that was in place before the implementation of the cash
balance formula described above. Employees who are eligible for both formulas
will receive their benefits under the formula that provides the higher benefit,
given the participant's choice of the form of benefit (single life annuity, lump
sum, etc.) Participants who remain eligible to receive the final average pay
formula will continue to accrue pension benefits under that formula until
December 31, 2010, at which time each participant's final average pay benefit
payable at the participant's normal retirement age (the later of age 65 or 5
years of service) will be frozen and unaffected by the participant's subsequent
service or compensation. After December 31, 2010, each participant's frozen
final average pay benefit will be the minimum benefit a participant can receive
from the AEP Plans at the participant's normal retirement age.
Final average pay under the AEP Plans is computed using the highest average
36 consecutive months of the salary and bonus earned out of the participant's
most recent 10 years of service. The information used to compute the final
average pay benefit for executive officers named in the Summary Compensation
Table above, other than Mr. Morris (who is not eligible for the final average
pay formula under the AEP Plans) and Mr. Hagan (whose final average pay benefits
are discussed below in connection with the CSW Plans), is consistent with that
shown in the Salary column of the Summary Compensation Table and that portion of
the Bonus column attributable to the Senior Officer Annual Incentive
Compensation Plan.
The following table shows the approximate annual annuities that would be
payable to executive officers and other management employees under the final
average pay formula of the AEP Plans, assuming termination of employment on
December 31, 2004 after various periods of service and with benefits commencing
at age 65.
AEP PLANS PENSION PLAN TABLE
Years of Accredited Service
-------------------------------------------------------------
Highest Average
Annual Earnings 15 20 25 30 35 40
- --------------- -------------------------------------------------------------
$ 400,000 $ 92,715 $123,620 $154,525 $ 185,430 $ 216,335 $ 242,935
500,000 116,715 155,620 194,525 233,430 272,335 305,585
600,000 140,715 187,620 234,525 281,430 328,335 368,235
700,000 164,715 219,620 274,525 329,430 384,335 430,885
800,000 188,715 251,620 314,525 377,430 440,335 493,535
900,000 212,715 283,620 354,525 425,430 469,335 556,185
1,000,000 236,715 315,620 394,525 473,700 552,335 618,835
1,200,000 284,715 379,620 474,525 569,700 664,335 744,135
The amounts shown in the table are the straight life annuities payable under
the final average pay formula of the AEP Plans without reduction for any
optional features that may be elected at the participant's expense. Retirement
benefits listed in the table are not subject to any further reduction for Social
Security or other offset amounts. The retirement annuity is reduced 3% per year
for each year prior to age 62 in the event of a termination of employment after
age 55 and the participant's election to commence benefits between ages 55 and
62. If an employee terminates employment after age 55 and commences benefits at
or after age 62, there is no reduction in the retirement annuity.
Under the AEP Plans, as of December 31, 2004, for the executive officers
named in the Summary Compensation Table (except for Mr. Morris and Mr. Hagan),
the number of years of service applicable for the final average pay formula were
as follows: Ms. Tomasky, 26.5 years; Ms. Koeppel, 19.8 years; Mr. Powers, 22.5
years; and Mr. Fayne, 30.1 years. The years of service for Ms. Tomasky, Ms.
Koeppel and Mr. Powers include years of service provided by their respective
agreements with AEP as described above in connection with the cash balance
formula. The agreements for Ms. Koeppel and Mr. Powers provide that their
respective supplemental retirement benefits are reduced by pension entitlements,
if any, from plans sponsored by prior employers.
Under the CSW Plans, certain employees who were 50 or over and had completed
at least 10 years of service as of July, 1997, remain eligible for benefits
under the prior pension formulas that are based on career average pay and final
average pay. Of the executive officers named in the Summary Compensation Table,
Mr. Hagan is eligible to participate in the CSW Plans and has a choice upon his
termination of employment to elect his benefit based on the cash balance formula
or the prior pension formulas.
The following table shows the approximate annual annuities that would be
payable to employees in certain higher salary classifications under the prior
benefit formulas provided through the CSW Plans, assuming termination of
employment on December 31, 2004 after various periods of service and with
benefits commencing at age 65, and prior to reduction by up to 50 percent of the
participant's Social Security benefit.
CSW PLANS PENSION PLAN TABLE
-----------------------------------------
Highest
Average
Annual 30 or
Earnings 15 20 25 more
- ----------- -----------------------------------------
$ 400,000 $100,000 $133,333 $166,667 $200,000
500,000 125,000 166,667 208,333 250,000
600,000 150,000 200,000 250,000 300,000
700,000 175,000 233,333 291,667 350,000
800,000 200,000 266,667 333,333 400,000
900,000 225,000 300,000 375,000 450,000
1,000,000 250,000 333,333 416,667 500,000
1,200,000 300,000 400,000 500,000 600,000
Under the CSW Plans, the annual normal retirement benefit payable from the
final average pay formula is based on 12/3% of "Average Compensation" times the
number of years of credited service (up to a maximum of 30 years), reduced by no
more than 50 percent of the participant's age 62 or later Social Security
benefit and then adjusted annually based on changes in the consumer price index.
"Average Compensation" equals the average annual compensation, reported as
Salary in the Summary Compensation Table, during the 36 consecutive months of
highest pay during the 120 months prior to retirement. Mr. Hagan has an
agreement entered into with CSW prior to its merger with AEP under which he is
entitled to a retirement benefit that will bring his credited years of service
to 30 if he remains employed with AEP until age 60 or thereafter. Mr. Hagan
attained age 60 during 2004. Therefore, his years of credited service and age as
of December 31, 2004, are 30 and 60.
AEP also made available a voluntary deferred-compensation program in 1986,
which permitted certain members of AEP System management to defer receipt of a
portion of their salaries. Under this program, a participant was able to
annually defer up to 10% of his or her salary over a four-year period, and
receive supplemental retirement or survivor benefit payments over a 15-year
period. The amount of supplemental retirement payments received is dependent
upon the amount deferred, age at the time the deferral election was made, and
number of years until the participant retires. Mr. Fayne is the only executive
officer named in the Summary Compensation Table who participated in this
program. He deferred $9,000 of his salary annually over a four-year period and,
as a result of his retirement, he will receive monthly supplemental retirement
payments of $4,594 over fifteen years commencing in January 2005.
EMPLOYMENT AGREEMENT
AEP entered into an employment agreement (Agreement) with Mr. Morris
that became effective January 1, 2004 for a three-year period. The Agreement is
automatically renewed for additional one-year periods unless Mr. Morris or AEP
takes specific actions to terminate it. The Agreement provides that Mr. Morris
receives an annual salary of $1,115,000, subject to increase, and will
participate in the annual bonus and long-term incentive plans. Mr. Morris is
eligible to receive an annual bonus under the Senior Officer Annual Incentive
Compensation Plan and his target percentage will be equal to at least 100% of
his base salary. The Agreement provides that in his first year, Mr. Morris will
receive an annual bonus that in no event is less than the target bonus. The
Agreement awarded Mr. Morris a nonqualified stock option grant for 149,000
shares, a performance share grant for 119,000 shares and 100,000 restricted
shares as a bonus and an additional 200,000 restricted shares as a replacement
for certain long-term compensation that Mr. Morris forfeited from his prior
employer in order to accept employment with AEP. One-half of the restricted
shares awarded to Mr. Morris as a bonus (50,000 shares) vested on January 1,
2005 and the remaining one-half will vest, subject to his continued AEP
employment, on January 1, 2006. The restricted shares awarded to Mr. Morris
as a replacement for forfeited compensation will vest, subject to his continued
employment, in three approximately equal components of 66,666, 66,667 and 66,667
shares on November 30, 2009, November 30, 2010 and November 30, 2011,
respectively. Mr. Morris may use AEP's aircraft for personal use. AEP has
purchased a universal life insurance policy for Mr. Morris that provides a $3
million death benefit. Mr. Morris was provided an opening balance in AEP's
Retirement Plan of $2.1 million, which vests in increments of 20% on each of the
first five anniversary dates of his employment. Mr. Morris is credited with the
maximum rate permitted under the Retirement Plan (currently at 8.5%) on all
eligible earnings up to two times his annual base salary. See above under
Retirement Benefits for additional information. In the event AEP terminates the
Agreement for reasons other than cause, Mr. Morris will receive a severance
payment equal to two times his annual base salary.
SEVERANCE AGREEMENTS AND CHANGE-IN-CONTROL AGREEMENTS
In January 2005, the AEP Board adopted a policy to seek shareholder approval
for any future severance agreement with any senior executive officer of AEP
when any such agreement would result in specified benefits provided to the
officer in excess of 2.99 times his or her salary and bonus. The policy resulted
from AEP Board discussions that began following the April 2004 annual
shareholders' meeting, at which a majority of the shareholders who cast votes
(although not a majority of the shares outstanding) approved a resolution
requesting that the AEP Board consider such a policy. A copy of the policy can
be found on our website at www.AEP.com.
AEP has change-in-control agreements with all of the executive officers named
in the Summary Compensation Table, except for Mr. Fayne. If there is a
"change-in-control" of AEP and the executive officer's employment is terminated
(i) by AEP without "cause" or (ii) by the officer because of a detrimental
change in responsibilities, a required relocation or a reduction in salary or
benefits, these agreements provide for:
o Lump sum payment equal to 2.99 times the officer's annual base salary plus
target annual incentive under the Senior Officer Annual Incentive
Compensation Plan.
o Payment, if required, to make the officer whole for any excise tax imposed
by Section 4999 of the Internal Revenue Code.
o Outplacement services and other non-cash severance or separation benefits
under the terms of a plan or agreement as may then be available to other
employees.
Under these agreements, "change-in-control" means:
o The acquisition by any person of the beneficial ownership of securities
representing 25% or more of AEP's voting stock;
o A change in the composition of a majority of the Board of Directors
under certain circumstances within any two-year period; or
o Approval by the shareholders of the liquidation of AEP, disposition of all
or substantially all of the assets of AEP or, under certain circumstances,
a merger of AEP with another corporation.
In addition to the change-in-control agreements described above, the AEP
2000 Long-Term Incentive Plan authorizes the HR Committee to include change-in-
control provisions in award agreements (defined in a manner similar to the
change-in-control agreements described above). Such provisions may include one
or more of the following: (1) the acceleration or extension of time periods for
purposes of exercising, vesting in or realizing gains from any award; (2) the
waiver or modification of performance or other conditions related to the payment
or other rights under an award; (3) provision for the cash settlement of an
award for an equivalent cash value; and (4) modification or adjustment to the
award as the HR Committee deems appropriate to protect the interests of
participants upon or following a change-in-control. The outstanding award
agreements issued to the executive officers contain provisions that accelerate
the vesting and exercise dates of unexercised options and that offer a cash
settlement upon a change-in-control.
The AEP Excess Benefit Plan also provides that all accrued supplemental
retirement benefits become fully vested upon a change-in-control.
AEP HUMAN RESOURCES COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The HR Committee annually reviews AEP's executive compensation in the context
of the performance of management and AEP. None of the members of the HR
Committee is an officer or employee of any AEP System company. In addition, each
of the current members of the HR Committee has been determined to be independent
by the Board of Directors in accordance with SEC and NYSE rules. One HR
Committee member, Mr. Brooks, retired as Chairman and Chief Executive Officer of
Central and South West Corporation in June 2000 following the completion of the
AEP-CSW merger, and currently receives non-qualified pension and deferred
compensation payments from AEP. As a result Mr. Brooks is not considered to be
an outside director for purposes of determining executive compensation pursuant
to Section 162(m) of the Internal Revenue Code and he, therefore, abstains from
voting on performance-based compensation issues at HR Committee meetings
whenever this is necessary in order to preserve the intended tax deductibility
of qualified compensation under Section 162(m).
In setting compensation levels, the HR Committee recognizes that AEP's
executive officers are charged with managing what is among the largest and most
geographically diverse energy companies in a volatile business environment.
AEP's executive compensation is designed to maximize shareholder value, to
support the implementation of AEP's business strategy and to improve both
corporate and personal performance. The HR Committee's compensation policies
supporting these objectives are:
o To pay in a manner that motivates both short- and long-term performance,
focuses on meeting specified corporate goals and promotes the long-term
interests of shareholders.
o To place a significant amount of compensation for senior executives at risk
in the form of variable incentive compensation instead of fixed or base pay,
with much of this risk similar to the risk experienced by other AEP
shareholders.
o To establish compensation opportunities that enhance AEP's ability to
attract, retain, reward, motivate and encourage the development of
exceptionally knowledgeable, highly qualified and experienced executives.
o To provide compensation that is reflective of current market practices in
order to maintain a stable and successful management team.
In carrying out its responsibilities, the HR Committee has hired a nationally
recognized independent consultant to provide information on current trends in
executive compensation and benefits within the energy services industry and
among U.S. industrial companies in general, and to provide recommendations to
the HR Committee regarding AEP's compensation and benefits programs and
practices.
The HR Committee annually reviews AEP's executive compensation relative to a
Compensation Peer Group comprised of companies that represent the talent markets
from which AEP must compete to attract and retain executives. The HR Committee
annually reviews and adjusts the composition of the Compensation Peer Group to
ensure that it provides appropriate compensation comparisons. For 2004, the
Compensation Peer Group consists of 13 large and diversified energy services
companies, plus 12 Fortune 500 companies, which, taken as a whole, approximately
reflect AEP's size, scale, business complexity and diversity. The HR Committee
generally uses median compensation information of the Compensation Peer Group as
its benchmark but does consider other comparisons, such as industry-specific
compensation surveys, when setting pay levels.
Stock Ownership Guidelines
The HR Committee believes that linking a significant portion of an
executive's current and potential future net worth to AEP's success, as
reflected in the stock price and dividends paid, gives the executive a stake
similar to that of AEP's shareholders and further encourages long-term
management strategies that benefit shareholders. Therefore, the HR Committee
maintains stock ownership targets for senior managers in order to further align
executive and shareholder interests. The HR Committee annually reviews the
target stock ownership levels for each salary grade and officer level and
periodically adjusts these levels as they determine to be appropriate. AEP's
target ownership levels are directly related to the officer's corporate
position, with the greatest ownership target assigned to the chief executive
officer. In 2004, stock ownership targets were assigned for each of the
executive officers named in the Summary Compensation Table in an amount of
109,300 shares for the Chief Executive Officer (CEO) and 35,300 for each of the
Executive Vice Presidents.
Executives are expected to achieve stock ownership targets within five years
of the date each is assigned. Personal AEP stock holdings, restricted stock, and
common stock equivalents resulting from performance shares, deferred
compensation and balances in the AEP stock fund of the AEP System Retirement
Savings Plan and AEP System Supplemental Retirement Savings Plan are included in
determining compliance with the stock ownership targets. AEP's ownership targets
reflect the minimum total stock ownership each executive is expected to achieve
within the specified five-year period and, therefore, all AEP common stock and
stock equivalents held by an executive are counted towards all of their
ownership targets simultaneously. All performance shares that would otherwise be
earned are mandatorily deferred into phantom Stock Units (career shares), a
common stock equivalent, for participants who have not met their stock ownership
targets. Participants are required to hold these career shares until after their
AEP employment ends. In addition, executives that have not met a minimum stock
ownership target within its associated 5 year window period will be required to
(i) defer twenty-five percent (25%) of their annual incentive compensation into
AEP phantom Stock Units and (ii) retain all AEP shares realized through AEP
stock options exercises, except an amount equal to the exercise costs and tax
withholding, until their stock ownership target has been satisfied. Beginning
January 1, 2006, the mandatory annual incentive compensation deferral, described
in (i) above, will increase to fifty percent (50%).
As of March 1, 2005, Mr. Morris, Ms. Tomasky and Mr. Hagan have each met all
of their stock ownership targets. Ms. Koeppel and Mr. Powers have each met the
stock ownership target assigned to them before 2004 and are on course to reach
the stock ownership target assigned to them in January 2004. See the table on
page 17 for actual ownership amounts.
Components of Executive Compensation
Base Salary. When reviewing executive base salaries, the HR Committee
considers the pay practices of its Compensation Peer Group; the
responsibilities, performance, and experience of each executive officer;
reporting relationships; supervisor recommendations; and the relationship of the
base salaries of executive officers to the base salaries of other AEP employees.
Base salaries are reviewed annually and adjusted, when and as appropriate, to
reflect individual and corporate performance and changes within the Compensation
Peer Group.
The HR Committee generally targets base salary levels at the median of AEP's
Compensation Peer Group. For 2004, base pay represented less than one-quarter of
the compensation opportunity for the CEO and less than one-third for the other
listed executive officers when annual and long-term incentive compensation is
included (assuming target performance levels were achieved). The 2004 base
salary levels for the CEO and other executive officers named in the Summary
Compensation Table approximated the median of AEP's Compensation Peer Group for
the positions each held at the beginning of the year.
Annual Incentive. The primary purpose of AEP's annual incentive compensation
is to motivate senior management to meet and exceed annual objectives that are
part of AEP's strategic plan for maximizing shareholder value. For 2004, AEP's
Senior Officer Incentive Compensation Plan (SOIP) provided a variable,
performance-based annual incentive as part of total compensation for executive
officers.
SOIP participants are assigned an annual target award expressed as a
percentage of their base earnings for the period. For 2004 the HR Committee
initially established annual SOIP target awards for the executive officers named
in the Summary Compensation Table, other than Mr. Morris, of 60% of salary. The
incentive target for Ms. Tomasky was increased to 65% of salary in June 2004
resulting in a weighted average target of 62.8% of salary for the full year. As
part of Mr. Morris's employment agreement, the HR Committee established his
annual target award at 100% of his salary for 2004 and specified that his bonus
for 2004 will not be less than the target amount.
SOIP awards for 2004 were based on the following pre-established performance
measures:
o Earnings Per Share (50%),
o Operations and Maintenance Expense vs. Budget (15%), and
o Annual operating goals (35%), which include:
o Workforce Safety (15%),
o Workforce Diversity (10%), and
o Environmental Goals (10%).
Actual awards for 2004 could have varied from 0% to 200% of the target award
based on performance. Annual incentive payments are subject to adjustment at the
discretion of the HR Committee.
For 2004, the above performance measures produced an aggregate award score of
96.5% of each employee's target award for the SOIP. The amounts earned for 2004
are shown for the executive officers listed in the Bonus column of the Summary
Compensation Table on page 5.
Long-Term Incentive. The primary purpose of longer-term, equity-based,
incentive compensation is to motivate senior managers to maximize shareholder
value by linking a portion of their compensation directly to shareholder return.
All AEP long-term incentive (LTI) awards to executive officers are made under
the shareholder-approved AEP 2000 Long-Term Incentive Plan. This plan provides
various types of LTI and performance measures from which the HR Committee may
select to provide the most effective incentives to Company management for
achievement of AEP's strategies and goals.
In December 2003 the HR Committee made LTI awards in lieu of LTI awards that
would normally have been made in January 2004, which were previously reported in
AEP's 2004 proxy statement. The HR Committee reverted back to a January award
cycle for subsequent LTI awards. As a result of this change in LTI award timing,
AEP made no LTI awards in 2004 to the executive officers named in the Summary
Compensation Table other than to Mr. Morris who received LTI awards upon his
hire in January 2004 pursuant to his employment agreement.
Stock Options
Upon his hire, the HR Committee granted 149,000 stock options to Mr. Morris
pursuant to his employment agreement as shown in the Summary Compensation Table
on page 5.
Subsequently, the HR Committee stopped issuing new stock option awards as
part of its LTI program, in favor of increased utilization of performance
shares. The HR Committee believes this change was necessary to reflect changes
in AEP's business objectives, external market compensation practices, and the
cost-benefit ratio of stock options relative to other alternatives. Therefore,
no other stock options were awarded in 2004.
Performance Shares
The HR Committee periodically grants target performance share awards to AEP
management. Performance shares were granted in January of 2002 and 2003 each
covering the three-year performance period beginning January 1st of that year
and generally vesting, subject to the participant's continued employment, at the
end of the performance period. Performance shares were also granted in December
2003 covering the performance period of December 10, 2003 through December 31,
2004 and generally vesting, subject to the participant's continued employment,
on December 31, 2006. The performance share awards for the 2002-2004 and
2003-2005 performance periods are earned based on AEP's three-year total
shareholder return for the performance period measured relative to the S&P
electric utility index with at least median performance required to earn the
target award. The performance share awards for the December 10, 2003 through
December 31, 2004 performance period are earned based on two equally weighted
performance measures: total shareholder return for the performance period
measured relative to the S&P electric utilities and one-year earnings per share
measured relative to a board approved target. The value of performance share
awards ultimately earned for a performance period can range from 0%-200% of the
target value plus accumulated dividends.
Upon his hire in January 2004 the HR Committee established a target
performance share award of 119,000 performance shares for the December 10, 2003
through December 31, 2004 performance period for Mr. Morris pursuant to his
employment agreement. No other performance share targets were established in
2004.
Payments of earned performance share awards are initially deferred in the
form of phantom Stock Units (equivalent in fair value to shares of AEP Common
Stock) until the participant has met his or her stock ownership target. Such
deferrals continue until at least the participant's termination of employment.
Once participants reach their respective stock ownership target, they may then
elect either to defer subsequent awards into AEP's deferred compensation plan,
which offers returns equivalent to various market-based investment options
including AEP stock equivalents, or to receive further earned performance share
awards in cash and/or AEP Common Stock.
AEP's total shareholder return for the 2002-2004 performance period ranked
19th relative to the S&P peer utilities which produced an award score equal to
20% of the performance shares targets originally granted for this performance
period plus dividend credits. However, the HR Committee reduced the award score
for this performance period to 0% since AEP's total shareholder return for this
performance period was both negative and less than the return on comparable U.S.
Treasury securities.
AEP's total shareholder return and earnings per share for the December 10,
2003 through December 31, 2004 performance period produced an award score of
123.1% of the performance share targets originally granted for this performance
period plus dividend credits. The resulting awards have been made in phantom
Stock Units that will generally vest, subject to the participant's continued
employment, on December 31, 2006.
A further description of performance share awards is shown under Long-Term
Incentive Plans - Awards in 2004 on page 7.
Restricted Stock
Upon his hire and pursuant to his employment agreement the HR Committee
granted 100,000 restricted shares to Mr. Morris as a bonus and an additional
200,000 restricted shares as a replacement for certain long-term compensation
from his prior employer that Mr. Morris was required to forfeit in order to
accept employment with AEP. These restricted shares are shares of AEP common
stock that include dividend and voting rights but that cannot be sold,
transferred, pledged or otherwise encumbered until they vest. One-half of the
restricted shares awarded to Mr. Morris as a bonus (50,000 shares) vested on
January 1, 2005 and the remaining one-half will vest, subject to his continued
AEP employment, on January 1, 2006. The restricted shares awarded to Mr. Morris
as a replacement for forfeited compensation will vest, subject to his continued
employment, in three approximately equal components of 66,666, 66,667 and 66,667
shares on November 30, 2009, November 30, 2010 and November 30, 2011,
respectively. The HR Committee believes that granting these restricted shares to
Mr. Morris was reasonable, appropriate and necessary in order to ensure his hire
and a timely and successful CEO transition, as well as to motivate Mr. Morris to
vigorously pursue the interests of shareholders. The dollar value of the
restricted shares awarded to Mr. Morris are shown in the Summary Compensation
Table on page 5.
No restricted shares were awarded to any other executive officer or other
employee in 2004 but the HR Committee did award restricted Stock Units to
certain executive officers and other key employees who are not listed in the
Summary Compensation Table during 2004.
Tax Policy on Deductibility of Compensation
The HR Committee has considered the impact of Section 162(m) of the Internal
Revenue Code, which limits the deductibility of compensation in excess of
$1,000,000 paid in any year to AEP's chief executive officer or any of the other
four executive officers named in the Summary Compensation Table who are serving
as such at the end of the year. The HR Committee's general policy is to
structure compensation programs so that Section 162(m) does not limit the tax
deductibility of compensation for AEP. The HR Committee also believes that AEP
needs flexibility to meet its incentive and retention objectives, even if AEP
may not deduct all of its compensation. Performance shares and stock options
issued under the AEP 2000 Long-Term Incentive Plan have been structured
to be exempt from the deduction limit because they are made pursuant to a
shareholder-approved, performance-driven plan. Annual incentive awards under the
SOIP are not eligible for the performance-based exemption because the SOIP has
not been designed or implemented in a manner that would comply with the
requirements of Section 162(m). The HR Committee believes that it is in the
interests of AEP to maintain flexibility to increase annual incentive awards
above the amount a strict performance formula might provide. The reservation of
such discretion, in itself, precludes the application of the exemption from the
Section 162(m) deduction limits.
No executive officer named in the Summary Compensation Table, other than Mr.
Morris, had taxable compensation paid in 2004 in excess of the Section 162(m)
limit. The restricted shares issued to Mr. Morris upon his hire and pursuant to
his employment agreement are not performance-based awards and the value of these
awards, his 2004 annual bonus and a small portion of his salary, will not be tax
deductible to AEP. The HR Committee intends to continue to consider the impact
of Section 162(m) in its executive compensation decisions and in evaluating
AEP's executive compensation programs.
AEP Human Resources Committee Members
John P. DesBarres, Chair
E. R. Brooks
Donald M. Carlton
Robert W. Fri
Compensation Committee Interlocks and Insider Participation
The HR Committee is composed of Messrs. Brooks, Carlton, DesBarres and Fri.
One HR Committee member, Mr. Brooks, retired as Chairman and Chief Executive
Officer of Central and South West Corporation in June 2000 following the
completion of the AEP-CSW merger. As a result Mr. Brooks is not considered to be
an outside director for purposes of determining executive compensation pursuant
to Section 162(m) of the Internal Revenue Code and he, therefore, abstains from
voting on performance-based compensation issues at HR Committee meetings
whenever this is necessary in order to preserve the tax deductibility of Section
162(m) qualified compensation.
SHARE OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the beneficial ownership of AEP Common Stock
and stock-based units as of January 1, 2005 for all nominees to the Board of
Directors, each of the persons named in the Summary Compensation Table and all
such directors and executive officers as a group. Unless otherwise noted, each
person had sole voting and investment power over the number of shares of AEP
Common Stock and stock-based units of AEP set forth across from his or her name.
Fractions of shares and units have been rounded to the nearest whole number.
Options
Exercisable
Stock Within
Name Shares Units(a) 60 Days Total
---- ------ -------- ------- -------
C. L. English.............. -- 30,632 -- 30,632
H. W. Fayne................ 7,129(b)(c) 13,699 283,667 304,495
T. M. Hagan................ 15,030(b) 155 129,499 144,684
J. B. Keane................ -- 15,316 -- 15,316
H. K. Koeppel.............. 246(b) 380 61,366 61,992
V. McCellon-Allen.......... -- 10,103 -- 10,103
M. G. Morris............... 310,921(f) -- 49,666 360,587
R. P. Powers............... 658(b)(d) 1,345 200,299 202,302
S. P. Smith................ -- -- 16,500 16,500
S. Tomasky................. 2,668(b)(d) 6,744 237,666 247,078
D. E. Waldo................ 22(b) -- 00 22
All directors, nominees and
executive officers as a group
(11 persons)............. 421,905(d)(e) 78,374 978,663 1,478,942
(a) This column includes amounts deferred in Stock Units and held under AEP's
various director and officer benefit plans.
(b) Includes the following numbers of share equivalents held in the AEP
Retirement Savings Plan: Ms. Tomasky, 2,668; Ms. Koeppel, 246; Mr. Fayne,
6,407; Mr. Hagan, 4,537; Mr. Powers, 658; Mr. Waldo, 22; and all directors
and executive officers as a group, 14,538.
(c) Includes the following numbers of shares held in joint tenancy with a family
member: Mr. Fayne, 671.
(d) Does not include, for Ms. Tomasky and Mr. Powers, 85,231 shares in the
American Electric Power System Educational Trust Fund over which Ms. Tomasky
and Mr. Powers share voting and investment power as trustees (they disclaim
beneficial ownership). The amount of shares shown for all directors and
executive officers as a group includes these shares.
(e) Represents less than 1.5% of the total number of shares outstanding.
(f) Consists of restricted shares with different vesting schedules and
accrued dividends.
MEETINGS OF THE BOARD OF DIRECTORS
Regular meetings of the Board of Directors were held once each month during
the year. In addition, the Board of Directors holds special meetings from time
to time as required. During 2004, the Board held twelve regular meetings.
Directors of the Company receive a fee of $50 for each meeting of the Board
of Directors attended in addition to their salaries.
The Board of Directors of the Company has no committees.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The independent registered public accounting firm of Deloitte & Touche LLP
has been selected as the independent registered public accounting firm of the
Company for the year 2005.
A representative of Deloitte & Touche LLP will not be present at the meeting
unless prior to the day of the meeting the Secretary of the Company has received
written notice from a stockholder addressed to the Secretary at 1 Riverside
Plaza, Columbus, Ohio 43215, that such stockholder will attend the meeting and
wishes to ask questions of a representative of the firm.
Audit and Non-Audit Fees
The following table presents fees for professional audit services rendered by
Deloitte & Touche LLP for the audit of the Company's annual financial statements
for the years ended December 31, 2004 and December 31, 2003, and fees billed for
other services rendered by Deloitte & Touche LLP during those periods. While the
Company has neither an Audit Committee nor pre-approval procedures, AEP's Audit
Committee pre-approval procedures are applicable to the Company.
2003 2004
---- ----
Audit Fees(1)
Financial Statement Audits.......... $ -- $ 806,963
Sarbanes-Oxley 404.................. $ -- $ 599,345
Audit Fees - Other.................. $ -- $ 48,360
----------- -----------
Total Audit Fees............... $ 411,900 $ 1,454,668
Audit-Related Fees(2).................... $ -- $ 5,000
Tax Fees(3).............................. $ 366,000 $ 1,668,727
All Other Fees........................... $ -- $ --
----------- -----------
TOTAL.............................. $ 777,900 $ 3,128,395
=========== ===========
(1) Audit fees in 2003 and 2004 consisted primarily of fees related to the
audit of the Company's annual consolidated financial statements. In 2004, audit
fees also included auditing procedures performed in accordance with
Sarbanes-Oxley Act Section 404 and the related Public Company Accounting
Oversight Board Auditing Standard Number 2 regarding the Company's internal
control over financial reporting. This category also includes work generally
only the independent registered public accounting firm can reasonably be
expected to provide, such as attestation requirements on statutory reports and
regulatory filings of the Company and certain of its wholly owned subsidiaries.
(2) Audit related fees consisted principally of audits of employee benefit
plans.
(3) Tax fees consisted principally of tax compliance services. Tax
compliance services are services rendered based upon facts already in existence
or transactions that have already occurred to document, compute, and obtain
government approval for amounts to be included in tax filings.
AEP's Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditors
The AEP Audit Committee's policy is to pre-approve all audit and non-audit
services provided by the independent registered public accounting firm. These
services may include audit services, audit-related services, tax services and
other services. Pre-approval is provided for up to one year and any pre-approval
is detailed as to the particular service or category of services and is subject
to a specific limitation. The independent registered public accounting firm and
management are required to report to the AEP Audit Committee at each regular
meeting regarding the extent of services provided by the independent registered
public accounting firm in accordance with this pre-approval policy, and the fees
for the services performed to date. The AEP Audit Committee may also pre-approve
particular services on a case-by-case basis. In 2004, all Deloitte & Touche LLP
services were pre-approved by the AEP Audit Committee.
FORM 10-K
A copy of the Company's 2004 Annual Report to the SEC, including the
Company's financial statements for the year ended December 31, 2004, is
being furnished with this information statement. The 2004 Annual Report is also
available on AEP's website at www.AEP.com.
HEATHER L. GEIGER,
Secretary
March 30, 2005