PROSPECTUS SUPPLEMENT
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(To prospectus dated June 30, 2003)
$450,000,000
OHIO POWER COMPANY
$225,000,000 4.85% Senior Notes, Series H, due 2014
$225,000,000 6.375% Senior Notes, Series I, due 2033
Interest on the Series H Notes and Series I Notes (collectively, the
"Senior Notes") is payable semi-annually on January 15 and July 15 of each year,
beginning January 15, 2004. The Series H Notes will mature on January 15, 2014.
The Series I Notes will mature on July 15, 2033. We may redeem the Series H
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 Series H Notes being redeemed
plus a make-whole premium, together with accrued and unpaid interest to the
redemption date. We may redeem the Series I Notes at our option at any time
either as a whole or in part (i) at any time prior to July 15, 2013, at a
redemption price equal to 100% of the principal amount of the Series I Notes
being redeemed plus a make-whole premium, and (ii) at any time on or after July
15, 2013, prior to maturity, at a redemption price of 100% of the principal
amount of the Series I Notes being redeemed, together, in both cases, 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 $136,915,000 of outstanding first
mortgage bonds as of March 31, 2003. We will issue the Senior Notes only in
registered form in multiples of $1,000.
We currently operate as a functionally separated electric utility company
and no longer charge bundled rates for our retail sales of electricity. The
State of Ohio has enacted restructuring legislation which provides for the legal
separation of our generation-related assets from our electric transmission and
distribution assets. We have sought regulatory approval to legally separate our
transmission and distribution assets from our generation-related assets pursuant
to such Ohio legislation and to transfer the transmission and distribution
assets to a to-be-formed affiliate (Ohio Wires). However, we are currently
determining the regulatory feasibility of complying with restructuring
legislation through continued functional separation. Assuming regulatory
compliance, it is currently our intention to remain functionally separated. If
we are unable to remain functionally separated and we legally separate, holders
will have the option to exchange their Senior Notes for notes of Ohio Wires
(Ohio Wires Notes) identical in all material respects to the Senior Notes.
Alternatively, a holder may elect to retain its Senior Notes. If any holder
fails to elect to retain its Senior Notes, unless otherwise required by law,
such holder will be deemed to have exercised its option to exchange its Senior
Notes for Ohio Wires Notes. For more information on the actions that need to be
taken for Ohio Power to remain functionally separated, see "THE COMPANY -
Functional Separation" herein.
Per Series Per Series
H Note Total I Note Total
Public Offering price(1) 99.918% $224,815,500 99.180% $223,155,000
Underwriting discount 0.650% $ 1,462,500 0.875% $ 1,968,750
Proceeds, before expenses,
to Ohio Power Company 99.268% $223,353,000 98.305% $221,186,250
(1)Plus accrued interest, if any, from July 11, 2003.
INVESTING IN THESE SENIOR 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 facilities of The Depository Trust Company, Clearstream, Luxembourg
or the Euroclear System, as the case may be, on or about July 11, 2003.
Joint Book-Running Managers
Barclays Capital Morgan Stanley
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Co-Managers
ABN AMRO Incorporated Danske Markets The Royal Bank of Scotland
The date of this prospectus supplement is July 8, 2003.
TABLE OF CONTENTS
Prospectus Supplement
Page
THE COMPANY................................................... S-3
USE OF PROCEEDS............................................... S-6
SUPPLEMENTAL DESCRIPTION OF THE SENIOR NOTES.................. S-6
CERTAIN UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSEQUENCES S-13
UNDERWRITING................................................. S-19
Prospectus
THE COMPANY....................................................... 2
RISK FACTORS...................................................... 2
PROSPECTUS SUPPLEMENTS............................................ 14
RATIO OF EARNINGS TO FIXED CHARGES................................ 14
WHERE YOU CAN FIND MORE INFORMATION............................... 14
USE OF PROCEEDS .................................................. 15
DESCRIPTION OF THE NOTES ......................................... 16
PLAN OF DISTRIBUTION.............................................. 21
LEGAL OPINIONS.................................................... 22
EXPERTS........................................................... 22
In this prospectus supplement, the terms "we," "our," "us," "Company" and
"Ohio Power" mean Ohio Power Company. You should rely only on the information
incorporated by reference or provided in this prospectus supplement or the
accompanying prospectus. We have not authorized anyone to provide you with
different information. We are not making an offer of these securities in any
state where the offer is not permitted. You should not assume that the
information in this prospectus supplement is accurate as of any date other than
the date on the front of the document.
THE COMPANY
General
We generate, sell, purchase, transmit and distribute electric power. We
serve approximately 702,000 customers in Ohio. We also sell and transmit power
at wholesale to other electric utilities, municipalities, electric cooperatives
and non-utility entities engaged in the wholesale power market. Our principal
executive offices are located at 1 Riverside Plaza, Columbus, Ohio 43215
(telephone number 614-716-1000). We are a subsidiary of American Electric Power
Company, Inc. (AEP), a public utility holding company, and we are a part of the
American Electric Power integrated utility system. The executive offices of AEP
are located at 1 Riverside Plaza, Columbus, Ohio 43215 (telephone number
614-716-1000).
Regulation
We are currently regulated by the Federal Energy Regulatory Commission
(FERC), Securities and Exchange Commission (SEC) and The Public Utilities
Commission of Ohio (PUCO). Beginning January 1, 2001, with the implementation of
Ohio's electric restructuring legislation (S.B. 3), the PUCO effectively ceased
rate regulation of our generation and transmission functions. The FERC continues
to regulate our transmission and wholesale power transactions and the SEC
continues its regulatory oversight of us as a utility owned by an electric
utility holding company registered under the Public Utility Holding Company Act
of 1935 (the 1935 Act).
Ohio Restructuring
S.B. 3 requires vertically integrated electric utility companies that
offer competitive retail electric service in Ohio to separate their generating
functions from their transmission and distribution functions. Effective January
1, 2001, S.B. 3 removed generation and other competitive functions from rate
regulation by the PUCO. S.B. 3 also provides for the period during which retail
customers can choose their electric power suppliers or have the protection of
default retail electric service (Default Service) at frozen generation rates
from the incumbent utility (Development Period). The Development Period began on
January 1, 2001 and will terminate no later than December 31, 2005, but the PUCO
may terminate the Development Period for one or more customer classes before
that date if it determines either that effective competition exists in the
incumbent utility's certified territory or that there is a twenty percent
switching rate of the incumbent utility's load by the customer class. At least
one utility has, however, filed a settlement that will provide it an extension
of the Development Period as it relates to such utility.
Following the Development Period, retail customers will receive
distribution and, where applicable, transmission service from the incumbent
utility whose distribution rates will be approved by the PUCO and whose
transmission rates will be approved by the FERC. Retail customers will continue
to have the right to choose their electric power suppliers or have the
protection of Default Service which must be offered by the incumbent utility at
market rates. The PUCO has circulated a draft of proposed rules on competitive
bidding processes but has not yet identified the specific method by which it
will determine market rates for Default Service following the Development
Period.
Functional Separation
We are currently operating on a functionally separated basis. With respect
to retail customers in Ohio, we are providing distribution service at rates
approved by the PUCO (which rates will be frozen at the end of the Development
Period through December 31, 2007), transmission service at rates approved by
FERC (the aggregate of the transmission and distribution rates are frozen per
S.B.3 through the Development Period, such that any adjustment of our
transmission rates by FERC will be mitigated by a corresponding adjustment to
Ohio Power's distribution rate by the PUCO) and Default Service at current
generation rates, which are frozen during the Development Period. Although we
could purchase power from third parties (and reserve all of our own generation
capacity for sales into the wholesale power market), we currently meet our
Default Service obligation from our own sources of generation. Although we have
formed competitive retail electric service affiliates for the purpose of
competing in the retail generation market in Ohio, we have not actively pursued
that market and have applied to have revoked the licenses of such affiliates to
compete in the retail generation market in Ohio.
While we are presently operating as a functionally separated electric
utility company, we have sought and, from certain governmental entities,
obtained regulatory approval to legally separate. However, we are currently
determining the regulatory feasibility of complying with restructuring
legislation through continued functional separation. Assuming regulatory
compliance, it is currently our intention to remain functionally separated.
Subject to such regulatory compliance, management believes that so long as we
did not participate during the Development Period in the competitive retail
generation market in Ohio, we would likely not be required under S.B. 3 to
legally separate. If we remained functionally separated throughout the
Development Period, we would operate as described in the paragraph above and
bear the risk that our generation costs (including the price of fuel and the
costs of environmental compliance) exceed the frozen generation rates we charge
our Default Service customers. We would be foreclosed from marketing generation
to retail customers in Ohio served by other utilities who might otherwise be
willing to purchase from us at rates higher than our frozen Default Service
rate. Any such prohibition on marketing to retail customers in Ohio would not
likely apply to marketing to wholesale customers.
Our compliance with restructuring legislation through continued functional
separation during the Development Period may require the approval of or
notification to the PUCO; it may also require notification to the FERC and the
SEC. Following the end of the Development Period, given the current uncertainty
with respect to the method by which Default Service market rates will be
determined and the legal status of the winning bidder (in the event of an
auction style process), there is some question as to whether we would be
required under S.B. 3 to legally separate. Further action by the PUCO may be
necessary to resolve this question. If legal separation were not required
following the end of the Development Period, the principal difference in
post-Development Period operations would be that the rates we could charge for
providing Default Service would be at market rates as determined by the PUCO,
not the current frozen generation rate. Given that the PUCO has not yet
identified the method by which it will determine market rates for Default
Service following the Development Period, it is not possible to predict how
market rates will be determined. We would bear the risk that the costs of
providing Default Service exceed what is determined to be market rates. Further,
foregoing participation in the competitive retail generation market in Ohio
would likely bar us not only from marketing generation to retail customers as
described above but, possibly, from submitting bids to provide retail generation
service in auctions or similar proceedings which the PUCO may direct to
determine the market price for generation for Default Service providers.
Although the FERC has approved our right of withdrawal from the
Interconnection Agreement dated July 6, 1951, as amended (Power Pool) and the
AEP System Interim Allowance Agreement (Allowance Agreement) as part of its
order approving the settlement agreements and AEP's restructuring application,
we are not required to withdraw and have remained a party to each. If we remain
a party to these agreements, notification to or approval by the FERC may be
required. Our withdrawal from the Power Pool and Allowance Agreement would
effectively end our rights and obligations in those agreements, including our
duty to sell power to and our right to receive revenues from the remaining
regulated utility affiliates which are parties to those agreements. Our
withdrawal would free our generation capacity for other wholesale marketing
transactions, including wholesale transactions with affiliates.
Our Operations If We Legally Separate
If we are unable to remain functionally separated and we legally separate,
the transmission and distribution assets (Transmission and Distribution
Business) would be transferred to a to-be-formed subsidiary (Ohio Wires) and
Ohio Power would own and operate the generation business. Ohio Wires would be
regulated by the FERC with respect to its transmission rates, by the SEC as a
utility owned by an electric utility holding company registered under the 1935
Act, and by the PUCO with respect to its distribution rates. In the case of
legal separation, Ohio Power would be regulated by the FERC with respect to its
wholesale power sales and by the SEC as a utility owned by an electric utility
holding company registered under the 1935 Act. The effective freeze in the
aggregate transmission and distribution rates of Ohio Power pursuant to S.B. 3
would apply through the end of the Development Period, at which time the
distribution rate would remain frozen through December 31, 2007.
During the remainder of the Development Period, Ohio Wires would be
responsible for providing distribution service at rates approved by the PUCO
(which rates would remain frozen from the end of the Development Period through
December 31, 2007), transmission service at rates approved by FERC and Default
Service at current generation rates which are frozen during the Development
Period. Although Ohio Wires could purchase power from third parties to meet its
Default Service obligations, management could cause Ohio Wires to enter into an
agreement with a power marketing affiliate (PMA), also owned by AEP, to purchase
all of the generation that Ohio Wires requires to meet its Default Service
obligation at a price equal to the amounts Ohio Wires collects from its Default
Service customers. That agreement would terminate at the end of the Development
Period. To enable the PMA to meet this requirement, management would cause Ohio
Power to sell power to PMA at Ohio Power's cost. Because it would buy at Ohio
Power's cost and sell to Ohio Wires at the current frozen generation rate, PMA
would bear the risk that its costs exceed what it collects from Ohio Wires. All
of the power supply agreements between PMA and Ohio Wires would be characterized
as straight "pass-through" agreements with respect to rates, as PMA would
recover only those amounts that Ohio Wires charges its retail customers.
Following the end of the Development Period, Ohio Wires would continue to
be responsible for providing distribution, transmission and Default Service to
retail customers in its franchised service areas in Ohio. The principal
difference in post-Development Period operations would be that the rates Ohio
Wires could charge for providing Default Service would not be frozen at the
current generation rate but would be a market rate, which the PUCO has yet to
identify the method for determining. It is not possible to predict the method by
which market rates will be determined. Although it is currently anticipated that
the generation supply component would be a pass through component for providers
of Default Service, Ohio Wires would bear the risk that its costs of providing
Default Service exceed the amount that it recovers, such recoverable amount
being the market rate that is determined by the PUCO.
USE OF PROCEEDS
The Company proposes to use the net proceeds from the sale of the Senior
Notes to fund its construction program, to repay short-term indebtedness and for
other corporate purposes. Proceeds may be temporarily invested in short-term
instruments pending their application to the foregoing purposes.
The Company has estimated that its consolidated construction costs
(inclusive of allowance for funds used during construction) for 2003 will be
approximately $241,000,000. At June 30, 2003, the Company had approximately
$362,317,000 of short-term unsecured indebtedness outstanding.
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 September 1, 1997, between us and Deutsche Bank Trust Company
Americas (formerly Bankers Trust Company), as Trustee, as supplemented and
amended and as to be further supplemented and amended.
Principal Amount, Maturity and Interest
The Series H Notes and Series I Notes will initially be issued in an
aggregate principal amount of $225,000,000 and $225,000,000, respectively. We
may, without consent of the holders of either series of the Senior Notes, issue
additional notes having the same ranking, interest rate, maturity and other
terms as the applicable Senior Notes. These notes, together with the applicable
Senior Notes, will be a single series of notes under the Indenture.
The Series H Notes will mature and become due and payable, together with
any accrued and unpaid interest, on January 15, 2014 and will bear interest at
the rate of 4.85% per year from July 11, 2003 until January 15, 2014. The Series
H Notes are not subject to any sinking fund provision.
The Series I Notes will mature and become due and payable, together with
any accrued and unpaid interest, on July 15, 2033 and will bear interest at the
rate of 6.375% per year from July 11, 2003 until July 15, 2033. The Series I
Notes are not subject to any sinking fund provision.
Interest on each Senior Note will be payable semi-annually in arrears on
each January 15 and July 15 and at redemption, if any, or maturity. The initial
interest payment date is January 15, 2004. 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 Deutsche Bank Trust Company Americas, Corporate Trust and Agency
Services, 60 Wall Street, MSNYC 60-2515, New York, New York 10005.
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 January 1 or July 1 prior to the
relevant interest payment date.
Optional Redemption
We may redeem the Series H 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 Series H
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 Series H Notes being redeemed and (2)
the sum of the present values of the remaining scheduled payments of principal
and interest on the Series H 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 20 basis points, plus, in each case, accrued
interest thereon to the date of redemption.
We may redeem the Series I 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 Series I
Notes either as a whole or in part (i) prior to July 15, 2013 at a redemption
price equal to the greater of (1) 100% of the principal amount of the Series I
Notes being redeemed and (2) the sum of the present values of the remaining
scheduled payments of principal and interest on the Series I Notes being
redeemed to July 15, 2013 (for purposes of this calculation, the remaining
scheduled payment of principal is deemed payable on July 15, 2013 (the Series I
Initial Redemption Date) and the remaining scheduled payments of interest are
those interest payments payable on or before the Series I Initial Redemption
Date) (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 25 basis
points and (ii) at any time on or after the Series I Initial Redemption Date,
prior to maturity, at a redemption price of 100% of the principal amount of the
Series I Notes being redeemed, plus, in each case, accrued interest thereon to
the date of redemption.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the Series H Notes or the remaining term of the Series I
Notes to the Series I Initial Redemption Date, as applicable, 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.
Exchange of Senior Notes upon Legal Separation
If all or substantially all of our Transmission and Distribution Business
is transferred to Ohio Wires (whether or not the Transmission and Distribution
Business constitutes "substantially all" of our total assets) as discussed above
under "THE COMPANY - Our Operations If We Legally Separate," holders will have
the option to exchange their Senior Notes for notes of Ohio Wires (Ohio Wires
Notes), the terms of which will be identical in all material respects to the
Senior Notes. Alternatively, a holder may elect to retain its Senior Notes. If
any holder fails to elect to retain its Senior Notes, unless otherwise required
by law, such holder will be deemed to have exercised its option to exchange its
Senior Notes for Ohio Wires Notes. The transfer of all or substantially all of
our Transmission and Distribution Business would not constitute a default with
respect to the Senior Notes nor would it be deemed a sale or transfer of all or
substantially all of our assets for purposes of the Indenture. Additionally,
such transfer would not alter the terms of the Senior Notes, and the Senior
Notes will continue to be governed by the Indenture.
If legal separation occurs, Ohio Wires will be obligated to file an
exchange offer registration statement and offer holders the option to elect to
(i) retain such Senior Notes or (ii) exchange such Senior Notes for Ohio Wires
Notes registered under the Securities Act of 1933, as amended (the "Securities
Act").
If a holder of a Senior Note fails to elect to retain its Senior Note,
unless otherwise required by law, the holder will be deemed to have exercised
its option to exchange such Senior Note for an Ohio Wires Note. Furthermore,
Ohio Wires will be obligated to consummate the Exchange Offer within 150 days
from the date of legal separation and failure to do so will result in Ohio Power
paying premium special interest on the Senior Notes at a rate of 0.50% per
annum.
Certain Transfers of All or Substantially All Our Assets
If we transfer any portion of our assets, but retain all or substantially
all of our Transmission and Distribution Business, such transfer would not
constitute a default with respect to the Senior Notes nor would it be deemed a
sale or transfer of all or substantially all of our assets for purposes of the
Indenture. Such transfer would not alter the terms of the Senior Notes and the
Senior Notes would remain outstanding and continue to be governed by the
Indenture.
Consolidation, Merger or Sale
Subject to the conditions described under "Exchange of Senior Notes upon
Legal Separation" and "Certain Transfers of All or Substantially All Our
Assets," we (or the successor to the Senior Notes, as the case may be) 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. 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. 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.
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.
Global Notes
Upon issuance, the Senior Notes will be represented by one or more global
notes deposited with The Depository Trust Company as the depositary for the
Senior Notes and registered in the name of DTC's nominee. See "Description of
the Notes-Book-Entry Notes - Registration, Transfer, and Payment of Interest and
Principal" in the accompanying prospectus for additional information about DTC
and procedures applicable to the global notes.
Book-Entry System
Beneficial interests in the global notes will be represented through
book-entry accounts of financial institutions acting on behalf of beneficial
owners as direct and indirect participants in DTC. Investors may elect to hold
interests in the global notes through either DTC in the United States or
Clearstream Banking, societe anonyme (Clearstream, Luxembourg) or Euroclear Bank
S.A./N.V., as operator of the Euroclear System (Euroclear), in Europe if they
are participants of such systems, or indirectly through organizations which are
participants in such systems. Clearstream, Luxembourg and Euroclear will hold
interests on behalf of their participants through customers' securities accounts
in Clearstream, Luxembourg's and Euroclear's names on the books of their
respective depositaries, which in turn will hold such interests in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank
N.A. will act as depositary for Clearstream, Luxembourg and JPMorgan Chase Bank
will act as depositary for Euroclear (in such capacities, the U.S.
Depositaries). Beneficial interests in the global notes will be held in
denominations of $1,000 and integral multiples thereof. Except as set forth
below, the global notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee.
Clearstream, Luxembourg advises that it is incorporated under the laws of
Luxembourg as a limited liability company. Clearstream, Luxembourg is owned by
Cedel International, societe anonyme, and Deutsche Borse AG. The shareholders of
these two entities are banks, securities dealers and financial institutions.
Clearstream, Luxembourg holds securities for its participating organizations
(Clearstream Participants) and facilitates the clearance and settlement of
securities transactions between Clearstream Participants through electronic
book-entry changes in accounts of Clearstream Participants, thereby eliminating
the need for physical movement of certificates. Clearstream, Luxembourg provides
to Clearstream Participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Clearstream, Luxembourg deals with
domestic securities markets in over 30 countries through established depositary
and custodial relationships and interfaces with domestic markets in several
countries. Clearstream, Luxembourg has established an electronic bridge with
Euroclear to facilitate settlement of trades between Clearstream, Luxembourg and
Euroclear. As a registered bank in Luxembourg, Clearstream, Luxembourg is
subject to regulation by the Luxembourg Commission for the Supervision of the
Financial Sector (Commission de Surveillance du Secteur Financier). Clearstream
Participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations and may include the underwriters.
Indirect access to Clearstream, Luxembourg is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Clearstream Participant, either directly or
indirectly. Clearstream, Luxembourg is an indirect participant in DTC.
Distributions with respect to interests in the Senior Notes held
beneficially through Clearstream, Luxembourg will be credited to cash accounts
of Clearstream Participants in accordance with its rules and procedures, to the
extent received by the U.S. Depositary for Clearstream, Luxembourg.
Euroclear advises that it was created in 1968 to hold securities for
participants of Euroclear (Euroclear Participants) and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may be settled in many currencies, including
United States dollars. Euroclear provides various other services, including
securities lending and borrowing and interfaces with domestic markets in several
countries. Euroclear is operated by Euroclear Bank S.A./N.V. (the Euroclear
Operator) under contract with Euroclear plc, a U.K. corporation. All operations
are conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator.
Euroclear plc establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the underwriters. Indirect access to Euroclear is also available
to other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly. Euroclear is an indirect
participant in DTC.
The Euroclear Operator is a Belgian bank. The Belgian Banking Commission
and the National Bank of Belgium regulate and examine the Euroclear Operator.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System, and applicable Belgian
law (collectively, the Terms and Conditions). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no records of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to each series of Senior Notes held
beneficially through Euroclear will be credited to the cash accounts of
Euroclear Participants in accordance with the Terms and Conditions, to the
extent received by the U.S. Depositary for Euroclear.
Global Clearance and Settlement Procedures
Initial settlement for the Senior Notes will be made in immediately
available funds. Secondary market trading between DTC participants will occur in
the ordinary way in accordance with DTC rules and will be settled in immediately
available funds using DTC's Same-Day Funds Settlement System. Secondary market
trading between Clearstream Participants and/or Euroclear Participants will
occur in the ordinary way in accordance with the applicable rules and operating
procedures of Clearstream, Luxembourg and Euroclear, as applicable.
Cross-market transfers between persons holding directly or indirectly
through DTC on the one hand, and directly or indirectly through Clearstream
Participants or Euroclear Participants, on the other, will be effected through
DTC in accordance with DTC rules on behalf of Euroclear or Clearstream,
Luxembourg, as the case may be, by its respective U.S. Depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Clearstream, Luxembourg, as the case may be, by the counterparty in such system
in accordance with its rules and procedures and within its established deadlines
(European time). Euroclear or Clearstream, Luxembourg, as the case may be, will,
if the transaction meets its settlement requirements, deliver instructions to
its U.S. Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same-day funds settlement applicable to
DTC. Clearstream Participants and Euroclear Participants may not deliver
instructions directly to their respective U.S. Depositaries.
Because of time-zone differences, credits of Senior Notes received in
Clearstream, Luxembourg or Euroclear as a result of a transaction with a DTC
participant will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. Such credits or any
transactions in such Senior Notes settled during such processing will be
reported to the relevant Euroclear Participant or Clearstream Participant on
such business day. Cash received in Clearstream, Luxembourg or Euroclear as a
result of sales of the Senior Notes by or through a Clearstream Participant or a
Euroclear Participant to a DTC participant will be received with value on the
DTC settlement date but will be available in the relevant Clearstream,
Luxembourg or Euroclear cash account only as of the business day following
settlement in DTC.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Senior Notes among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform such procedures and such procedures
may be discontinued or changed at any time.
CERTAIN UNITED STATES FEDERAL
INCOME AND ESTATE TAX CONSEQUENCES
The following summary describes the material United States federal income
tax consequences of the ownership of Senior Notes as of the date hereof. Except
where noted, it deals only with Senior Notes purchased in the original issuance
at the initial issue price and held as capital assets and does not deal with
special situations, such as those of dealers in securities or currencies,
financial institutions, tax-exempt entities, insurance companies, persons
holding Senior Notes as a part of a hedging, integrated, conversion or
constructive sale transaction or a straddle, traders in securities that elect to
use a mark-to-market method of accounting for their securities holdings, persons
liable for alternative minimum tax, investors in pass-through entities or U.S.
Holders (as defined below) of the Senior Notes whose "functional currency" is
not the United States dollar. Furthermore, the discussion below is based upon
the provisions of the Internal Revenue Code of 1986, as amended (the Code), and
regulations, rulings and judicial decisions thereunder as of the date hereof,
and such authorities may be repealed, revoked or modified so as to result in
United States federal income tax consequences different from those discussed
below. If a partnership holds our Senior Notes, the tax treatment of a partner
will generally depend upon the status of the partner and the activities of the
partnership. If you are a partner of a partnership holding our Senior Notes, you
should consult your tax advisors. Persons considering the purchase, ownership or
disposition of Senior Notes should consult their own tax advisors concerning the
United States federal income tax consequences in light of their particular
situations as well as any consequences arising under the laws of any other
taxing jurisdiction.
As used herein, a "U.S. Holder" of a Senior Note means a holder that is
for United States federal income tax purposes (i) a citizen or resident of the
United States, (ii) a corporation created or organized in or under the laws of
the United States or any political subdivision thereof, (iii) an estate the
income of which is subject to United States federal income taxation regardless
of its source or (iv) a trust if it (x) is subject to the primary supervision of
a court within the United States and one or more United States persons have the
authority to control all substantial decisions of the trust or (y) has a valid
election in effect under applicable United States Treasury regulations to be
treated as a United States person. A "Non-U.S. Holder" is a holder (other than
an entity treated as a partnership) that is not a U.S. Holder.
Payments of Interest
Stated interest on a Senior Note will generally be taxable to a U.S.
Holder as ordinary income at the time it is paid or accrued in accordance with
the U.S. Holder's method of accounting for tax purposes.
Sale, Exchange and Retirement of Senior Notes
A U.S. Holder's tax basis in a Senior Note will, in general, be the U.S.
Holder's cost therefor. Upon the sale, exchange, retirement or other disposition
of a Senior Note, a U.S. Holder will recognize gain or loss equal to the
difference between the amount realized upon the sale, exchange, retirement or
other disposition (less any accrued and unpaid interest, which will be treated
as a payment of interest for United States federal income tax purposes) and the
adjusted tax basis of the Senior Note. Such gain or loss will be capital gain or
loss. Capital gains of individuals derived in respect of capital assets held for
more than one year are eligible for reduced rates of taxation. The deductibility
of capital losses is subject to limitations.
Optional Redemption
Under certain circumstances exercise of the option to redeem the Senior
Notes will require us to pay a "make-whole" premium to a holder of the Senior
Notes. We intend to take the position that the Senior Notes should not be
treated as contingent payment debt instruments because of this additional
payment. If the IRS successfully challenges this position, and the Senior Notes
are treated as contingent payment debt instruments, the tax consequences of
holding and disposing of the Senior Notes will differ materially from those
discussed herein.
You are urged to consult your own tax advisors regarding the United States
federal income tax treatment of the "make-whole" premium and the consequences
thereof.
Legal Separation
Tax consequences to U.S. Holders who retain their Senior Notes
If we complete the legal separation, as more fully described under
"SUPPLEMENTAL DESCRIPTION OF THE SENIOR NOTES - Exchange of Senior Notes upon
Legal Separation," the legal separation will not result in a taxable event to
those U.S. Holders who elect to retain their Senior Notes.
Tax consequences to U.S. Holders who do not retain their Senior Notes
If we complete the legal separation, as more fully described under
"SUPPLEMENTAL DESCRIPTION OF THE SENIOR NOTES - Exchange of Senior Notes upon
Legal Separation," U.S. Holders who do not elect to retain their Senior Notes
will exchange the Senior Notes for Ohio Wires Notes. Although the treatment of
the exchange of Senior Notes for Ohio Wires Notes is not entirely certain, we
currently intend to take the position that, subject to the discussion below of
"excess principal amount," such an exchange should qualify for tax-free
treatment if the exchange occurs before 2008.
Even if the exchange qualifies for tax-free treatment, a U.S. Holder must
nonetheless recognize gain to the extent of that portion of the Ohio Wires
Note's fair market value that is attributable to the "excess principal amount,"
if any. If neither the Senior Notes nor the Ohio Wires Notes are "publicly
traded" (as discussed below), there will be no excess principal amount. However,
if the Senior Notes and/or the Ohio Wires Notes are publicly traded, the
calculation of excess principal amount is not clear under current United States
federal income tax law. In particular, such calculation might be based upon the
issue prices of the Senior Notes and the Ohio Wires Notes, rather than on their
stated principal amounts. You should consult your own tax advisor regarding
alternative interpretations of excess principal amount and the United Stated
federal income tax consequences thereof.
If, contrary to our position, the exchange of Senior Notes is not treated
as a tax-free transaction, the amount of gain or loss recognized by a U.S.
Holder will generally be equal to the difference between the amount realized on
the exchange and the U.S. Holder's adjusted tax basis in the Senior Notes. The
amount realized will be equal to the stated principal amount of the Ohio Wires
Notes if neither the Senior Notes nor the Ohio Wires Notes are treated as
publicly traded. In such case, a U.S. Holder that purchased Senior Notes at
their stated principal amount will not realize gain or loss on the exchange. If,
however, the Ohio Wires Notes are treated as publicly traded, the amount
realized on the exchange will be equal to the fair market value of the Ohio
Wires Notes at the time of the exchange. Alternatively, if the Senior Notes but
not the Ohio Wires Notes are treated as publicly traded, the amount realized on
the exchange will be equal to the fair market value of the Senior Notes at the
time of the exchange. Except to the extent treated as ordinary income under the
market discount rules, recognized gain or loss will generally be capital gain or
loss; provided, however, that any amounts attributable to accrued but unpaid
interest on the Senior Notes will be taxable as ordinary interest income.
Capital gains of individuals derived in respect of capital assets held for more
than one year are eligible for reduced rates of taxation. The deductibility of
capital losses is subject to limitations. Your initial tax basis in the Ohio
Wires Notes will be the issue price of the Ohio Wires Notes on the date of the
exchange, and the holding period of the Ohio Wires Notes will begin on the day
after the exchange.
Currently, we are unsure if the Senior Notes or the Ohio Wires Notes will
be publicly traded. Certain underwriters have informed us that they intend to
make a market in the Senior Notes. See "UNDERWRITING." However, the
determination of whether the Senior Notes or the Ohio Wires Notes will be
publicly traded at the time of the exchange is a question of fact that depends
on circumstances at or near such time, including whether or not a market has
actually been created for the Senior Notes and/or the Ohio Wires Notes and
whether or not recent price quotations of brokers, dealers or traders or actual
prices of recent sales transactions are readily available.
Regardless of whether the exchange of Senior Notes is treated as a
tax-free transaction, if either the Senior Notes or the Ohio Wires Notes are
treated as publicly traded, the Ohio Wires Notes may be considered as issued
with a premium or original issue discount (OID). If the Ohio Wires Notes are
issued with a premium, you may elect to amortize such premium over the life of
the Ohio Wires Notes. If the Ohio Wires Notes are issued with OID, the tax
consequences of holding and disposing of the Ohio Wires Notes will differ
materially from those discussed herein. You are urged to consult your own tax
advisor regarding the potential application of the OID rules and the
consequences thereof.
As more fully described under "SUPPLEMENTAL DESCRIPTION OF THE SENIOR
NOTES- Exchange of Senior Notes Upon Legal Separation," we may be required to
pay a special interest premium to U.S. Holders of Senior Notes if Ohio Wires
fails to file a registration statement within 150 days from the date of legal
separation. Although the matter is not free from doubt, we intend to take the
position that a U.S. Holder of a Senior Note should be required to report any
such additional interest as ordinary income for United States federal income tax
purposes at the time it accrues or is received in accordance with such holder's
method of accounting. It is possible, however, that the IRS may take a different
position, in which case the timing and amount of income may be different.
Non-U.S. Holders
Under current United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) no withholding of United States federal income tax will be required
with respect to the payment by us or any paying agent of principal or interest
on a Senior Note owned by a Non-U.S. Holder under the "portfolio interest" rule,
provided that (i) interest paid on the Senior Notes is not effectively connected
with the beneficial owner's conduct of a trade or business in the United States,
(ii) the beneficial owner does not actually or constructively own 10% or more of
the total combined voting power of all classes of our stock entitled to vote
within the meaning of section 871(h)(3) of the Code and the regulations
thereunder, (iii) the beneficial owner is not a controlled foreign corporation
that is related to us through stock ownership, (iv) the beneficial owner is not
a bank whose receipt of interest on a Note is described in section 881(c)(3)(A)
of the Code and (v) the beneficial owner satisfies the statement requirement
(described generally below) set forth in section 871(h) and section 881(c) of
the Code and the regulations thereunder.
(b) no withholding of United States federal income tax generally will be
required with respect to any gain realized by a Non-U.S. Holder upon the sale,
exchange, retirement or other disposition of a Senior Note; and
(c) a Senior Note beneficially owned by an individual who at the time of
death is not a citizen or resident of the United States will not be subject to
United States federal estate tax as a result of such individual's death,
provided that any payment to such holder on the Senior Note, would be eligible
for exemption from the 30% federal withholding tax under the "portfolio
interest" rule described in paragraph (a) above without regard to the statement
requirement described in (a)(v) above.
To satisfy the requirement referred to in (a)(v) above, the beneficial
owner of such Senior Note, or a financial institution holding the Senior Note on
behalf of such owner, must provide, in accordance with specified procedures, a
paying agent of us with a statement to the effect that the beneficial owner is
not a United States person. Currently, these requirements will be met if (1) the
beneficial owner provides its name and address, and certifies, under penalties
of perjury, that it is not a United States person (which certification may be
made on an IRS Form W-8BEN) or (2) a financial institution holding the Senior
Note on behalf of the beneficial owner certifies, under penalties of perjury,
that such statement has been received by it, and furnishes a paying agent with a
copy thereof. The statement requirement referred to in (a)(v) above may also be
satisfied with other documentary evidence with respect to Senior Notes held
through an offshore account or through certain foreign intermediaries.
If a Non-U.S. Holder cannot satisfy the requirements of the "portfolio
interest" exception described in (a) above, payments of interest made to such
Non-U.S. Holder will be subject to a 30% withholding tax unless the beneficial
owner of the Senior Note provides us or any paying agent, as the case may be,
with a properly executed (1) IRS Form W-8BEN claiming an exemption from or
reduction in withholding under the benefit of an applicable income tax treaty or
(2) IRS Form W-8ECI stating that interest paid on the Senior Note is not subject
to withholding tax because it is effectively connected with the beneficial
owner's conduct of a trade or business in the United States. Alternative
documentation may be applicable in certain situations.
If a Non-U.S. Holder is engaged in a trade or business in the United
States and interest on the Senior Note is effectively connected with the conduct
of such trade or business, the non-U.S. Holder, although exempt from the
withholding tax discussed above, will be subject to United States federal income
tax on such interest on a net income basis in the same manner as if it were a
U.S. Holder. In addition, if such holder is a foreign corporation, it may be
subject to a branch profits tax equal to 30% (or a lesser rate under an
applicable income tax treaty) of such amount, subject to adjustments.
Any gain realized upon the sale, exchange, retirement or other disposition
of a Senior Note generally will not be subject to United States federal income
tax unless (i) such gain or income is effectively connected with a trade or
business in the United States of the Non-U.S. Holder, or (ii) in the case of a
Non-U.S. Holder who is an individual, such individual is present in the United
States for 183 days or more in the taxable year of such sale, exchange,
retirement or other disposition, and certain other conditions are met.
Special rules may apply to certain Non-U.S. Holders, such as "controlled
foreign corporations," "passive foreign investment companies," "foreign personal
holding companies" and certain expatriates that are subject to special treatment
under the Code. Such entities should consult their own tax advisors to determine
the United States federal, state, local and other tax consequences that may be
relevant to them.
Information Reporting and Backup Withholding
U.S. Holders
In general, information reporting requirements will apply to payments of
principal and interest paid on Senior Notes and to the proceeds upon the sale of
a Senior Note paid to U.S. Holders other than certain exempt recipients (such as
corporations). A backup withholding tax will apply to such payments if the U.S.
Holder fails to provide a taxpayer identification number or certification of
exempt status or fails to report in full dividend and interest income.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
Non-U.S. Holders
Information reporting will generally apply to payments of interest and the
amount of tax, if any, withheld with respect to such payments to Non-U.S.
Holders of the Senior Notes. Copies of the information returns reporting such
interest payments and any withholding may also be made available to the tax
authorities in the country in which the Non-U.S. Holder resides under the
provisions of an applicable income tax treaty.
In general, no backup withholding will be required with respect to
payments made by us or any paying agent to Non-U.S. Holders if a statement
described in (a)(v) under "Non-U.S. Holders" has been received (and the payor
does not have actual knowledge or reason to know that the beneficial owner is a
United States person).
In addition, information reporting and, depending on the circumstances,
backup withholding, will apply to the proceeds of the sale of a Senior Note
within the United States or conducted through United States-related financial
intermediaries unless the statement described in (a)(v) under "Non-U.S. Holders"
has been received (and the payor does not have actual knowledge or reason to
know that the beneficial owner is a U.S. person) or the holder otherwise
establishes an exemption.
UNDERWRITING
Barclays Capital Inc. and Morgan Stanley & Co. Incorporated are acting as
representatives of the underwriters named below. Subject to the terms and
conditions of the underwriting agreement, we have agreed to sell to each of the
underwriters named below and each of the underwriters has severally and not
jointly agreed to purchase from us the respective principal amount of Senior
Notes set forth opposite its name below:
Principal Amount Principal Amount
Underwriter of Series H Notes of Series I Notes
Barclays Capital Inc... $ 88,875,000 $ 88,875,000
Morgan Stanley & Co. Incorporated 88,875,000 88,875,000
ABN AMRO Incorporated.. 15,750,000 15,750,000
Danske Markets Inc..... 15,750,000 15,750,000
The Royal Bank of Scotland plc 15,750,000 15,750,000
$ 225,000,000 $ 225,000,000
In the underwriting agreement, the underwriters have agreed to the terms
and conditions to purchase all of the Senior Notes offered if any of the Senior
Notes are purchased.
The expenses associated with the offer and sale of the Senior Notes are
expected to be approximately $200,000 for the Series H Notes and $200,000 for
the Series I Notes.
The underwriters propose to offer the Senior Notes to the public at the
initial public offering price set forth on the cover page of this prospectus
supplement and to certain dealers at such price less a concession not in excess
of .400% per Series H Note and .500% per Series I Note. The underwriters may
allow, and such dealers may reallow, a discount not in excess of .250% per
Series H Note and .250% per Series I Note to certain other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed.
Prior to this offering, there has been no public market for the Senior
Notes. The Senior Notes will not be listed on any securities exchange. Certain
of the underwriters have advised us that they intend to make a market in the
Senior Notes. The underwriters will have no obligation to make a market in the
Senior Notes, however, and may cease market making activities, if commenced, at
any time. There can be no assurance of a secondary market for the Senior Notes,
or that the Senior Notes may be resold.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or
contribute to payments that each underwriter may be required to make in respect
thereof.
In connection with the offering, the underwriters may purchase and sell
the Senior Notes in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the offering. Stabilizing
transactions consist of certain bids or purchases for the purposes of preventing
or retarding a decline in the market price of the Senior Notes and syndicate
short positions involve the sale by the underwriters of a greater number of
Senior Notes than they are required to purchase from us in the offering. The
underwriters also may impose a penalty bid, whereby selling concessions allowed
to syndicate members or other broker dealers in respect of the securities sold
in the offering for their account may be reclaimed by the syndicate if such
Senior Notes are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Senior Notes, which may be higher than the price that might
otherwise prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected in the
over-the-counter market or otherwise.
Some of the underwriters or their affiliates engage in transactions with,
and have performed services for, us and our affiliates in the ordinary course of
business.
Barclays Capital Inc. will make the Senior Notes available for
distribution on the Internet through a proprietary Web site and/or third-party
system operated by Market Axess Inc., an Internet-based communications
technology provider. Market Axess Inc. is providing the system as a conduit for
communications between Barclays Capital Inc. and its customers and is not a
party to any transactions. We do not believe that Market Axess Inc., will
function as an underwriter or agent of the issuer nor do we believe that Market
Axess Inc. will act as a broker for any customer of Barclays Capital Inc. Market
Axess Inc. a registered broker-dealer, will receive compensation from Barclays
Capital Inc. based on transactions the underwriters conduct through the system.
Barclays Capital Inc. will make the Senior Notes available to its customers
through the Internet distributions, whether made through a proprietary or
third-party system, on the same terms as distributions made through other
channels.
PROSPECTUS
OHIO POWER COMPANY
1 Riverside Plaza
Columbus, Ohio 43215
614-716-1000
$650,000,000
UNSECURED NOTES
TERMS OF SALE
A prospectus supplement or pricing supplement will include the final terms
for each note. If we decide to list upon issuance any note or notes on a
securities exchange, a prospectus supplement or pricing supplement will identify
the exchange and state when we expect trading could begin. The following terms
may apply to the notes that we may sell at one or more times.
- Mature 9 months to 50 years
- Fixed or floating interest rate -
- Remarketing features
- Certificate or book-entry form
- Subject to redemption
- Not convertible, amortized or subject to a sinking fund
- Interest paid on fixed rate notes quarterly or semi-annually
- Interest paid on floating rate notes monthly, quarterly, semi-annually,
or annually
- Issued in multiples of a minimum denomination
- Issued with original issue discount
INVESTING IN THESE NOTES INVOLVES RISKS. SEE THE SECTION ENTITLED "RISK
FACTORS" BEGINNING ON PAGE 2 FOR MORE INFORMATION.
The notes have not been approved or disapproved by the Securities and Exchange
Commission or any state securities commission, nor have these organizations
determined that this prospectus is accurate or complete. Any representation to
the contrary is a criminal offense.
The date of this prospectus is June 30, 2003.
THE COMPANY
General
We generate, sell, purchase, transmit and distribute electric power. We
serve approximately 702,000 customers in Ohio. We also sell and transmit power
at wholesale to other electric utilities, municipalities, electric cooperatives
and non-utility entities engaged in the wholesale power market. Our principal
executive offices are located at 1 Riverside Plaza, Columbus, Ohio 43215
(telephone number 614-716-1000). We are a subsidiary of American Electric Power
Company, Inc. ("AEP"), a public utility holding company, and we are a part of
the American Electric Power integrated utility system. The executive offices of
AEP are located at 1 Riverside Plaza, Columbus, Ohio 43215 (telephone number
614-716-1000).
RISK FACTORS
RISKS RELATED TO OUR REGULATED BUSINESS AND EVOLVING REGULATION
We may need regulatory or other approval to remain functionally separated; if we
are unable to remain functionally separated, we need SEC approval.
We currently operate as a functionally separated electric utility and no
longer charge bundled rates for our retail sales of electricity. Ohio has
enacted restructuring legislation (S.B.3) that provides for the legal separation
of our generation-related assets from our electric transmission and distribution
assets (Transmission and Distribution Business). The Public Utilities Commission
of Ohio (PUCO) has approved our transition plan to legally separate our
Transmission and Distribution Business as provided by Ohio restructuring
legislation. We are currently determining, however, the regulatory feasibility
of complying with restructuring legislation through continued functional
separation. Assuming regulatory compliance, it is currently our intention to
remain functionally separated.
Our compliance with restructuring legislation through continued functional
separation during the market development period provided for in S.B.3
(Development Period) may require the approval of or notification to the PUCO; it
may also require notification to the Federal Energy Regulatory Commission (FERC)
and the Securities and Exchange Commission (SEC). Furthermore, following the end
of the Development Period, given the current uncertainty with respect to the
method by which default service market rates will be determined, there is some
question as to whether we would be required under S.B.3 to legally separate.
Further action by the PUCO may be necessary to resolve this question. We can
give no assurance that we can remain functionally separated.
If we are unable to remain functionally separated and we are required to
legally separate, we would still need SEC approval to legally separate. We can
give no assurance that the SEC would not impose material adverse terms as a
condition to approving our legal separation.
We operate in a changing regulatory environment.
Our business plan is based on the provision of distribution services at
PUCO-established rates and the provision of transmission services at
FERC-established rates and assumes that deregulated generation in Ohio will not
be re-regulated. There can be no assurance that Ohio will not reverse or revise
its current regulatory initiatives, and there can be no assurance that recent
federal legislative and regulatory initiatives, which have been designed to
facilitate competition in the energy sector, will continue or will not be
reversed. Alteration of the regulatory landscape in which we operate will impact
the effectiveness of our business plan and may harm our financial condition and
results of operations.
RISKS RELATED TO OUR TRANSMISSION AND DISTRIBUTION BUSINESS
Our Transmission and Distribution Business is operating in a new market
environment in which our Transmission and Distribution Business and others have
little operating experience.
The competitive electric market in Ohio is new. Our Transmission and
Distribution Business has not had any significant operating history under the
market framework created by the Ohio restructuring legislation. While to date
the transition has not resulted in material difficulties, unforeseen
difficulties could develop which could become material. Additionally, structural
changes adopted to address any such difficulties could materially adversely
affect our Transmission and Distribution Business' revenues and results of
operations.
Rate regulation of our Transmission and Distribution Business may delay or deny
full recovery of costs.
Our Transmission and Distribution Business currently provides distribution
service to retail customers in Ohio at rates effectively frozen through December
31, 2007 and approved by the PUCO. These rates are regulated by the PUCO based
on an analysis of our expenses incurred in a test year. Thus, the rates we are
allowed to charge may or may not match our expenses at any given time. While
rate regulation in Ohio is premised on providing a reasonable opportunity to
earn a reasonable rate of return on invested capital, there can be no assurance
that the PUCO will judge all of our Transmission and Distribution Business'
costs to have been prudently incurred or that the regulatory process in which
rates are determined will always result in rates that will produce full recovery
of our Transmission and Distribution Business' costs.
Disruptions at power generation facilities owned by affiliates or third parties
could interrupt our Transmission and Distribution Business' sale of distribution
and transmission services.
Our Transmission and Distribution Business could depend on power
generation facilities owned by our affiliates through 2005, and following that
time, possibly third parties to provide the electric power which our
Transmission and Distribution Business transmits and distributes to our
Transmission and Distribution Business' customers. If legal separation occurs,
that entity will not own or operate any power generation facilities. If power
generation is disrupted or if power generation capacity is inadequate, our
Transmission and Distribution Business' services may be interrupted, and our
revenues, financial condition and results of operations may be adversely
affected.
Our Transmission and Distribution Business' revenues and results of operations
are subject to risks that are beyond its control.
Unless mitigated by timely and adequate regulatory recovery, the cost of
repairing damage to our Transmission and Distribution Business' facilities due
to storms, natural disasters, wars, terrorist acts and other catastrophic
events, in excess of reserves established for such repairs, may adversely impact
our Transmission and Distribution Business' revenues, operating and capital
expenses and results of operations.
Uncertainty exists regarding FERC proposed security standards.
In July 2002, the FERC published for comment its proposed security
standards as part of the Standards for Market Design. These standards are
intended to ensure all market participants have a basic security program that
effectively protects the electric grid and related market activities and require
compliance by January 1, 2004. The impact of these proposed standards is
far-reaching and has significant penalties for non-compliance. These standards
apply to marketers, transmission owners and power producers, including our
Transmission and Distribution Business. Compliance with these standards would
represent a significant effort that would impact our Transmission and
Distribution Business. Unless the cost can be recovered from customers, results
of operations and cash flows would be adversely affected.
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.
In May 2002, AEP announced an agreement with the Pennsylvania-New
Jersey-Maryland RTO (the PJM) Interconnection to pursue terms for participation
in its RTO. In July 2002, the FERC tentatively approved the decision of certain
AEP subsidiaries, including us, to join PJM subject to certain conditions being
met. The performance of these conditions is only partially under AEP's control.
In October 2002, PJM announced that the referenced AEP subsidiaries and other
unaffiliated utilities planned to turn functional control of their transmission
lines over to PJM during the first quarter of 2003 and were scheduled to become
full members by May 2003. Legislation adopted in a jurisdiction in which one of
our affiliates operates and other regulatory considerations have delayed our
participation in PJM.
Management is unable to predict the outcome of the legislative and
regulatory actions and proceedings or their impact on the timing and operation
of RTOs, our Transmission and Distribution Business' operations or future
results of operations and cash flows.
RISKS RELATED TO OUR GENERATION AND RELATED ASSETS
We have limited ability to pass on to our customers our costs of production.
We are exposed to risk from changes in the market prices of coal used to
generate power. The protection afforded by retail fuel clause recovery
mechanisms was eliminated effective January 1, 2001 by the implementation of
customer choice in Ohio. Because the risk of fuel price increases, increased
environmental compliance costs and generating unit outage cannot be passed
through to customers during the Development Period in Ohio (which will end no
later than December 31, 2005), we retain these risks.
Until the end of the Development Period, our Transmission and Distribution
Business is required to provide power at capped rates, which may be below
current market rates, to retail customers that do not choose an alternative
power generation supplier. We currently provide the power that our Transmission
and Distribution Business is required to provide to non-switching customers.
This means that we bear the risk of fuel and power price increases, increased
costs of environmental compliance and generating unit outage. Following the end
of the Development Period, there is no obligation to sell to such customers at
capped generation rates. By law, the cost of generation service for customers
that do not choose an alternative power generation supplier must be at market
rates. The determination of what constitutes market rates has not been resolved
by the PUCO. If, following the end of the Development Period, our costs to
acquire or provide generation service to such customers exceed what is
determined to be market rates, our financial condition and results of operations
would be adversely affected.
Our default service does not restrict customers from switching power suppliers.
Those default service customers that we serve may choose to purchase power
from alternative suppliers. Should they choose to switch from us, our sales of
power may decrease. Customers originally choosing alternative suppliers may
later switch to our default service obligations. This may increase demand above
our facilities' available capacity. Thus, any such switching by customers could
have an adverse effect on our results of operations and financial position.
Conversely, to the extent the power sold by us to meet the default service
obligations could have been sold to third parties at more favorable wholesale
prices, we will have incurred potentially significant lost opportunity costs.
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 virtually all of our generating capacity is coal-fired. We have
contracts of varying durations for the supply of coal for most of our existing
generation capacity, but as these contracts end, we may not be able to purchase
coal on terms as favorable as the current contracts.
Changes in the cost of coal and changes in the relationship between such
cost and the market price of power will affect our financial results. Since the
price we obtain for power may not change at the same rate as the change in coal
costs, we may be unable to pass on the changes in costs to our customers. In
addition, the price we can charge our retail customers in Ohio is frozen through
December 31, 2005.
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.
We may not be able to respond effectively to competition from other generation
companies.
We may not be able to respond in a timely or effective manner to the many
changes in the power industry that may occur as a result of regulatory
initiatives to increase competition. To the extent that competition increases,
our profit margins may be negatively affected. Industry deregulation may not
only continue to facilitate the current trend toward consolidation in the
utility industry but may also encourage the disaggregation of other vertically
integrated utilities into separate generation, transmission and distribution
businesses. As a result, additional competitors in our industry may be created,
and we may not be able to maintain our revenues and earnings levels.
While demand for power is generally increasing throughout the United
States, the rate of construction and development of new, more efficient electric
generation facilities may exceed increases in demand in some regional electric
markets. The start-up of new facilities in our regional markets could increase
competition in the wholesale power market in our region, which could harm our
business, results of operations and financial condition. Also, industry
restructuring in our region could affect our operations in a manner that is
difficult to predict, since the effects will depend on the form and timing of
the restructuring.
Our costs of compliance with environmental laws are significant, and the cost of
compliance with future environmental laws could harm our cash flow and
profitability.
Our operations are subject to extensive federal, state and local
environmental statutes, rules and regulations relating to air quality, water
quality, waste management, natural resources and health and safety. Compliance
with these legal requirements requires us to commit significant capital toward
environmental monitoring, installation of pollution control equipment, emission
fees and permits at all of our facilities. These expenditures have been
significant in the past, and we expect that they will increase in the future.
Costs of compliance with environmental regulations could harm our industry, our
business and our results of operations and financial position, especially if
emission and/or discharge limits are tightened, more extensive permitting
requirements are imposed, additional substances become regulated and the number
and types of assets we operate increase.
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. We expect to
spend between $495 and $824 million (of which $404 million had been expended as
of March 31, 2003) in connection with the installation of emission control
equipment at our facilities to comply with the new nitrogen oxide emission rules
under the Clean Air Act. Moreover, environmental laws are subject to change,
which may materially increase our costs of compliance or accelerate the timing
of these capital expenditures. Our compliance strategy, although reasonably
based on the information available to us today, may not successfully address the
relevant standards and interpretations of the future.
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 utility
subsidiaries in U.S. District Court for the Southern District of Ohio. A
separate lawsuit initiated by certain special interest groups was consolidated
with the 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.
We are unlikely to be able to pass on the cost of environmental compliance to
our customers.
Most of our contracts with wholesale customers do not permit us to recover
additional capital and other costs incurred by us to comply with new
environmental regulations. Due to the deregulation of generation in Ohio, we
cannot currently recover through increased rates additional capital and other
costs incurred by us to comply with new environmental regulations with respect
to our generation previously regulated in Ohio.
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 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.
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.
RISKS RELATED TO OUR POWER TRADING AND WHOLESALE BUSINESSES
In October 2002, AEP announced its plans to reduce the exposure to energy
trading markets of its subsidiaries that trade power (including us) and to
downsize the trading and wholesale marketing operations conducted on behalf of
such subsidiaries. Our power trading and marketing operations are limited to
risk management around our generation assets and those of our regulated
affiliates. Management is unable to predict the effect this downsizing of our
trading operations will have on our future results of operations and cash flows.
The following risk factors appearing under this subheading should be read in
light of the announcements discussed in this paragraph.
Our revenues and results of operations are subject to market risks that are
beyond our control.
We sell a portion of the 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.
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 results of operations 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 financial performance may be adversely affected if we are unable to
successfully operate our electric generating facilities.
Our performance depends on the successful operation of our electric
generating facilities. Operating electric generating facilities involves many
risks, including:
o operator error and breakdown or failure of equipment or processes;
o operating limitations that may be imposed by environmental or other
regulatory requirements;
o labor disputes;
o fuel supply interruptions; and
o catastrophic events such as fires, earthquakes, explosions, floods or
other similar occurrences.
A decrease or elimination of revenues from power produced by our electric
generating facilities or an increase in the cost of operating the facilities
would adversely affect our results of operations.
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. As reported in the national press, the credit
downgrades of numerous participants in this market would suggest that credit
rating agencies have concluded that the risk of default by such participants has
increased. Although our estimates take into account the expected probability of
default by a counterparty, our actual exposure to a default by a counterparty
may be greater than the estimates predict if defaults by counterparties exceed
our estimates.
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.
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.
We are unable to predict the course, results or impact, if any, of current or
future energy market investigations.
In February 2002, the FERC issued an order directing its staff to conduct
a fact-finding investigation into whether any entity, including Enron Corp.,
manipulated short-term prices in electric energy or natural gas markets in the
West or otherwise exercised undue influence over wholesale prices in the West,
for the period January 1, 2000, forward. In April 2002, AEP furnished certain
information to the FERC in response to their related data request.
Pursuant to the FERC's February order, on May 8, 2002, the FERC issued
further data requests, including requests for admissions, with respect to
certain trading strategies engaged in by Enron Corp. and, allegedly, traders of
other companies active in the wholesale electricity and ancillary services
markets in the West, particularly California, during the years 2000 and 2001.
This data request was issued to AEP as part of a group of over 100 entities
designated by the FERC as all sellers of wholesale electricity and/or ancillary
services to the California Independent System Operator and/or the California
Power Exchange.
The May 8, 2002 FERC data request required senior management to conduct an
investigation into AEP's trading activities during 2000 and 2001 and to provide
an affidavit as to whether AEP engaged in certain trading practices that the
FERC characterized in the data request as being potentially manipulative. AEP's
senior management complied with the order and denied its involvement with those
trading practices.
On May 21, 2002, the FERC issued a further data request with respect to
this matter to AEP and over 100 other market participants requesting information
for the years 2000 and 2001 concerning "wash," "round trip" or "sale/buy back"
trading in the Western System Coordinating Council (WSCC), which involves the
sale of an electricity product to another company together with a simultaneous
purchase of the same product at the same price (collectively, wash sales).
Similarly, on May 22, 2002, the FERC issued an additional data request with
respect to this matter to AEP and other market participants requesting similar
information for the same period with respect to the sale of natural gas products
in the WSCC and Texas. After reviewing its records, AEP responded to the FERC
that it did not participate in any "wash sale" transactions involving power or
gas in the relevant market. AEP further informed the FERC that certain of its
traders did engage in trades on the Intercontinental Exchange, an electronic
electricity trading platform owned by a group of electricity trading companies,
including AEP, on September 21, 2001, the day on which all brokerage commissions
for trades on that exchange were donated to charities for the victims of the
September 11, 2001 terrorist attacks, which do not meet the FERC criteria for a
"wash sale" but do have certain characteristics in common with such sales.
The Public Utility Commission of Texas, which has jurisdiction over
several of our affiliates, also issued similar data requests to us and other
power marketers. We responded to such data request by the July 2, 2002 response
date. The U.S. Commodity Futures Trading Commission (CFTC) issued a subpoena to
us on June 17, 2002 requesting information with respect to "wash sale" trading
practices. We responded to the CFTC.
In August 2002, AEP received an informal data request from the SEC asking
it to voluntarily provide documents related to "round-trip" or "wash" trades and
AEP has provided the requested information to the SEC. In March 2003, we
received a subpoena from the SEC. The subpoena seeks additional information and
is part of the SEC's formal investigative process. We responded to the subpoena
in April 2003. AEP recently completed a review of its trading activities in the
United States for the last three years involving sequential trades with the same
terms and counterparties. The revenue from such trading is not material to
either our financial statements or AEP's. We believe that substantially all
these transactions involve economic substance and risk transference and do not
constitute "wash sales".
Management is unable to predict the course or outcome of these or any
future energy market investigations or their impact, if any, on power commodity
trading generally or, more specifically, on our trading operations or future
results of operations and cash flows.
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 of numerous other market participants have
significantly reduced such participants' participation in the wholesale power
markets. Likewise, numerous market participants have announced material scaling
back of or exit from the wholesale power market business. These events are
causing a decrease in the number of significant participants in the wholesale
power markets, at least temporarily, which has resulted and could continue to
result in a decrease in the volume and liquidity in the wholesale power markets.
We are unable to predict the impact of such developments on our power marketing
and trading business.
Potential for disruption exists if the delay of a FERC market power mitigation
order is lifted.
A FERC order on AEP's triennial market based wholesale power rate
authorization update required certain mitigation actions that certain AEP
subsidiaries, including us, would need to take for sales/purchases within its
control area and required AEP to post information on its website regarding its
power systems status. As a result of a request for rehearing filed by AEP and
other market participants, FERC issued an order delaying the effective date of
the mitigation plan until after a planned technical conference on market power
determination. No such conference has been held and management is unable to
predict the timing of any further action by the FERC or its affect on future
results of our operations and cash flows.
RISKS RELATED TO MARKET OR ECONOMIC VOLATILITY
We are subject to risks associated with a changing economic environment.
In response to the occurrence of several recent events, including the
September 11, 2001 terrorist attack on the United States, the ongoing war
against terrorism by the United States and the bankruptcy of Enron Corp., the
financial markets have been disrupted in general, and the availability and cost
of capital for our business and that of our competitors has been at least
temporarily harmed. In addition, following the bankruptcy of Enron Corp., the
credit ratings agencies initiated a thorough review of the capital structure and
earnings power of energy companies, including us. These events could constrain
the capital available to our industry and could limit our access to funding for
our operations. Our business is capital intensive, and we are dependent upon our
ability to access capital at rates and on terms we determine to be attractive.
If our ability to access capital becomes significantly constrained, our interest
costs will likely increase and our financial condition and results of operations
could be adversely affected.
The insurance industry has also been disrupted by these events. As a
result, the availability of insurance covering risks we and our competitors
typically insure against may decrease. In addition, the insurance we are able to
obtain may have higher deductibles, higher premiums and more restrictive policy
terms.
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
A3, respectively. If Moody's or Standard & Poor's were to downgrade our
long-term rating, particularly below investment grade, our borrowing costs would
increase, which would diminish our financial results. In addition, we would
likely be required to pay a higher interest rate in future financings, and our
potential pool of investors and funding sources could decrease.
On February 10, 2003, Moody's downgraded AEP's short-term debt rating to
P-3 (with stable outlook) from P-2. On March 7, 2003, Standard & Poor's affirmed
AEP's short-term rating of A-2 with stable outlook. As a result of the Moody's
downgrade, AEP's access to the commercial paper market may be limited and our
short-term debt borrowing costs may increase because we conduct our short-term
borrowing through AEP and on the same terms available to AEP.
Our power trading business relies on the investment grade ratings of our
senior, unsecured debt. Most of our counterparties require the creditworthiness
of an investment grade entity to stand behind transactions. If our rating were
to decline below investment grade, our ability to profitably operate our power
trading business would be diminished, because we would likely have to deposit
cash or cash related instruments, which would reduce our profits.
PROSPECTUS SUPPLEMENTS
We may provide information to you about the notes in up to three separate
documents that progressively provide more detail: (a) this prospectus provides
general information some of which may not apply to your notes, (b) the
accompanying prospectus supplement provides more specific terms of your notes,
and (c) if not in the accompanying prospectus supplement, the pricing supplement
will provide the final terms of your notes. It is important for you to consider
the information contained in this prospectus, the prospectus supplement and the
pricing supplement in making your investment decision.
RATIO OF EARNINGS TO FIXED CHARGES
The Ratio of Earnings to Fixed Charges for each of the periods indicated
is as follows:
Twelve Months Ended Ratio
December 31, 1998 3.28
December 31, 1999 3.43
December 31, 2000 2.75
December 31, 2001 2.77
December 31, 2002 3.55
March 31, 2003 3.73
For purposes of computing this ratio (a) earnings consist of income before
provision for income taxes and fixed charges and (b) fixed charges consist of
interest expense, amortization of debt expense and pretax preferred stock
dividend requirements.
For current information on the Ratio of Earnings to Fixed Charges, please
see our most recent Form 10-K and 10-Q. See Where You Can Find More Information.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement we filed with the SEC.
We also file annual, quarterly and special reports and other information with
the SEC. You may read and copy any document we file at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the Public Reference Room.
You may also examine our SEC filings through the SEC's web site at
http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information that we file
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings made
with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Securities
Exchange Act of 1934 until we sell all the notes.
Annual Report on Form 10-K for the year ended December 31, 2002;
Quarterly Report on Form 10-Q for the quarter ended March 31, 2003; and
Current Reports on Form 8-K filed February 5, 2003 and May 14, 2003.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
Mr. R. Todd Rimmer
American Electric Power Service Corporation
1 Riverside Plaza
Columbus, Ohio 43215
614-716-1000
You should rely only on the information incorporated by reference or
provided in this prospectus or any supplement. We have not authorized anyone
else to provide you with different information. We are not making an offer of
these notes in any state where the offer is not permitted. You should not assume
that the information in this prospectus or any supplement is accurate as of any
date other than the date on the front of those documents.
USE OF PROCEEDS
Unless otherwise stated in a prospectus supplement, the net proceeds from
the sale of the notes will be used for general corporate purposes relating to
our utility business. These purposes include redeeming or repurchasing
outstanding debt, including short-term debt, advances from affiliates or
preferred stock and replenishing working capital. If we do not use the net
proceeds immediately, we temporarily invest them in short-term, interest-bearing
obligations. We estimate that our construction costs in 2003 will approximate
$241,000,000. We had $239,328,000 of advances from affiliates outstanding as of
March 31, 2003.
DESCRIPTION OF THE NOTES
General
We will issue the notes under the Indenture dated September 1, 1997 (as
previously supplemented and amended) between us and the Trustee, Deutsche Bank
Trust Company Americas, formerly known as Bankers Trust Company. 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 60
Wall 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 October 1, 1938 (as previously
supplemented and amended) between us and JPMorgan Chase Bank, formerly The Chase
Manhattan Bank, as Trustee. For current information on our debt outstanding see
our most recent Form 10-K and 10-Q. See Where You Can Find More Information.
The notes will be denominated in U.S. dollars and we will pay principal
and interest in U.S. dollars. Unless an applicable pricing or prospectus
supplement states otherwise, the notes will not be subject to any conversion,
amortization, or sinking fund. We expect that the notes will be "book-entry,"
represented by a permanent global note registered in the name of The Depository
Trust Company, or its nominee. We reserve the right, however, to issue note
certificates registered in the name of the noteholders.
In the discussion that follows, whenever we talk about paying principal on
the notes, we mean at maturity or redemption. Also, in discussing the time for
notices and how the different interest rates are calculated, all times are New
York City time and all references to New York mean the City of New York, unless
otherwise noted.
The following terms may apply to each note as specified in the applicable
pricing or prospectus supplement and the note.
Redemptions
If we issue redeemable notes, we may redeem such notes at our option
unless an applicable pricing or prospectus supplement states otherwise. The
pricing or prospectus supplement will state the terms of redemption. We may
redeem notes in whole or in part by delivering written notice to the noteholders
no more than 60, and not less than 30, days prior to redemption. If we do not
redeem all the notes of a series at one time, the Trustee selects the notes to
be redeemed in a manner it determines to be fair.
Remarketed Notes
If we issue notes with remarketing features, an applicable pricing or
prospectus supplement will describe the terms for the notes including: interest
rate, remarketing provisions, our right to redeem notes, the holders' right to
tender notes, and any other provisions.
Book-Entry Notes - Registration, Transfer, and Payment of Interest and
Principal
Unless otherwise stated in a prospectus supplement, book-entry notes of a
series will be issued in the form of a global note that the Trustee will deposit
with The Depository Trust Company, New York, New York ("DTC"). This means that
we will not issue note certificates to each holder. One or more global notes
will be issued to DTC who will keep a computerized record of its participants
(for example, your broker) whose clients have purchased the notes. The
participant will then keep a record of its clients who purchased the notes.
Unless it is exchanged in whole or in part for a note certificate, a global note
may not be transferred; except that DTC, its nominees, and their successors may
transfer a global note as a whole to one another.
Beneficial interests in global notes will be shown on, and transfers of
global notes will be made only through, records maintained by DTC and its
participants.
DTC has provided us the following information: DTC is a limited-purpose
trust company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the United States
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered under the
provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds
securities that its participants ("Direct Participants") deposit with DTC. DTC
also records the settlement among Direct Participants of securities
transactions, such as transfers and pledges, in deposited securities through
computerized records for Direct Participants' accounts. This eliminates the need
to exchange note certificates. Direct Participants include securities brokers
and dealers, banks, trust companies, clearing corporations and certain other
organizations.
Other organizations such as securities brokers and dealers, banks and
trust companies that work through a Direct Participant also use DTC's book-entry
system. The rules that apply to DTC and its participants are on file with the
SEC.
A number of its Direct Participants and the New York Stock Exchange,
Inc., The American Stock Exchange, Inc. and the National Association of
Securities Dealers, Inc. own DTC.
We will wire principal and interest payments to DTC's nominee. We and the
Trustee will treat DTC's nominee as the owner of the global notes for all
purposes. Accordingly, we, the Trustee and any paying agent will have no direct
responsibility or liability to pay amounts due on the global notes to owners of
beneficial interests in the global notes.
It is DTC's current practice, upon receipt of any payment of principal or
interest, to credit Direct Participants' accounts on the payment date according
to their respective holdings of beneficial interests in the global notes as
shown on DTC's records. In addition, it is DTC's current practice to assign any
consenting or voting rights to Direct Participants whose accounts are credited
with notes on a record date. The customary practices between the participants
and owners of beneficial interests will govern payments by participants to
owners of beneficial interests in the global notes and voting by participants,
as is the case with notes held for the account of customers registered in
"street name." However, payments will be the responsibility of the participants
and not of DTC, the Trustee or us.
According to DTC, the foregoing information with respect to DTC has been
provided to the Direct Participants and other members of the financial community
for informational purposes only and is not intended to serve as a
representation, warranty or contract modification of any kind.
Notes represented by a global note will be exchangeable for note
certificates with the same terms in authorized denominations only if:
o DTC notifies us that it is unwilling or unable to continue as depositary
or if DTC ceases to be a clearing agency registered under applicable law
and a successor depositary is not appointed by us within 90 days; or
o we determine not to require all of the notes of a series to be
represented by a global note and notify the Trustee of our decision.
Note Certificates-Registration, Transfer, and Payment of Interest and
Principal
If we issue note certificates, they will be registered in the name of the
noteholder. The notes may be transferred or exchanged, pursuant to
administrative procedures in the indenture, without the payment of any service
charge (other than any tax or other governmental charge) by contacting the
paying agent. Payments on note certificates will be made by check.
Original Issue Discount
We may issue the notes at an original issue discount, bearing no interest
or bearing interest at a rate that, at the time of issuance, is below market
rate, to be sold at a substantial discount below their stated principal amount.
Generally speaking, if the notes are issued at an original issue discount and
there is an event of default or acceleration of their maturity, holders will
receive an amount less than their principal amount. Tax and other special
considerations applicable to original issue discount debt will be described in
the prospectus supplement in which we offer those notes.
Interest Rate
The interest rate on the notes will either be fixed or floating. The
interest paid will include interest accrued to, but excluding, the date of
maturity or redemption. Interest is generally payable to the person in whose
name the note is registered at the close of business on the record date before
each interest payment date. Interest payable at maturity or redemption, however,
will be payable to the person to whom principal is payable.
If we issue a note after a record date but on or prior to the related
interest payment date, we will pay the first interest payment on the interest
payment date after the next record date. We will pay interest payments by check
or wire transfer, at our option.
Fixed Rate Notes
A pricing or prospectus supplement will designate the record dates,
payment dates and the fixed rate of interest payable on a note. We will pay
interest monthly, quarterly or semi-annually, and upon maturity or redemption.
Unless an applicable pricing or prospectus supplement states otherwise, if any
payment date falls on a day that is not a business day, we will pay interest on
the next business day and no additional interest will be paid. Interest payments
will be the amount of interest accrued to, but excluding, each payment date.
Interest will be computed using a 360-day year of twelve 30-day months.
Floating Rate Notes
Each floating rate note will have an interest rate formula. The applicable
pricing supplement will state the initial interest rate or interest rate formula
on each note effective until the first interest reset date. The applicable
pricing or prospectus supplement will state the method and dates on which the
interest rate will be determined, reset and paid.
Events of Default
"Event of Default" means any of the following:
- failure to pay for three business days the principal of (or premium, if
any, on) any note of a series when due and payable;
- failure to pay for 30 days any interest on any note of any series when due
and payable;
- failure to perform any other requirements in such notes, or in the Indenture
in regard to such notes, for 90 days after notice;
- certain events of bankruptcy or insolvency; or any other event of default
specified in a series of notes.
An Event of Default for a particular series of notes does not necessarily
mean that an Event of Default has occurred for any other series of notes issued
under the Indenture. If an Event of Default occurs and continues, the Trustee or
the holders of at least 33% of the principal amount of the notes of the series
affected may require us to repay the entire principal of the notes of such
series immediately ("Repayment Acceleration"). In most instances, the holders of
at least a majority in aggregate principal amount of the notes of the affected
series may rescind a previously triggered Repayment Acceleration. However, if we
cause an Event of Default because we have failed to pay (unaccelerated)
principal, premium, if any, or interest, Repayment Acceleration may be rescinded
only if we have first cured our default by depositing with the Trustee enough
money to pay all (unaccelerated) past due amounts and penalties, if any.
The Trustee must within 90 days after a default occurs, notify the holders
of the notes of the series of default unless such default has been cured or
waived. We are required to file an annual certificate with the Trustee, signed
by an officer, concerning any default by us under any provisions of the
Indenture.
Subject to the provisions of the Indenture relating to its duties in case
of default, the Trustee shall be under no obligation to exercise any of its
rights or powers under the Indenture at the request, order or direction of any
holders unless such holders offer the Trustee reasonable indemnity. Subject to
the provisions for indemnification, the holders of a majority in principal
amount of the notes of any series may direct the time, method and place of
conducting any proceedings for any remedy available to, or exercising any trust
or power conferred on, the Trustee with respect to such notes.
Modification of Indenture
Under the Indenture, our rights and obligations and the rights of the
holders of any notes may be changed. Any change affecting the rights of the
holders of any series of notes requires the consent of the holders of not less
than a majority in aggregate principal amount of the outstanding notes of all
series affected by the change, voting as one class. However, we cannot change
the terms of payment of principal or interest, or a reduction in the percentage
required for changes or a waiver of default, unless the holder consents. We may
issue additional series of notes and take other action that does not affect the
rights of holders of any series by executing supplemental indentures without the
consent of any noteholders.
Consolidation, Merger or Sale
We may merge or consolidate with any corporation or sell substantially all
of our assets as an entirety as long as the successor or purchaser expressly
assumes the payment of principal, and premium, if any, and interest on the
notes.
Legal Defeasance
We will be discharged from our obligations on the notes of any series at
any time if:
o we deposit with the Trustee sufficient cash or government securities to
pay the principal, interest, any premium and any other sums due to the
stated maturity date or a redemption date of the note of the series, and
o we deliver to the Trustee an opinion of counsel stating that the federal
income tax obligations of noteholders of that series will not change as a
result of our performing the action described above.
If this happens, the noteholders of the series will not be entitled to the
benefits of the Indenture except for registration of transfer and exchange of
notes and replacement of lost, stolen or mutilated notes.
Covenant Defeasance
We will be discharged from our obligations under any restrictive covenant
applicable to the notes of a particular series if we perform both actions
described above. See Legal Defeasance. If this happens, any later breach of that
particular restrictive covenant will not result in Repayment Acceleration. If we
cause an Event of Default apart from breaching that restrictive covenant, there
may not be sufficient money or government obligations on deposit with the
Trustee to pay all amounts due on the notes of that series. In that instance, we
would remain liable for such amounts.
Governing Law
The Indenture and notes of all series will be governed by the laws of the
State of New York.
Concerning the Trustee
We and our affiliates use or will use some of the banking services of the
Trustee and other services of its affiliates in the normal course of business.
PLAN OF DISTRIBUTION
We may sell the notes (a) through agents; (b) through underwriters or
dealers; or (c) directly to one or more purchasers.
By Agents
Notes may be sold on a continuing basis through agents designated by us.
The agents will agree to use their reasonable efforts to solicit purchases for
the period of their appointment.
The Agents will not be obligated to make a market in the notes. We cannot
predict the amount of trading or liquidity of the notes.
By Underwriters
If underwriters are used in the sale, the underwriters will acquire the
notes for their own account. The underwriters may resell the notes in one or
more transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale. The obligations of
the underwriters to purchase the notes will be subject to certain conditions.
The underwriters will be obligated to purchase all the notes of the series
offered if any of the notes are purchased. Any initial public offering price and
any discounts or concessions allowed or re-allowed or paid to dealers may be
changed from time to time.
Direct Sales
We may also sell notes directly. In this case, no underwriters or agents
would be involved.
General Information
Underwriters, dealers, and agents that participate in the distribution of
the notes may be underwriters as defined in the Securities Act of 1933 (the
"Act"), and any discounts or commissions received by them from us and any profit
on the resale of the notes by them may be treated as underwriting discounts and
commissions under the Act.
We may have agreements with the underwriters, dealers and agents to
indemnify them against certain civil liabilities, including liabilities under
the Act.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, us or our affiliates in the ordinary course of their
businesses.
LEGAL OPINIONS
Our counsel, Simpson Thacher & Bartlett LLP, New York, NY, and one of our
lawyers will each issue an opinion about the legality of the notes for us. Dewey
Ballantine LLP, New York, NY will issue an opinion for the agents or
underwriters. From time to time, Dewey Ballantine LLP acts as counsel to our
affiliates for some matters.
EXPERTS
The financial statements of the Company incorporated in this prospectus by
reference from the Company's Current Report on Form 8-K dated May 14, 2003 have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report which is incorporated herein by reference (which report expresses an
unqualified opinion and includes an explanatory paragraph relating to the
realignment of segments for financial reporting purposes).
The financial statement schedule of the Company incorporated by reference
in this prospectus from the Company's Annual Report on Form 10-K (as updated by
the Company's Current Report on Form 8-K dated May 14, 2003) has been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report, which is
incorporated herein by reference.
The aforementioned reports have been so incorporated in reliance upon such
firm given their authority as experts in accounting and auditing.
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$450,000,000
OHIO POWER COMPANY
$225,000,000 4.85% Senior Notes, Series H, due 2014
$225,000,000 6.375% Senior Notes, Series I, due 2033
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PROSPECTUS SUPPLEMENT
July 8, 2003
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Joint Book-Running Managers
Barclays Capital
Morgan Stanley
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Co-Managers
ABN AMRO Incorporated
Danske Markets
The Royal Bank of Scotland
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