PROSPECTUS SUPPLEMENT
- ---------------------
(To prospectus dated May 21, 2002)
$200,000,000
SOUTHWESTERN ELECTRIC POWER COMPANY
4.50% Senior Notes, Series B, due 2005
Interest on the Senior Notes is payable semi-annually on January 1 and
July 1 of each year, beginning January 1, 2003. The Senior Notes will mature on
July 1, 2005. We may redeem the Senior Notes at our option at any time either as
a whole or in part at a redemption price equal to 100% of the principal amount
of the Senior Notes being redeemed plus, if applicable, a make-whole premium,
together with accrued and unpaid interest to the redemption date. The Senior
Notes do not have the benefit of any sinking fund.
The Senior Notes are unsecured and rank equally with all of our other
unsecured and unsubordinated indebtedness from time to time outstanding and will
be effectively subordinated to all of our secured debt from time to time
outstanding, including $310,000,000 of outstanding first mortgage bonds as of
March 31, 2002. We will issue the Senior Notes only in registered form in
multiples of $1,000.
Per Note Total
Public offering price(1) . . . . . . . . 99.657% $199,314,000
Underwriting discount . . . . . . . . . .350% $ 700,000
Proceeds, before expenses,
to Southwestern Electric Power Company 99.307% $198,614,000
(1)Plus accrued interest, if any, from June 26, 2002.
INVESTING IN THESE NOTES INVOLVES RISKS. SEE THE SECTION
ENTITLED "RISK FACTORS" BEGINNING ON PAGE 2 OF THE ACCOMPANYING
PROSPECTUS FOR MORE INFORMATION.
Neither the U.S. Securities and Exchange Commission nor any state
securities commission has approved or disapproved of the Senior Notes or
determined that this prospectus supplement or the accompanying prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
The Senior Notes will be ready for delivery in book-entry only form
through The Depository Trust Company on or about June 26, 2002.
Joint Book-Running Managers
BANC ONE CAPITAL MARKETS, INC. JPMORGAN
Co-Managers
CREDIT LYONNAIS SECURITIES MELLON FINANCIAL MARKETS, LLC
TOKYO-MITSUBISHI INTERNATIONAL PLC U.S. BANCORP PIPER JAFFRAY
The date of this prospectus supplement is June 20, 2002.
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.
Page
TABLE OF CONTENTS
Prospectus Supplement
SUMMARY CONSOLIDATED FINANCIAL DATA........................... S-3
SUPPLEMENTAL DESCRIPTION OF THE SENIOR NOTES.................. S-4
USE OF PROCEEDS............................................... S-6
RECENT DEVELOPMENTS........................................... S-6
UNDERWRITING.................................................. S-7
Prospectus
THE COMPANY....................................................... 2
RISK FACTORS...................................................... 2
PROSPECTUS SUPPLEMENTS............................................ 10
RATIO OF EARNINGS TO FIXED CHARGES................................ 11
WHERE YOU CAN FIND MORE INFORMATION............................... 11
USE OF PROCEEDS .................................................. 12
DESCRIPTION OF THE NOTES ......................................... 12
PLAN OF DISTRIBUTION.............................................. 18
LEGAL OPINIONS.................................................... 19
EXPERTS........................................................... 19
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated financial information
for each of the periods indicated. You should read the information in this table
together with our consolidated financial statements and other financial
information incorporated by reference in this prospectus supplement and the
accompanying prospectus.
Three
Months
Ended
March 31, 2002 Year Ended December 31,
2001 2000 1999
(in thousands)
INCOME STATEMENTS DATA:
Operating Revenues (a) $ 330,748 $2,574,448 $1,682,726 $ 971,527
Operating Expenses 309,248 2,428,241 1,554,448 824,465
Operating Income 21,500 146,207 128,278 147,062
Nonoperating Income (Loss) (492) 741 3,851 (1,965)
Interest Charges 13,818 57,581 59,457 58,892
Income Before Extraordinary
Item 7,190 89,367 72,672 86,205
Extraordinary Loss - - - (3,011)
Net Income 7,190 89,367 72,672 83,194
Preferred Stock Dividend
Requirements 57 229 229 229
Earnings Applicable to
Common Stock $ 7,133 $ 89,138 $ 72,443 $ 82,965
========== ========== ========== ==========
Three
Months
Ended
March 31, 2002 Year Ended December 31,
2001 2000 1999
(in thousands)
BALANCE SHEETS DATA:
Electric Utility Plant $3,466,682 $3,460,764 $3,319,024 $3,231,431
Accumulated Depreciation and
Amortization 1,574,868 1,550,618 1,457,005 1,384,242
Net Electric Utility Plant $1,891,814 $1,910,146 $1,862,019 $1,847,189
========== ========== ========== ==========
Total Assets $2,332,540 $2,490,358 $2,657,956 $2,106,215
========== ========== ========== ==========
Common Shareholder's Equity $ 677,744 $ 689,575 $ 674,649 $ 664,206
========== ========== ========== ==========
Preferred Stock $ 4,704 $ 4,704 $ 4,704 $ 4,706
========== ========== ========== ==========
Trust Preferred Securities $ 110,000 $ 110,000 $ 110,000 $ 110,000
========== ========== ========== ==========
Long-term Debt (b) $ 494,812 $ 645,283 $ 645,963 $ 541,568
========== ========== ========== ==========
Total Capitalization and
Liabilities $2,332,540 $2,490,358 $2,657,956 $2,106,215
========== ========== ========== ==========
(a) Operating revenues, net of trading and marketing related purchased power
expense are: $230,465,000 for the three months ended March 31, 2002 and
$1,165,305,000, $1,124,210,000 and $971,527,000 for the years ended
December 31, 2001, 2000 and 1999.
(b) Including portion due within one year.
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 February 25, 2000, between us and The Bank of New York, as Trustee,
as supplemented and amended and as to be further supplemented and amended.
Principal Amount, Maturity and Interest
The Senior Notes will initially be issued in an aggregate principal amount
of $200,000,000. We may, without consent of the holders of the Senior Notes,
issue additional notes having the same ranking, interest rate, maturity and
other terms as the Senior Notes. These notes, together with the Senior Notes,
will be a single series of notes under the Indenture.
The Senior Notes will mature and become due and payable, together with any
accrued and unpaid interest, on July 1, 2005 and will bear interest at the rate
of 4.50% per year from June 26, 2002 until July 1, 2005. The Senior Notes are
not subject to any sinking fund provision.
Interest on each Senior Note will be payable semi-annually in arrears on
each January 1 and July 1 and at redemption, if any, or maturity. The initial
interest payment date is January 1, 2003. Each payment of interest shall include
interest accrued through the day before such interest payment date. Interest on
the Senior Notes will be computed on the basis of a 360-day year consisting of
twelve 30-day months.
We will pay interest on the Senior Notes (other than interest payable at
redemption, if any, or maturity) in immediately available funds to the owners of
the Senior Notes as of the Regular Record Date (as defined below) for each
interest payment date.
We will pay the principal of the Senior Notes and any premium and interest
payable at redemption, if any, or at maturity in immediately available funds at
the office of The Bank of New York, 5 Penn Plaza in New York, New York.
If any interest payment date, redemption date or the maturity is not a
Business Day (as defined below), we will pay all amounts due on the next
succeeding Business Day and no additional interest will be paid.
The "Regular Record Date" will be the December 15 or June 15 prior to the
relevant interest payment date.
"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.
Optional Redemption
We may redeem the Senior Notes at our option at any time, upon no more
than 60 and not less than 30 days' notice. We may redeem the Senior Notes either
as a whole or in part at a redemption price equal to the greater of (1) 100% of
the principal amount of the Senior Notes being redeemed and (2) the sum of the
present values of the remaining scheduled payments of principal and interest on
the Senior Notes being redeemed (excluding the portion of any such interest
accrued to the date of redemption) discounted (for purposes of determining
present value) to the redemption date on a semi-annual basis (assuming a 360-day
year consisting of twelve 30-day months) at the Treasury Rate (as defined below)
plus 20 basis points, plus, in each case, accrued interest thereon to the date
of redemption.
"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.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the Senior Notes that would be utilized, at the time of
selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the remaining term
of the Senior Notes.
"Comparable Treasury Price" means, with respect to any redemption date,
(1) the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
Business Day preceding such redemption date, as set forth in the daily
statistical release (or any successor release) published by the Federal Reserve
Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities" or (2) if such release (or any successor release) is not
published or does not contain such prices on such third Business Day, the
Reference Treasury Dealer Quotation for such redemption date.
"Independent Investment Banker" means one of the Reference Treasury
Dealers appointed by us and reasonably acceptable to the Trustee.
"Reference Treasury Dealer" means a primary U.S. Government Securities
Dealer selected by us and reasonably acceptable to the Trustee.
"Reference Treasury Dealer Quotation" means, with respect to the Reference
Treasury Dealer and any redemption date, the average, as determined by the
Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by such Reference Treasury Dealer at or before 5:00 p.m.,
New York City time, on the third Business Day preceding such redemption date.
USE OF PROCEEDS
We propose to use the net proceeds from the sale of the Senior Notes 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.
RECENT DEVELOPMENTS
On April 19, 2002, Moody's Investor Service ("Moody's") placed our credit
ratings on review for possible downgrade. The review could conclude with more
than a one notch downgrade. Currently, Moody's rates our senior unsecured debt
at A2.
We are a wholly-owned subsidiary of American Electric Power Company, Inc.
("AEP"). AEP conducts its power trading business through its subsidiary American
Electric Power Service Corporation, which markets or trades electricity for our
account and our electric utility affiliates. Accordingly, we have a proportional
interest in AEP's activity pertaining to the marketing and trading of
electricity.
A fact-finding investigation initiated by the Federal Energy Regulatory
Commission (the "FERC") into whether any entity, including Enron Corp.,
manipulated short-term prices in electric energy or natural gas markets in the
Western System Coordinating Council (the "WSCC") or otherwise exercised undue
influence over wholesale prices in the WSCC, for the period January 1, 2000,
forward is discussed in note 8 to the financial statements in our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002 under the caption
"California Energy Market Investigation by FERC - Affecting AEP". With the
assistance of outside counsel retained for this purpose, AEP reviewed its
records and interviewed relevant personnel and, based upon that review, it has
timely advised FERC that it is not aware of any improper activities by its
personnel in respect of these matters.
On May 21, 2002, 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 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"). After reviewing its records, AEP
responded to FERC that it did not participate in any "wash sale" transactions
involving power in the relevant market. AEP further informed FERC that certain
of its traders did engage in trades on the IntercontinentalExchange, 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 has also issued similar data
requests to AEP and other power marketers. AEP intends to respond to such data
requests by the July 2, 2002 response date. We understand that the SEC and U.S.
Commodity Futures Trading Commission ("CFTC") are also looking into "wash sale"
trading practices, and in the case of the CFTC, we have received a subpoena
issued June 17, 2002 requesting information with respect to these matters. In
addition, the United States Department of Justice made a civil investigation
demand to AEP and other electric generating companies concerning their
investigation of the IntercontinentalExchange. AEP has 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 our financial statements. We and AEP
believe that substantially all these transactions involve economic substance and
risk transference and do not constitute "wash sales".
The Enron Corp. bankruptcy and enhanced regulatory scrutiny have
contributed to more rigorous credit rating review of wholesale power market
participants. Credit downgrades of certain other market participants have
significantly reduced such participants' participation in the wholesale power
markets. These events are causing a decrease in the number of significant
participants in the wholesale power markets, at least temporarily, which could
result in a decrease in the volume and liquidity in the wholesale power markets.
We are unable to predict the impact of such developments on our power marketing
and trading business.
UNDERWRITING
Banc One Capital Markets, Inc. and J.P. Morgan Securities Inc. ("J.P.
Morgan") 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
Underwriter of Senior Notes
----------- -----------------
Banc One Capital Markets, Inc. $ 80,000,000
J.P. Morgan Securities Inc. 80,000,000
Credit Lyonnais Securities (USA) Inc. 10,000,000
Mellon Financial Markets, LLC 10,000,000
Tokyo-Mitsubishi International plc 10,000,000
U.S. Bancorp Piper Jaffray Inc. 10,000,000
$200,000,000
============
In the Underwriting Agreement, the underwriters have agreed 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 $270,000.
The underwriters propose to offer the Senior Notes to the public at the
initial public offering price set forth on the cover page of this prospectus
supplement and to certain dealers at such price less a concession not in excess
of .250% per Senior Note. The underwriters may allow, and such dealers may
reallow, a discount not in excess of .125% per Senior Note to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
Prior to this offering, there has been no public market for the Senior
Notes. The Senior Notes will not be listed on any securities exchange. Certain
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.
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.
J.P. Morgan 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., a registered broker-dealer, will receive compensation from J.P.
Morgan based on transactions J.P. Morgan conducts through the system. J.P.
Morgan 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
SOUTHWESTERN ELECTRIC POWER COMPANY
1 Riverside Plaza
Columbus, Ohio 43215
614-223-1000
$250,000,000
UNSECURED NOTES
TERMS OF SALE
The following terms may apply to the $250,000,000 unsecured notes (the
"notes") that we may sell at one or more times. A 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 pricing supplement will identify the
exchange and state when we expect trading could begin.
- Mature 9 months to 50 years - Fixed or floating interest rate -
Remarketing features - Certificate or book-entry form - Subject to
redemption
- Not convertible, amortized or subject to a sinking fund - Interest paid
on fixed rate notes quarterly or semi-annually - Interest paid on floating
rate notes monthly, quarterly, semi-annually, or annually - Issued in
multiples of a minimum denomination
INVESTING IN THESE NOTES INVOLVES RISKS. SEE THE SECTION
ENTITLED "RISK FACTORS" BEGINNING ON PAGE 2 FOR MORE INFORMATION.
The notes have not been approved or disapproved by the Securities and Exchange
Commission ("SEC") 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 May 21, 2002.
THE COMPANY
We generate, sell, purchase, transmit and distribute electric power. We
serve approximately 431,000 retail customers in northeastern Texas, northwestern
Louisiana and western Arkansas. 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
614-223-1000). We are a subsidiary of American Electric Power Company, Inc., a
public utility holding company, and we are a part of the American Electric Power
integrated utility system. The executive offices of American Electric Power
Company, Inc. are located at 1 Riverside Plaza, Columbus, Ohio 43215 (telephone
number 614-223-1000).
RISK FACTORS
RISKS RELATED TO OUR REGULATED
BUSINESS AND EVOLVING REGULATION
o Our rates are subject to regulation by three states and a federal agency
whose regulatory paradigms and goals may not be consistent.
We operate in, and are subject to the laws and regulations of, the states
of Texas, Louisiana and Arkansas. We are currently a vertically integrated
electric utility and most of our revenue results from the sale of electricity to
retail customers subject to bundled rates that are approved by the applicable
state utility commission and, to a certain extent, the Federal Energy Regulatory
Commission (the "FERC"). Texas has enacted electric utility restructuring
legislation ("Texas Restructuring Legislation") that requires the legal
separation and deregulation of generation assets from transmission and
distribution assets that will remain regulated. The implementation of such
legislation has been delayed in the portion of Texas in which we operate.
Arkansas approved an electric restructuring law which established the general
framework governing the retail electric market, but has delayed competition
until October 1, 2003. The Arkansas Public Service Commission ("Arkansas
Commission") has recommended the further delay or repeal of the electric
restructuring law. Louisiana has not enacted an electric restructuring law and
has not announced any plans to do so.
FERC has pursued several regulatory initiatives, such as the formation and
operation of new regional transmission organizations, or "RTOs", which have been
designed to generally facilitate competition in the energy sector. States such
as Louisiana have questioned both the FERC's jurisdiction to pursue such
initiatives and their benefit, if any, to the ratepayers in their state. Our
state commissions generally have authority over the sale or other transfer of
control, of transmission assets to an RTO.
Exposure to inconsistent state and Federal regulatory standards may limit
our ability to operate profitably. Further alteration of the regulatory
landscape in which we operate may harm our financial condition and results of
operations.
o We are subject to the risk that our regulators will not permit recovery of
material amounts of our fuel costs.
Our retail rates currently in effect in Louisiana are adjusted based on
our cost of fuel in accordance with a fuel cost adjustment. The fuel cost
adjustment is applied to each billing month based on the second previous month's
average fuel cost. Provision for any over- or under-recovery of fuel costs is
allowed under an automatic fuel clause.
In Arkansas, a fuel adjustment rider is developed annually based on the
previous year's actual fuel cost. This factor is then applied to each billing
month's sales, allowing us to recover fuel costs from customers. Any difference
between actual fuel cost for the month and revenues collected from customers,
including interest, will be used in the determination of the annual factor for
the following year.
The Louisiana Public Service Commission ("Louisiana Commission") and the
Arkansas Commission may audit our fuel costs to determine the reasonableness of
the actual fuel costs. To the extent these commissions do not permit us to
recover fuel costs under the procedures described above, our net income could be
materially reduced.
We experienced significant natural gas price increases in the second half
of 2000 and early 2001 which resulted in under-recovery of fuel costs in Texas
and the need to seek increases in fuel rates and surcharges there to recover
these under-recoveries. During 2001, gas price declines and fuel rate and fuel
surcharge increases approved by the Public Utility Commission of Texas (PUCT)
lowered our unrecovered fuel balances at the end of 2001.
Fuel recovery for Texas utilities is a multi-step procedure. When fuel
costs change, utilities file with the PUCT for authority to adjust fuel factors.
If a utility's prior fuel factors result in an over- or under-recovery of fuel,
the utility will also request a surcharge factor to refund or collect that
amount. While fuel factors are intended to recover all fuel-related costs, final
settlement of these accounts are subject to reconciliation and approval by the
PUCT. Fuel reconciliation proceedings determine whether fuel costs incurred and
collected during the reconciliation period were reasonable and necessary. All
fuel costs incurred since the prior reconciliation date are subject to PUCT
review and approval. If material amounts are determined to be unreasonable and
ordered to be refunded to customers, results of operations and cash flows would
be diminished. As of December 31, 2001, the amount of fuel cost we have incurred
that is subject to reconciliation is $314 million; the amount that we have
under-recovered as of that date is $7 million. If PUCT does not reconcile and
permit recovery for these costs for any reason, our revenue and income would
suffer in a corresponding amount. Fuel cost recovery as described above will end
upon implementation of Texas Restructuring Legislation in our service area.
o The implementation of electric utility restructuring legislation in
Arkansas and Texas may limit our ability to pass on to our customers our
costs of production in those jurisdictions.
Arkansas
If and when Arkansas implements the electric restructuring law, the costs
that we incur to generate and sell electricity in Arkansas may not be eligible
for recovery through rates. While the electric restructuring law in Arkansas
established the general framework governing the retail electric market, the
Arkansas Commission has been charged with the task of addressing market power
issues, which have not yet been resolved. There can be no assurance that we will
be able to generate and sell electricity profitably in Arkansas following
implementation.
Texas
While customer choice of electricity supplier began in much of Texas on
January 1, 2002, it has been delayed in our service area. Pursuant to
restructuring, delivery of electricity continues to be the responsibility of the
local electric transmission and distribution company at regulated prices. Once
customer choice is implemented, the protection afforded by retail fuel clause
recovery mechanisms will likely be eliminated. In view of the fact that higher
fuel prices and generating unit outage can only be partially passed through, and
then only with regulatory approval, we would bear the costs associated with
those events. At present, however, we are protected against market price changes
by an active fuel clause.
o The different regional power markets in which we compete or will compete
in the future have changing transmission regulatory structures, which
could affect our performance in these regions.
Our results are likely to be affected by differences in the market and
transmission regulatory structures in various regional power markets. Problems
or delays that may arise in the formation and operation of RTOs may restrict our
ability to sell power produced by our generating capacity to certain markets if
there is insufficient transmission capacity otherwise available. The rules
governing the various regional power markets may also change from time to time,
which could affect our costs or revenues. Because it remains unclear which
companies will be participating in the various regional power markets, or how
RTOs will develop or what regions they will cover, we are unable to assess fully
the impact that these power markets may have on our business.
We are currently a member of the Southwest Power Pool ("SPP"). The SPP has
agreed to merge with the Midwest Independent Transmission System Operator
("MISO"), an independent operator of transmission assets in the Midwest. We
provided notice that we will withdraw from the SPP effective October 31, 2002.
This action was taken to provide us additional flexibility in deciding which RTO
we will ultimately join. Final decisions on this issue have not been made.
The Louisiana Commission is concerned about the effect on retail
ratepayers of utilities in Louisiana joining RTOs. The Commission has ordered
all utilities in Louisiana, including us, to perform and submit to the
Commission the costs and benefits of RTO options available to the utilities. The
Commission has also determined that certain RTO structures that contemplate
legally transferring transmission assets to it are presumptively not in the
public interest. To the extent we are faced with conflicting state and Federal
requirements as to our participation in RTOs, it could adversely affect our
ability to operate and recover transmission costs from retail customers.
Management is unable to predict the outcome of these transmission
regulatory actions and proceedings or their impact on the timing and operation
of RTOs, our transmission operations or future results of operations and cash
flows.
o AEP's merger with CSW may ultimately be found to violate the Public
Utility Holding Company Act of 1935 ("PUHCA").
AEP acquired CSW in a merger completed on June 15, 2000. As a result of
the merger AEP acquired four additional domestic electric utility companies,
including us. On January 18, 2002, the U.S. Court of Appeals for the District of
Columbia ruled that the SEC's June 14, 2000 order approving the merger failed to
properly find that the merger meets the requirements of PUHCA and sent the case
back to the SEC for further review. Specifically, the Court told the SEC to
revisit its conclusion that the merger met PUHCA's requirement that the electric
utilities be "physically interconnected" and confined to a "single area or
region."
We believe that the merger meets the requirements of PUHCA and expect the
matter to be resolved favorably. We intend to fully cooperate with the staff of
the SEC in supplementing the record, if necessary, to ensure the merger complies
with PUHCA. We can give no assurance, however, that: (i) the SEC or any
applicable court review will find that the merger complies with PUHCA, or (ii)
the SEC or any applicable court review will not impose material adverse
conditions on us in order to find that the merger complies with PUHCA. If the
merger were ultimately found to violate PUHCA, it may require AEP to take
remedial actions or divest assets, which may harm our results of operations or
financial condition.
RISKS RELATED TO OUR POWER TRADING
AND WHOLESALE BUSINESSES
o Our revenues and results of operations are subject to market risks that
are beyond our control.
We sell power from our generation facilities into the spot market or other
competitive power markets or on a contractual basis. We also enter into
contracts to purchase and sell electricity as part of our power marketing and
trading operations. With respect to such transactions, we are not guaranteed any
rate of return on our capital investments through regulated rates, and our
revenues and results of operations are likely to depend, in large part, upon
prevailing market prices for power in our regional markets and other competitive
markets. These market prices may fluctuate substantially over relatively short
periods of time. It is reasonable to expect that trading margins may erode as
markets mature and that there may be diminished opportunities for gain should
volatility decline. In addition, the FERC, which has jurisdiction over wholesale
power rates, as well as independent system operators that oversee some of these
markets, may impose price limitations, bidding rules and other mechanisms to
address some of the volatility in these markets. Fuel prices may also be
volatile, and the price we can obtain for power sales may not change at the same
rate as changes in fuel costs. These factors could reduce our margins and
therefore diminish our revenues and results of operations.
Volatility in market prices for fuel and power may result from:
- weather conditions;
- seasonality;
- power usage;
- illiquid markets;
- transmission or transportation constraints or inefficiencies;
- availability of competitively priced alternative energy
sources;
- demand for energy commodities;
- natural gas, crude oil and refined products, and coal
production levels;
- natural disasters, wars, embargoes and other catastrophic
events; and
- federal, state and foreign energy and environmental regulation
and legislation.
o Our power trading (including fuel procurement and power marketing) and
risk management policies cannot eliminate the risk associated with these
activities.
Our power trading (including fuel procurement and power marketing)
activities expose us to risks of commodity price movements. We attempt to manage
our exposure through enforcement of established risk limits and risk management
procedures. These risk limits and risk management procedures may not always be
followed or may not work as planned and cannot eliminate the risks associated
with these activities. As a result, we cannot predict the impact that our power
trading and risk management decisions may have on our business, operating
results or financial position.
We routinely have open trading positions in the market, within established
guidelines, resulting from the management of our trading portfolio. To the
extent open trading positions exist, fluctuating commodity prices can improve or
diminish our financial results and financial position.
Our power trading and risk management activities, including our power
sales agreements with counterparties, rely on projections that depend heavily on
judgments and assumptions by management of factors such as the future market
prices and demand for power and other energy-related commodities. These factors
become more difficult to predict and the calculations become less reliable the
further into the future these estimates are made. Even when our policies and
procedures are followed and decisions are made based on these estimates, results
of operations may be diminished if the judgments and assumptions underlying
those calculations prove to be wrong or inaccurate.
o Parties with whom we have contracts may fail to perform their obligations,
which could harm our results of operations.
We are exposed to the risk that counterparties that owe us money or power
will breach their obligations. Should the counterparties to these arrangements
fail to perform, we may be forced to enter into alternative hedging arrangements
or honor underlying commitments at then-current market prices that may exceed
our contractual prices, which would cause our financial results to be diminished
and we might incur losses. Although our estimates take into account the expected
probability of default by a counterparty, our actual exposure to a default by a
counterparty may be greater than the estimates predict if defaults by
counterparties exceed our estimates.
o We rely on electric transmission facilities that we do not own or control.
If these facilities do not provide us with adequate transmission capacity,
we may not be able to deliver our wholesale electric power to the
purchasers of our power.
We depend on transmission facilities owned and operated by other
unaffiliated power companies to deliver the power we sell at wholesale. This
dependence exposes us to a variety of risks. If transmission is disrupted, or
transmission capacity is inadequate, we may not be able to sell and deliver our
wholesale power. If a region's power transmission infrastructure is inadequate,
our recovery of wholesale costs and profits may be limited. If restrictive
transmission price regulation is imposed, the transmission companies may not
have sufficient incentive to invest in expansion of transmission infrastructure.
The FERC has issued electric transmission initiatives that require
electric transmission services to be offered unbundled from commodity sales.
Although these initiatives are designed to encourage wholesale market
transactions for electricity, access to transmission systems may in fact not be
available if transmission capacity is insufficient because of physical
constraints or because it is contractually unavailable. We also cannot predict
whether transmission facilities will be expanded in specific markets to
accommodate competitive access to those markets.
o We do not fully hedge against price changes in commodities.
As part of our power marketing and trading operations, we routinely enter
into contracts to purchase and sell electricity 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.
RISKS RELATED TO MARKET OR ECONOMIC VOLATILITY
o We are subject to risks associated with a changing economic environment.
In response to the occurrence of several recent events, including the
September 11, 2001 terrorist attack on the United States, the ongoing war
against terrorism by the United States, and the bankruptcy of Enron Corp., the
financial markets have been disrupted in general, and the availability and cost
of capital for our business and that of our competitors has been at least
temporarily harmed. In addition, following the bankruptcy of Enron Corp., the
credit ratings agencies initiated a thorough review of the capital structure and
earnings power of energy companies, including us. These events could constrain
the capital available to our industry and could limit our access to funding for
our operations. Our business is capital intensive, and we are dependent upon our
ability to access capital at rates and on terms we determine to be attractive.
If our ability to access capital becomes significantly constrained, our interest
costs will likely increase and our financial condition could be harmed and
future results of operations could be significantly diminished.
The insurance industry has also been disrupted by these events. As a
result, the availability of insurance covering risks we and our competitors
typically insure against may decrease. In addition, the insurance we are able to
obtain may have higher deductibles, higher premiums and more restrictive policy
terms.
o A downgrade in our credit rating could negatively affect our ability to
access capital and/or to operate our power trading businesses.
Standard & Poor's and Moody's rate our senior, unsecured debt at BBB+ and
A2, 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. Further, if
AEP's short-term rating were to fall below P-2 or A-2, the current ratings
assigned by Standard & Poor's and Moody's, respectively, it would significantly
limit its access to the commercial paper market and would increase our
short-term borrowing costs because we conduct our short-term borrowing through
AEP, and on the same terms available to AEP.
Our power trading business relies on the investment grade ratings of our
senior, unsecured debt. Most of our counterparties require the creditworthiness
of an investment grade entity to stand behind transactions. If our rating were
to decline below investment grade, our ability to profitably operate our power
trading business would be diminished because we would likely have to deposit
cash or cash related instruments, which would reduce our profits.
o Our operating results may fluctuate on a seasonal and quarterly basis.
Electric power generation is generally a seasonal business. In many parts
of the country, demand for power peaks during the hot summer months, with market
prices also peaking at that time. In other areas, power demand peaks during the
winter. As a result, our overall operating results in the future may fluctuate
substantially on a seasonal basis. The pattern of this fluctuation may change
depending on the terms of power sale contracts we enter into. In addition, we
have historically sold less power, and consequently earned less income, when
weather conditions are milder. We expect that unusually mild weather in the
future could diminish our results of operations and harm our financial
condition.
o Changes in technology may significantly affect our business by making our
power plants less competitive.
A key element of our business model is that generating power at central
power plants achieves economies of scale and produces power at relatively low
cost. There are other technologies that produce power, most notably fuel cells,
microturbines, windmills and photovoltaic (solar) cells. It is possible that
advances in technology will reduce the cost of alternative methods of producing
power to a level that is competitive with that of most central power station
electric production. If this were to happen and if these technologies achieved
economies of scale, our market share could be eroded, and the value of our power
plants could be reduced. Changes in technology could also alter the channels
through which retail electric customers buy power, thereby harming our financial
results.
o Changes in commodity prices may increase our cost of producing power or
decrease the amount we receive from selling power, harming our financial
performance.
We are exposed to changes in the price and availability of coal and
natural gas because a significant portion of our generating capacity is
coal-fired with the remainder using natural gas as fuel. We have contracts of
varying durations for the supply of fuel for most of our existing generation
capacity, but as these contracts end, we may not be able to purchase fuel on
terms as favorable as the current contracts. Our exposure to such changes in
fuel costs is mitigated in part by our ability to recover fuel costs from
regulated customers pursuant to state and Federal fuel recovery provisions.
Changes in the cost of fuel 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 fuel
costs, we may be unable to pass on the changes in costs to our customers in the
future.
Actual power prices and fuel costs will differ from those assumed in
financial projections used to initially value our trading and marketing
transactions, and those differences may be material. As a result, our financial
results may be diminished in the future as those transactions are marked to
market.
o Demand for power could exceed our supply capacity.
We are currently obligated to supply power to our regulated retail and
wholesale customers. At peak times, the demand for power required to meet this
obligation will exceed our available generation capacity. Until recently, we
have had little need to purchase power in the market for our retail customers.
If current consumption trends continue in the future, we may be required to buy
more power on the market or build additional generation. Either the market or
regulators (through rate recovery) may not permit us to pass all of these
purchase or construction costs on to our customers. To the extent regulators do
not permit timely recovery of the base rate portion of these costs, we have
exposure to regulatory lag associated with the time between the incurrence of
costs of purchased or constructed capacity and their recovery in customers'
rates.
RISKS RELATED TO ENVIRONMENTAL REGULATION
o Our costs of compliance with environmental laws are significant, and the
cost of compliance with future environmental laws could harm our cash flow
and profitability.
Our operations are subject to extensive federal, state and local
environmental statutes, rules and regulations relating to air quality, water
quality, waste management, natural resources and health and safety. Compliance
with these legal requirements requires us to commit significant capital toward
environmental monitoring, installation of pollution control equipment, emission
fees and permits at all of our facilities. These expenditures have been
significant in the past and we expect that they will increase in the future.
Costs of compliance with environmental regulations could harm our industry, our
business and our results of operations and financial position, especially if
emission and/or discharge limits are tightened, more extensive permitting
requirements are imposed, additional substances become regulated and the number
and types of assets we operate increase.
o Governmental authorities may assess penalties on us for failures to comply
with environmental laws and regulations.
If we fail to comply with environmental laws and regulations, even if
caused by factors beyond our control, that failure may result in the assessment
of civil or criminal penalties and fines against us. Recent lawsuits by the EPA
and various states filed against certain of our affiliate utility companies
highlight the environmental risks faced by generating facilities, in general,
and coal-fired generating facilities, in particular.
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 any
pricing supplement in making your investment decision.
RATIO OF EARNINGS TO FIXED CHARGES
The Ratio of Earnings to Fixed Charges for each of the periods indicated
is as follows:
Twelve Months.........
Period Ended.......... Ratio
December 31, 1997..... 3.46
December 31, 1998..... 3.52
December 31, 1999..... 2.95
December 31, 2000..... 2.56
December 31, 2001..... 3.20
For current information on the Ratio of Earnings to Fixed Charges, please
see our most recent Form 10-K. See Where You Can Find More Information.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement we filed with the SEC.
We also file annual, quarterly and special reports and other information with
the SEC. You may read and copy any document we file at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the Public Reference Room.
You may also examine our SEC filings through the SEC's web site at
http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information that we file
with the SEC will automatically update and supersede this information. We
incorporate by reference the document listed below and any future filings made
with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Securities
Exchange Act of 1934 until we sell all the notes.
Annual Report on Form 10-K for the year ended December 31, 2001.
You may request a copy of these filings, at no cost, by writing or telephoning
us at the following address:
Mr. G. C. Dean
American Electric Power Service Corporation
1 Riverside Plaza
Columbus, Ohio 43215
614-223-1000
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 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 2002
will approximate $111,900,000. At April 30, 2002, our outstanding short-term
debt was $291,909,000.
DESCRIPTION OF THE NOTES
General
We will issue the notes under the Indenture dated February 25, 2000 (as
previously supplemented and amended) between us and the Trustee, The Bank of New
York. This prospectus briefly outlines some provisions of the Indenture. If you
would like more information on these provisions, you should review the Indenture
and any supplemental indentures 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 5 Penn Plaza, 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 any supplemental
indentures. Each series of notes may differ as to their terms.
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 February 1, 1940 (as previously
supplemented and amended) between us and The Bank of New York, as trustee. For
current information on our debt outstanding see our most recent Form 10-K. 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:
- 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
- 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.
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 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 the principal of (or premium, if any, on)
any note of a series for three days after payment is due;
- failure to pay any interest on any note of any series for 30
days after payment is due;
- failure to perform any other requirements in such notes, or
in the Indenture in regard to such notes, for 90 days after
notice;
- failure to pay any sinking fund installment for three days
after payment is due;
- 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 within ten days after the date of such notice ("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 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 entity 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 on
the 91st day after the date of the deposit referred to in the first item below
if:
- - we deposit with the Trustee sufficient cash or government securities to
pay (i) 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
(ii) any applicable mandatory sinking fund payments on the day such
payments are due;
- - we deliver to the Trustee an opinion of counsel to the effect that such
provision would not cause any outstanding notes then listed on a national
security exchange to be delisted; and
- - 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 certain restrictive
covenants applicable to the notes of a particular series if we perform all of
the 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, 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 and the related financial statement schedule as
of December 31, 2001 and 2000 and for the years then ended incorporated by
reference in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports, which are incorporated by
reference herein, and have been so incorporated in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.
The financial statements for the year ended December 31, 1999 incorporated
by reference in this prospectus have been audited by Arthur Andersen LLP,
independent auditors, as stated in their report, which is incorporated by
reference herein, and have been so incorporated in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.