Filed pursuant to Rule 424(b)(5)
Registration Nos. 333-86050
333-86050-01
333-86050-02
333-86050-03
PROSPECTUS SUPPLEMENT
(To Prospectus Dated May 17, 2002)
[LOGO]
AEP
AMERICAN(R)
ELECTRIC
POWER
6,000,000 Equity Units
American Electric Power Company, Inc.
9.25% Equity Units
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American Electric Power Company, Inc. is offering 9.25% Equity Units. Each
Equity Unit has a stated amount of $50 and will initially consist of (a) a
forward purchase contract under which you will agree to purchase shares of our
common stock for $50 on August 16, 2005, and (b) a 5.75% senior note due August
16, 2007 with a principal amount of $50. The senior note will initially be held
as a component of your Equity Unit and will be pledged to secure your
obligation under the related forward purchase contract.
We will make quarterly contract adjustment payments to you under the forward
purchase contract at the annual rate of 3.50% of the stated amount of $50 per
forward purchase contract, as described herein. In addition, we will make
quarterly interest payments on the senior note at the initial annual rate of
5.75%. The interest rate on the senior note will be reset, and the senior note
remarketed, as described in this prospectus supplement. The senior notes are
unsecured and rank equally with all of our other unsecured senior indebtedness.
Concurrently with this offering, we are offering (by a separate prospectus
supplement) 16,000,000 shares of our common stock, plus up to an additional
2,400,000 shares of our common stock if the underwriters for that offering
exercise their over-allotment option in full. Neither offering is conditioned
on the completion of the other.
We have been approved to list the Equity Units on the New York Stock
Exchange under the symbol "AEP PrA." On June 5, 2002, the closing price of our
common stock on the New York Stock Exchange was $40.90 per share.
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Investing in the Equity Units involves risks. See "Risk Factors" beginning
on page S-20 of this prospectus supplement and page 2 of the accompanying
prospectus.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
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Per Equity Unit Total
--------------- ------------
Public offering price.................... $50.00 $300,000,000
Underwriting discount.................... $ 1.50 $ 9,000,000
Proceeds to us, before expenses.......... $48.50 $291,000,000
The public offering price stated above does not include accumulated contract
adjustment payments and accrued interest, if any. Contract adjustment payments
on the forward purchase contracts and interest on the senior notes will accrue
from the date of original issuance of the Equity Units. We have granted the
underwriters an option to purchase within 13 days of the original issuance of
Equity Units up to an additional 900,000 Equity Units at the initial public
offering price less the underwriting discount.
The underwriters expect to deliver the Equity Units against payment in New
York, New York on or about June 11, 2002.
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Joint Book-Running Managers
Goldman, Sachs & Co. JPMorgan Salomon Smith Barney
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Banc of America Securities LLC Credit Suisse First Boston
Lehman Brothers
Merrill Lynch & Co. UBS Warburg
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A.G. Edwards & Sons, Inc. Danske Securities Edward D. Jones & Co., L.P.
McDonald Investments Inc. TD Securities The Williams Capital Group, L.P.
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Global Coordinator
Salomon Smith Barney
June 5, 2002
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[MAP]
Map showing Power Plants, Coal Mines, Coal Terminal Facilities, Louisiana
Intrastate Gas, Houston Pipe Line, Natural Gas Storage, Service Territory,
Barge Lines, Transmission Line.
Map showing Generating Units
Marketing & Trading Presence
Power: U.S., U.K., France, Germany, the Netherlands, Switzerland & Scandinavia
Natural Gas: U.S., U.K. & Northwestern Europe
Coal: U.S. & Europe
You should rely only on the information contained in or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus supplement, the accompanying
prospectus and the documents incorporated by reference is accurate only as of
their respective dates. Our business, financial condition, results of
operations and prospects may have changed since those dates.
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TABLE OF CONTENTS
Page
----
Prospectus Supplement
Summary...................................................................... S-1
Concurrent Offering.......................................................... S-19
Risk Factors................................................................. S-20
Forward-Looking Statements................................................... S-24
Use of Proceeds.............................................................. S-25
Capitalization............................................................... S-26
American Electric Power Company, Inc......................................... S-27
Price Range of Common Stock and Dividend Policy.............................. S-32
Accounting Treatment......................................................... S-33
Description of the Equity Units.............................................. S-34
Description of the Senior Notes.............................................. S-55
United States Federal Income Tax Consequences................................ S-60
Certain ERISA Considerations................................................. S-70
Underwriting................................................................. S-72
Legal Matters................................................................ S-75
Experts...................................................................... S-75
Prospectus
The Company.................................................................. 2
Prospectus Supplements....................................................... 2
Risk Factors................................................................. 2
Ratio of Earnings to Fixed Charges........................................... 16
Where You Can Find More Information.......................................... 16
Use of Proceeds.............................................................. 17
The Trusts................................................................... 17
Accounting Treatment of Trusts............................................... 18
Description of the Senior Notes.............................................. 18
Description of Common Stock.................................................. 23
Description of the Junior Subordinated Debentures............................ 24
Description of Trust Preferred Securities.................................... 30
Description of Guarantees.................................................... 46
Description of the Stock Purchase Contracts and the Stock Purchase Units..... 50
Relationship Among Trust Preferred Securities, Debt Securities and Guarantees 50
Book-Entry System............................................................ 52
Plan of Distribution......................................................... 54
Legal Opinions............................................................... 55
Experts...................................................................... 55
i
This document is in two parts. The first is this prospectus supplement,
which describes the specific terms of the securities we are offering and also
adds to and updates information contained in the accompanying prospectus and
the documents incorporated by reference in that prospectus. The second part,
the accompanying prospectus, gives more general information about securities we
may offer from time to time, including securities other than those we are
offering in this prospectus supplement. If information in this prospectus
supplement is inconsistent with the accompanying prospectus, you should rely on
this prospectus supplement.
It is important for you to read and consider all of the information
contained in this prospectus supplement and the accompanying prospectus in
making your investment decision. You should also read and consider the
information in the documents we have referred you to in "Where You Can Find
More Information" on page 16 of the accompanying prospectus.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
additional related discussions. The table of contents in this prospectus
supplement provides the pages on which these captions are located.
ii
SUMMARY
The following information supplements, and should be read together with, the
information contained in other parts of this prospectus supplement and in the
prospectus to which it relates. This summary highlights selected information
from this prospectus supplement and the accompanying prospectus to help you
understand the Equity Units. You should read this prospectus supplement and the
accompanying prospectus carefully to understand fully the terms of the Equity
Units as well as the tax and other considerations that are important to you in
making a decision about whether to invest in the Equity Units. You should also
review the "Risk Factors" section beginning on page S-20 of this prospectus
supplement and page 2 of the accompanying prospectus to determine whether an
investment in the Equity Units is appropriate for you.
Unless the context requires otherwise, references to "American Electric
Power," "AEP," the "Company," "we," "our" or "us" refer to American Electric
Power Company, Inc., a New York corporation, and its consolidated subsidiaries.
American Electric Power Company, Inc.
We are one of the largest investor owned electric public utility holding
companies in the U.S. We provide generation, transmission and distribution
service to over 4.9 million retail customers in eleven states (Arkansas,
Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Tennessee, Texas,
Virginia and West Virginia) through our electric utility operating companies.
We are also one of the largest marketers and traders of electricity and natural
gas in the United States. In 2000, we established an energy trading operation
in Europe.
We have a significant presence throughout the domestic energy value chain.
Our U.S. electric assets include:
. 38,000 megawatts of generation capacity;
. over 38,000 miles of transmission lines; and
. 186,000 miles of distribution lines.
Our natural gas assets include:
. 128 billion cubic feet (Bcf) of gas storage facilities; and
. 6,400 miles of gas pipelines in Louisiana and Texas.
Through our coal and transportation assets we:
. control over 7,000 railcars;
. control over 1,800 barges and 37 tug boats;
. operate two coal handling terminals with 20 million tons of capacity; and
. produce over 7 million tons of coal annually in the U.S.
Our focus is in the U.S., but we also have smaller operations in other parts of
the world including:
. a growing energy trading operation in Europe based in the United Kingdom;
and
. 4,000 megawatts of generating capacity in England, which represents
approximately 16% of the total coal-fired generation capacity of England
and Wales.
S-1
Strategy and Corporate Restructuring
Our strategy is a balanced business model of regulated and unregulated
operations backed by assets and supported by enterprise-wide risk management
and a strong balance sheet. Our goal is to combine a predictable earnings
stream and cash flow from our regulated operations with greater growth
opportunities from our unregulated operations.
We are currently in the process of restructuring our assets and operations.
The new corporate structure will consist of a regulated holding company and an
unregulated holding company. The regulated holding company will own our
integrated utilities and Ohio and Texas transmission and distribution assets.
The unregulated holding company will own our Ohio and Texas generation,
independent power producers, gas pipeline and storage, United Kingdom
generation, barging and coal mining assets and marketing and trading operations.
Approval is needed from the SEC under the Public Utility Holding Company Act
and the Federal Energy Regulatory Commission (FERC) to make these
organizational changes. We are awaiting the SEC's and the FERC's decision in
this matter.
We have developed specific strategies for each of our regulated and
unregulated operations:
. Regulated Operations
- Maintain moderate but steady earnings growth;
- Maximize value of transmission assets and protect revenue stream
through regional transmission organization membership;
- Continue process improvement to maintain distribution service quality
while enhancing financial performance;
- Optimize generation assets through enhanced availability of
off-system sales; and
- Manage regulatory process to maximize retention of earnings
improvement.
. Unregulated Operations
- Disciplined approach to asset acquisition and disposition;
- Value-driven asset optimization through the linkage of superior
commercial, analytical and technical skills;
- Broad participation across all energy markets with a disciplined and
opportunistic allocation of risk capital;
- Continued investment in both technology and process improvement to
enhance our competitiveness;
- Stringent risk management procedures with independent, internal risk
oversight; and
- Continued expansion of intellectual capital through ongoing
recruiting, performance- linked compensation and the development of a
structure that promotes sound decision- making and innovation at all
levels.
S-2
Overview of Current Regulated Operations
Our electric utility subsidiaries have traditionally provided electric
service, consisting of generation, transmission and distribution, on an
integrated basis to their retail customers. Our operating subsidiaries include
Appalachian Power Company, Central Power and Light Company (CPL), Columbus
Southern Power Company (CSP), Indiana Michigan Power Company, Kentucky Power
Company, Ohio Power Company (OPCo), Public Service Company of Oklahoma,
Southwestern Electric Power Company, West Texas Utilities Company (WTU),
Kingsport Power Company, Wheeling Power Company and AEP Generating Company.
These operating subsidiaries provide electric service to over 4.9 million
customers in 11 states through our electric networks of over 38,000 miles of
transmission lines and 186,000 miles of distribution lines. After corporate
separation, the generation assets of CPL, CSP, OPCo and WTU will be transferred
to the unregulated operations.
Overview of Unregulated Operations
Our unregulated business operations focus on value-driven asset optimization
at each link of the energy chain through the following activities:
. Manage a diversified portfolio of owned assets and structured third party
arrangements, including:
- Power generation facilities and renewable energy sources;
- Natural gas pipeline, storage and processing facilities;
- Coal mines and related facilities; and
- Barge, rail and other fuel transportation related assets.
. Trade and market energy commodities, including electric power, natural
gas, natural gas liquids, oil, coal, and SO\\2\\ allowances in North
America and Europe;
. Provide price-risk management services and liquidity through a variety of
energy-related financial instruments, including exchange-traded futures
and over-the-counter forward, option, and swap agreements; and
. Enter into long-term transactions to buy or sell capacity, energy, and
ancillary services of electric generating facilities, either existing or
to be constructed, at various locations in North America and Europe.
Recent Developments
Please refer to the discussion in "Registrants' Combined Management
Discussion and Analysis of Financial Condition, Contingencies and Other
Matters" under the caption "Possible Divestitures" in our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002. As discussed therein, we are
considering disposing of the following non-core assets:
Possible Divestitures
. SEEBOARD, our energy delivery and retail supply business in the U.K. We
have provided interested parties an information memorandum and, based
upon their initial level of interest, have provided some of those parties
the opportunity to pursue more detailed investigations. We anticipate
receiving proposals from one or more of these parties to purchase
SEEBOARD in June 2002.
S-3
. Texas Retail Electric Providers. We have recently entered into a
definitive agreement to dispose of two of our Texas retail electric
providers which serve retail residential and small commercial customers
in Texas. The disposal price will not be determined until a date closer
to the consummation of the transaction, which is expected to be during
the fourth quarter of 2002.
. CitiPower, our energy delivery and retail supply business in
Australia. We have distributed an information memorandum among
interested parties and currently expect to receive offers in late June
2002.
. Other generation, distribution and telecommunications assets. We are
considering the divestiture of our power generation interests in Medway
Power in the U.K., Nanyang Electric in China, Pacific Hydro in Australia,
certain cogeneration facilities in the U.S., our joint investment in
power distribution in Brazil and our domestic telecommunications assets.
If we dispose of these assets in the foreseeable future we may realize gains
on certain dispositions but we would expect that in the aggregate we would
realize a non-recurring loss (including currency adjustment) that would be
significant. In the case of our foreign investments, a portion of any such loss
might be recognized as an impairment of goodwill, which, under a recent change
in accounting rules, would be recognized retroactively to January 2002. This
impairment charge could result even if we decide not to dispose of the relevant
asset.
Marketing and Trading
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", we discuss a fact-finding
investigation initiated by 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, which we refer to as the WSCC, or
otherwise exercised undue influence over wholesale prices in the WSCC, for the
period January 1, 2000, forward. With the assistance of outside counsel
retained for this purpose, we have reviewed our records and interviewed
relevant personnel and, based upon that review, we have timely advised the FERC
that we are not aware of any improper activities by our personnel in respect of
these matters.
On May 21, 2002, the FERC issued a further data request with respect to this
matter to us 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"). Similarly, on May 22, 2002, the
FERC issued an additional data request with respect to this matter to us 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 our records, we responded to the FERC that we did not participate in
any "wash sale" transactions involving power or gas in the relevant market. We
further informed the FERC that certain of our traders did engage in trades on
the IntercontinentalExchange, an electronic electricity trading platform owned
by a group of electricity trading companies, including us, 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.
S-4
Press reports indicate that the SEC and the Commodity Futures Trading
Commission are also looking into "wash sale" trading practices. In addition,
the United States Department of Justice made a civil investigation demand to us
and other electric generating companies concerning their investigation of the
IntercontinentalExchange. We have recently completed a review of our 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 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.
S-5
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.
Years Ended December 31,
Three Months Ended -------------------------
March 31, 2002 2001 2000 1999
------------------ ------- ------- -------
(in millions, except per share data)
Consolidated Statements of Income Data:
Revenues (1)................................................................... $13,414 $61,257 $36,706 $24,745
Expense........................................................................ 12,894 58,862 34,702 22,441
------- ------- ------- -------
Operating Income............................................................... 520 2,395 2,004 2,304
Other Income (Expenses)........................................................ (5) 172 55 160
Less: Interest, Preferred Dividend Requirements of Subsidiaries and Minority
Interest in Finance Subsidiary.............................................. 239 995 1,160 996
------- ------- ------- -------
Income Before Income Taxes..................................................... 276 1,572 899 1,468
Income Taxes................................................................... 95 569 597 482
------- ------- ------- -------
Income Before Extraordinary Items and Cumulative Effect........................ 181 1,003 302 986
Extraordinary Losses (net of tax):
Discontinuance of Regulatory Accounting for Generation....................... -- (48) (35) (8)
Loss on Reacquired Debt...................................................... -- (2) -- (6)
Cumulative Effect of Accounting Change (net of tax)............................ -- 18 -- --
------- ------- ------- -------
Net Income..................................................................... $ 181 $ 971 $ 267 $ 972
======= ======= ======= =======
Average Shares Outstanding..................................................... 322 322 322 321
Earnings Per Share:
Income Before Extraordinary Items and Cumulative Effect...................... $ 0.56 $ 3.11 $ 0.94 $ 3.07
Extraordinary Losses......................................................... -- (0.16) (0.11) (0.04)
Cumulative Effect of Accounting Change....................................... -- 0.06 -- --
------- ------- ------- -------
Net Income................................................................... $ 0.56 $ 3.01 $ 0.83 $ 3.03
======= ======= ======= =======
Cash Dividends Paid Per Share.................................................. $ 0.60 $ 2.40 $ 2.40 $ 2.40
======= ======= ======= =======
As of December 31,
As of March 31, -------------------------
2002 2001 2000 1999
- ------- ------- -------
(in millions)
Consolidated Balance Sheet Data:
Total Current Assets........................................................... $14,280 $12,563 $20,901 $ 4,974
Net Property, Plant and Equipment.............................................. 24,447 24,543 22,393 21,865
Regulatory Assets.............................................................. 3,331 3,162 3,698 3,464
Investments and Other Assets................................................... 8,095 7,013 6,358 5,390
------- ------- ------- -------
Total Assets................................................................... $50,153 $47,281 $53,350 $35,693
======= ======= ======= =======
As of December 31,
As of March 31, -------------------------
2002 2001 2000 1999
--------------- ------- ------- -------
(in millions)
Capitalization:
Total Debt..................................................................... $15,786 $15,208 $15,087 $14,536
Certain Subsidiary Obligated, Mandatorily Redeemable, Preferred Securities of
Subsidiary Trusts Holding Solely Junior Subordinated Debentures of Such
Subsidiaries.................................................................. 321 321 334 335
Minority Interest in Finance Subsidiary........................................ 750 750 -- --
Cumulative Preferred Stock of Subsidiaries..................................... 156 156 161 182
Total Common Shareholders' Equity.............................................. 8,186 8,229 8,054 8,673
------- ------- ------- -------
Total Capitalization......................................................... $25,199 $24,664 $23,636 $23,726
======= ======= ======= =======
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(1)Revenues, net of trading and marketing related fuel and purchased energy
expense are: $3,680 million for the three months ended March 31, 2002 and
$15,826 million, $13,673 million and $12,386 million for the years ended
December 31, 2001, 2000 and 1999.
S-6
The Offering -- Q & A
What are the Equity Units?
Each Equity Unit will be issued in the stated amount of $50 and will
initially consist of:
(1)a forward purchase contract under which
. you will agree to purchase, and we will agree to sell, for $50,
shares of our common stock on August 16, 2005; we will determine the
number of shares you will purchase based on an average trading price
of our common stock for a period preceding the stock purchase date,
calculated in the manner described below; and
. we will pay you contract adjustment payments at the annual rate of
3.50% of the stated amount of $50 as specified below (subject to our
right of deferral); and
(2)a senior note due August 16, 2007, with a principal amount of $50, on
which we will pay interest quarterly at the initial annual rate of 5.75%
until a successful remarketing of the senior notes and at the reset
rate, as described below, after the settlement date of a successful
remarketing or if the senior notes are not successfully remarketed,
after the stock purchase date.
You will own the senior notes that are a component of the Equity Units, but
the senior notes will initially be pledged to us to secure your obligations
under the forward purchase contracts.
What are the Stripped Units?
Each holder of Equity Units may elect prior to a successful remarketing or
tax event redemption, within the timeframes specified in "Description of the
Equity Units--Creating Stripped Units and Recreating Equity Units," to withdraw
the pledged senior notes underlying the Equity Units, creating "Stripped
Units." A holder might consider it beneficial either to hold the senior notes
directly or to realize income from their sale. To create a Stripped Unit, the
holder must substitute, as pledged securities, specifically identified treasury
securities that will pay $50 on or before August 16 , 2005, which is the amount
due under the forward purchase contract. If a holder substitutes pledged
securities in this way, the pledged senior notes will be released from the
pledge agreement and delivered to the holder. Holders of Stripped Units may
recreate Equity Units by re-substituting the senior notes for the treasury
securities underlying the Stripped Units within the timeframes specified in
"Description of the Equity Units--Creating Stripped Units and Recreating Equity
Units."
What are the forward purchase contracts?
The forward purchase contract underlying an Equity Unit obligates you to
purchase, and us to sell, for $50, on the stock purchase date, a number of
newly issued shares of our common stock equal to the settlement rate described
below. We will base the settlement rate on an average trading price of our
common stock for a period preceding that date, calculated in the manner
described below.
What is the settlement rate?
The settlement rate is the number of newly issued shares of our common stock
that we are obligated to sell and you are obligated to buy upon settlement of a
forward purchase contract on the stock purchase date.
S-7
The settlement rate for each forward purchase contract will be as follows,
subject to adjustment under specified circumstances:
. if the applicable market value of our common stock is equal to or greater
than $49.08, the settlement rate will be 1.0187 shares of our common
stock per forward purchase contract;
. if the applicable market value of our common stock is less than $49.08
but greater than $40.90, the settlement rate will be equal to $50 divided
by the applicable market value of our common stock per forward purchase
contract; and
. if the applicable market value of our common stock is less than or equal
to $40.90, the settlement rate will be 1.2225 shares of our common stock
per forward purchase contract.
"Applicable market value" means the average of the closing price per share
of our common stock on each of the 20 consecutive trading days ending on the
third trading day immediately preceding the stock purchase date.
At the option of each holder, a forward purchase contract may be settled
early by the early delivery of cash to the forward purchase contract agent, as
described below, in which case 1.0187 shares of our common stock will be issued
per forward purchase contract.
What payments will we make to holders of the Equity Units?
If you hold Equity Units, we will pay you quarterly contract adjustment
payments on the forward purchase contracts at the annual rate of 3.50% of the
$50 stated amount through and including the stock purchase date. The contract
adjustment payments may be subject to deferral as described below. In addition,
we will pay you interest on the senior notes at the initial annual rate of
5.75% of the principal amount of $50 per senior note until the earlier of a
successful remarketing of the senior notes or the stock purchase date. We are
not entitled to defer interest payments on the senior notes. If your senior
notes are successfully remarketed as described below and you continue to hold
Equity Units after the remarketing, you will still receive a quarterly payment
in respect of the Equity Units on the stock purchase date in the same amount
that was paid on the senior notes before remarketing from the proceeds of the
treasury securities purchased with the proceeds of the remarketed senior notes,
which we refer to as the treasury portfolio. If you elect not to participate in
the remarketing, you will receive interest on your senior notes at the reset
rate from the settlement date of that remarketing (or if not successfully
remarketed, the stock purchase date) until their maturity on August 16, 2007.
What payments will we make to holders of the Stripped Units?
If you hold Stripped Units, you will receive only the quarterly contract
adjustment payments payable by us at the annual rate of 3.50% of the $50 stated
amount through and including the stock purchase date. The contract adjustment
payments may be subject to deferral as described below. In addition, original
issue discount will accrue on each related treasury security.
What payments will we make to holders of separate senior notes?
If you hold senior notes separately from the Equity Units, you will receive
only the cash interest payable on the senior notes. The senior notes, whether
held separately from or as part of the Equity Units, will initially pay
interest at the annual rate of 5.75% of the principal amount of $50 per senior
note until the earlier of the settlement date of a successful remarketing or
the stock purchase date. After such time, we will pay interest on the senior
notes at the reset rate from the settlement date of a
S-8
successful remarketing (or if not successfully remarketed, the stock purchase
date) until their maturity on August 16, 2007. If no successful remarketing
occurs before the stock purchase date, the reset rate will be a rate equal to a
market rate of interest as described later in this prospectus supplement.
What are the payment dates?
Subject to our deferral right in respect of the contract adjustment payments
described below, we will pay interest on the senior notes and contract
adjustment payments on the forward purchase contracts quarterly in arrears on
each February 16, May 16, August 16 and November 16, commencing August 16, 2002.
When can we defer payments?
We may, at our option and upon prior written notice to the holders of the
Equity Units and Stripped Units and the forward purchase contract agent, defer
payment of all or part of the contract adjustment payments on the forward
purchase contracts until no later than the stock purchase date. We will pay
additional contract adjustment payments on any deferred installments of
contract adjustment payments at a rate of 5.75% per year until paid, compounded
quarterly, to but excluding August 16, 2005, unless your forward purchase
contract has been terminated. If we have deferred contract adjustment payments
until the stock purchase date, we will pay those deferred installments plus
accrued interest in cash to holders of Equity Units and Stripped Units on the
stock purchase date.
We are not entitled to defer payments of interest on the senior notes.
What is remarketing?
In order to provide holders of Equity Units with the necessary collateral to
be applied to settle their forward purchase contracts, the remarketing agent
will sell the senior notes of holders of Equity Units, other than those
electing not to participate in the remarketing, and the remarketing agent will
use the proceeds to purchase the treasury portfolio. The participating holders
of Equity Units will pledge the treasury portfolio to secure their obligations
under the related forward purchase contracts. The cash paid on the pledged
treasury portfolio underlying the Equity Units of these holders will be used to
satisfy the holders' obligations to purchase our common stock on the stock
purchase date. This will be one way for holders of Equity Units to satisfy
their obligations to purchase shares of our common stock under the related
forward purchase contracts. In the event a remarketing occurs on or after the
fourth business day preceding the stock purchase date, the proceeds of the
remarketing will not be used to purchase the treasury portfolio but such
proceeds will be paid in direct settlement of the obligations of the holders of
the Equity Units to purchase our common stock. Unless a holder elects not to
participate in the remarketing as described below, the remarketing agent will
remarket the senior notes that are included in the Equity Units on one or more
scheduled occasions starting on the initial remarketing date, which will be the
third business day immediately preceding May 16, 2005.
We will enter into a remarketing agreement with Salomon Smith Barney Inc.,
which will agree to use its commercially reasonable best efforts to sell the
senior notes that are included in Equity Units and that are participating in
the remarketing, at a price equal to approximately, but not less than, 100.25%
of the remarketing value.
S-9
The "remarketing value" will be equal to the sum of:
(1) the value at the remarketing date of either (a) a portfolio of
treasury securities that will pay, on the quarterly payment date falling on
August 16, 2005, an amount of cash equal to the aggregate interest payment
that is scheduled to be payable on the relevant quarterly payment date on
the senior notes that are participating in the remarketing, if the
remarketing occurs prior to the fourth business day immediately preceding
the stock purchase date, or (b) an amount of cash equal to the aggregate
interest payment that is scheduled to be payable on the relevant quarterly
payment date on the senior notes that are participating in the remarketing,
if the remarketing occurs on or after the fourth business day immediately
preceding the stock purchase date, assuming for both (a) and (b), even if
not true, that the interest rate on the senior notes remains at the initial
rate; and
(2) the value at the remarketing date of either (a) the amount of
treasury securities that will pay, on or before August 16, 2005, an amount
of cash equal to $50 for each senior note that is participating in the
remarketing, if the remarketing occurs prior to the fourth business day
immediately preceding the stock purchase date, or (b) an amount of cash
equal to $50 for each senior note that is participating in the remarketing,
if the remarketing occurs on or after the fourth business day immediately
preceding the stock purchase date.
The remarketing agent will use the proceeds from the sale of the senior
notes included in Equity Units in a successful remarketing occurring prior to
the fourth business day preceding the stock purchase date to purchase, in the
discretion of the remarketing agent, in open market transactions or at treasury
auction, the amount and the types of treasury securities described in (1) and
(2) above, which it will deliver through the forward purchase contract agent to
the collateral agent to secure the obligations under the related forward
purchase contracts of the holders of the Equity Units whose senior notes
participated in the remarketing. In the event that a remarketing occurs on or
after the fourth business day preceding the stock purchase date, the proceeds
of the remarketing will not be used to purchase the treasury portfolio, but
such proceeds will be paid in direct settlement of the obligations of the
holders of Equity Units to purchase our common stock. The remarketing agent
will deduct an amount not exceeding 25 basis points (0.25%) of the total
proceeds from the remarketing as a remarketing fee. The remarketing agent will
remit the remaining portion of the proceeds, if any, to the holders of the
Equity Units participating in the remarketing.
Alternatively, a holder of Equity Units may elect not to participate in the
remarketing and retain the senior notes underlying those Equity Units by
delivering the treasury securities described in (1) and (2) above, in the
amount and types specified by the remarketing agent, applicable to the holder's
senior notes, to the forward purchase contract agent on the fourth business day
before any remarketing date to satisfy its obligation under the related forward
purchase contracts. The interest rate on a senior note will be reset to the
reset rate regardless of whether the holder of the senior note elects to
participate in the remarketing.
What is the reset rate?
In order to facilitate the remarketing of the senior notes at the
remarketing price described above, the remarketing agent will reset the rate of
interest on the senior notes for the quarterly payments payable after the
earlier of the settlement date of a successful remarketing or the stock
purchase date until their maturity on August 16, 2007. The reset rate will be
the rate sufficient to cause the then
S-10
current aggregate market value of all the outstanding senior notes being
remarketed to be equal to approximately, but not less than, 100.25% of the
remarketing value described above. Resetting the interest rate on the senior
notes at this rate should enable the remarketing agent to sell the senior notes
in the remarketing and purchase the necessary treasury portfolio, the proceeds
of which will be sufficient to settle the forward purchase contracts and to pay
the quarterly payment on the Equity Units due on the stock purchase date in the
case of a remarketing occurring prior to the fourth business day preceding the
stock purchase date. In the case of a remarketing on or after the fourth
business day preceding the stock purchase date, the proceeds will be paid in
direct settlement of the obligations of the holders of Equity Units to purchase
our common stock.
The reset rate will be determined by the remarketing agent on the third
business day before May 16, 2005. If the remarketing agent cannot establish a
reset rate meeting these requirements on this initial remarketing date and, as
a result, the senior notes cannot be sold as described below, the interest rate
will not be reset and will continue to be the initial rate of the senior notes.
However, the remarketing agent will use its commercially reasonable best
efforts thereafter to remarket the senior notes on one or more subsequent
occasions. If a reset rate cannot be established on a given date, the
remarketing will not occur on that date. If the remarketing agent fails to
remarket the senior notes on or prior to the third business day immediately
preceding the stock purchase date, the interest rate will be a market rate of
interest as described later in this prospectus supplement.
The reset of the interest rate on the senior notes will not change the
quarterly payments due to holders of the Equity Units on the stock purchase
date, which, as described above, will be paid from the proceeds of the treasury
portfolio in an amount equal to interest on the senior notes at the initial
annual rate of 5.75% of $50.
What happens if the remarketing agent does not sell the senior notes?
If, as described above, the remarketing agent cannot establish a reset rate
on the remarketing date that will be sufficient to cause the then current
aggregate market value of all the outstanding senior notes being remarketed to
be equal to approximately, but not less than, 100.25% of the remarketing value,
and the remarketing agent cannot sell the senior notes offered for remarketing
on the remarketing date at a price equal to approximately, but not less than
100.25% of the remarketing value, determined on the basis of the senior notes
being remarketed, the remarketing agent will attempt to establish a reset rate
on one or more subsequent occasions.
If the remarketing agent fails to remarket the senior notes offered for
remarketing at the price specified in the preceding paragraph on or prior to
the third business day immediately preceding the stock purchase date, any
holder who has not otherwise settled its related forward purchase contract in
cash by the close of business on the seventh business day immediately preceding
the stock purchase date will be deemed to have directed us to exercise our
rights as a secured party and retain and dispose of the securities pledged as
collateral in full satisfaction of its obligations under the forward purchase
contract.
If you are not a party to a forward purchase contract, may you still
participate in a remarketing of your senior notes?
Holders of senior notes that are not included as part of Equity Units may
elect to have their senior notes included in the remarketing in the manner
described in "Description of the Equity Units--Optional Remarketing of Senior
Notes Which Are Not Included in Equity Units." The remarketing agent will use
its commercially reasonable best efforts to remarket the separately held senior
notes
S-11
included in the remarketing at a price equal to approximately, but not less
than 100.25% of the remarketing value, determined on the basis of the
separately held senior notes being remarketed. After deducting its remarketing
fee in an amount not exceeding 25 basis points (0.25%) of the total proceeds
from the remarketing, the remaining portion of the proceeds will be remitted to
the holders whose separate senior notes were sold in the remarketing.
If a holder of senior notes elects to have its senior notes remarketed but
the remarketing agent fails to sell the senior notes during any remarketing
period, the senior notes will, except as otherwise provided in this prospectus
supplement, be promptly returned to the holder following the conclusion of that
period. If the remarketing agent fails to remarket the senior notes on or prior
to the third business day immediately preceding the stock purchase date, the
interest reset rate will be a market rate of interest, as described in this
prospectus supplement.
Besides participating in the remarketing, how else can you satisfy your
obligations under the forward purchase contract?
Besides participating in the remarketing, you may also satisfy your
obligations under the forward purchase contract:
. if you have created Stripped Units or elected not to participate in the
remarketing, by delivering and pledging specified treasury securities in
substitution for your senior notes, and applying the cash payments
received on the pledged treasury securities for every Stripped Unit or
Equity Unit held by you;
. if you hold Stripped Units, or if you hold Equity Units and a successful
remarketing of the senior notes has not occurred prior to such time,
through the delivery of cash prior to 11:00 a.m. (New York City time) on
the seventh business day prior to August 16, 2005, with prior
notification to the forward purchase contract agent as described in
"Description of the Equity Units--Notice to Settle with Cash;"
. through the early delivery of cash to the forward purchase contract agent
in the manner described in "Description of the Equity Units--Early
Settlement;" or
. if we are involved in a merger, acquisition or consolidation before the
stock purchase date in which at least 30% of the consideration for our
common stock consists of cash or cash equivalents, through an early
settlement of the forward purchase contract as described in "Description
of the Equity Units--Early Settlement upon Cash Merger."
In addition, the forward purchase contracts, our related rights and
obligations and those of the holders of the Equity Units, including their
obligations to purchase our common stock, will automatically terminate upon the
occurrence of particular events involving our bankruptcy, insolvency or
reorganization. If the forward purchase contracts are terminated for this
reason, the pledged senior notes and treasury securities will be released and
distributed to you. If we become the subject of a case under the U.S.
bankruptcy code, a delay may occur as a result of the automatic stay under the
U.S. bankruptcy code and continue until the automatic stay has been lifted. The
automatic stay will not be lifted until the bankruptcy judge agrees to lift it
and return your collateral to you. In addition, it is possible that at the
conclusion of such a bankruptcy case, the claim represented by the senior notes
will receive substantially less than the face amount of such claim or indeed
receive no recovery at all.
S-12
If the forward purchase contract is settled early through cash or as the
result of a bankruptcy event as described above, such holders will have no
further rights to receive any accrued contract or deferred contract adjustment
payments.
Under what circumstances may we redeem the senior notes before they mature?
If the tax laws change or are interpreted in a way that adversely affects
the tax treatment of the senior notes, then we may elect to redeem the senior
notes. The redemption price will be an amount equal to the price of a portfolio
of treasury securities described below or, if we redeem after the earlier of a
successful remarketing or August 16, 2005, for an amount equal to the par value
of the senior notes plus accrued and unpaid interest, if any. If we redeem the
senior notes before a successful remarketing, the collateral agent will use the
money received from the redemption to purchase a portfolio of zero-coupon U.S.
treasury securities that (1) mature on or before each payment date of the
senior notes through August 16, 2005, in an amount equal to the aggregate
interest that would have been due on that payment date on the senior notes
included in Equity Units and (2) mature on or before August 16, 2005 in an
aggregate amount equal to the principal of the senior notes included in the
Equity Units. This treasury portfolio will replace the senior notes as the
collateral securing your obligations to purchase our common stock under the
forward purchase contracts. If we redeem the senior notes prior to the earlier
of a successful remarketing or the stock purchase date, then each Equity Unit
will consist of a forward purchase contract for our common stock and an
ownership interest in the treasury portfolio.
What is the maturity of the senior notes?
The senior notes will mature on August 16, 2007.
What are the principal United States federal income tax consequences related to
the Equity Units, Stripped Units and senior notes?
If you purchase Equity Units in this offering, under the agreements
governing the Equity Units, you will be deemed to agree to treat the purchase
of an Equity Unit as the purchase of a unit consisting of the senior note and
forward purchase contract constituting the Equity Units. You must allocate the
purchase price of the Equity Units between those senior notes and forward
purchase contracts in proportion to their respective initial fair market
values, which will establish your initial tax basis. We expect to report the
initial fair market value of each senior note as $50 and the initial fair
market value of each forward purchase contract as $0 and by purchasing Equity
Units, you will be deemed to agree to such allocation.
Under the indenture governing the senior notes, we and each holder of the
senior notes agree, for U.S. federal income tax purposes, to treat the senior
notes as indebtedness that is subject to the regulations governing contingent
payment debt obligations in the manner described below under "United States
Federal Income Tax Consequences." As discussed more fully below, the effect of
these Treasury regulations will be (1) to require you, regardless of your usual
method of tax accounting, to use the accrual method with respect to the senior
notes, (2) to possibly result in the accrual of original issue discount by you
in excess of stated interest payments actually received by you and (3)
generally to result in ordinary rather than capital treatment of any gain, and
to some extent loss, on the sale,
S-13
exchange or other disposition of the senior note at any time up to six months
after the date on which the interest rate on the senior notes is reset.
If you own Stripped Units, you will be required to include in gross income
your allocable share of any original issue discount or acquisition discount on
the treasury securities that accrues in such year.
We intend to report the contract adjustment payments as income to you, but
you may want to consult your tax advisor concerning alternative
characterizations.
Because there is no statutory, judicial or administrative authority directly
addressing the tax treatment of Equity Units or instruments similar to Equity
Units, we urge you to consult your own tax advisor concerning the tax
consequences of an investment in Equity Units. For additional information, see
"United States Federal Income Tax Consequences" in this prospectus supplement.
Will the Equity Units, Stripped Units or senior notes be listed on a stock
exchange?
We have been approved to list the Equity Units on the NYSE under the symbol
"AEP PrA." Neither the Stripped Units nor the senior notes will initially be
listed; however, if either of these securities are separately traded to a
sufficient extent that they meet applicable exchange listing requirements, we
will attempt to cause those securities to be listed on the exchange on which
the Equity Units are then listed.
How does American Electric Power expect to use the proceeds from this offering?
We estimate that we will receive net proceeds from this offering of Equity
Units of $290,370,000, after deducting expenses and underwriting discounts and
commissions, or $334,020,000 if the underwriters exercise in full their option
to purchase additional Equity Units. We intend to use the net proceeds to repay
up to $290 million of our commercial paper and for general corporate purposes,
which may include, but are not limited to, working capital and capital
expenditures.
S-14
The Offering--Explanatory Diagrams
The following diagrams demonstrate some of the key features of the forward
purchase contracts, Equity Units, Stripped Units and the senior notes, and the
transformation of Equity Units into Stripped Units and senior notes.
Forward Purchase Contracts
. Equity Units and Stripped Units both include a forward purchase contract
under which you agree to purchase shares of our common stock on the stock
purchase date.
. The number of shares to be purchased under each forward purchase contract
will depend on the "applicable market value." The "applicable market
value" means the average of the closing price per share of our common
stock on each of the 20 consecutive trading days ending on the third
trading day immediately preceding the stock purchase date.
[GRAPHIC]
Value of Delivered Shares Percentage of Shares Delivered
on Stock Purchase Date on Stock Purchase Date(3)
V P
a e
l 100% 120% r
u c
e e
n Deliver Deliver Deliver
t 100% of Between 83% of
a Shares(4) 83% and Shares(6)
g 100% of
e Shares(5)
Reference Threshold Reference Threshold
Price(1) Appreciation Price(2) Price(1) Appreciation Price(1)
$40.90 $49.08 $40.90 $49.08
Common Stock Price Common Stock Price
--------
(1)The "reference price" is $40.90.
(2)The "threshold appreciation price" is equal to $49.08, which is 120% of the
reference price.
(3)For each of the percentage categories shown, the percentage (expressed as a
decimal) of the shares of our common stock to be delivered on the stock
purchase date to a holder of Equity Units or Stripped Units is determined by
dividing
. the related number of shares of our common stock to be delivered, as
indicated in the footnote for each category, by
. an amount equal to $50, the stated amount of the Equity Units, divided by
the reference price.
(4)If the applicable market value of our common stock is less than or equal to
the reference price, the number of shares of our common stock to be
delivered will be calculated by dividing the stated amount of $50 by the
reference price.
(5)If the applicable market value of our common stock is between the reference
price and the threshold appreciation price, the number of shares of our
common stock to be delivered will be calculated by dividing the stated
amount of $50 by the applicable market value.
(6)If the applicable market value of our common stock is greater than or equal
to the threshold appreciation price, the number of shares of our common
stock to be delivered will be calculated by dividing the stated amount of
$50 by the threshold appreciation price.
S-15
Equity Units
. An Equity Unit will consist of two components as illustrated below:
[FLOW CHART]
Forward Purchase Senior Notes
Contract
(Owed to Holder) (Owed to Holder)
Common Stock 5.75% per year
and contract payable quarterly
adjustment payments +
(reset for quarterly
3.50% per annum payments payable
payable quarterly on and after
reset date)
(Owed to American (Owed to Holder)
Electric Power)
$50 at Maturity
$50 at Stock (August 16, 2007)
Purchase Date
Equity Units
. After a successful remarketing, the Equity Units will include the
treasury portfolio in lieu of the senior notes.
. If you hold Equity Units, you own the senior notes and, after
remarketing, the treasury portfolio, but will pledge them to us to secure
your obligations under the forward purchase contract.
. If you hold Equity Units, you may also substitute a specified amount of
treasury securities for the senior notes if you decide not to participate
in the remarketing.
S-16
Stripped Units
. A Stripped Unit consists of two components as described below:
[FLOW CHART]
Forward Purchase Zero-Coupon
Contract Treasury Securities
(Owed to Holder)
Common Stock
and contract
adjustment payments +
3.50% per annum payable
quarterly
(Owed to American (Owed to Holder)
Electric Power)
$50 at Maturity
$50 at Stock (August 15, 2005)
Purchase Date
Stripped Units
. If you hold Stripped Units, you own the treasury security but will pledge
it to us to secure your obligations under the forward purchase contract.
The treasury security is a zero-coupon U.S. treasury security (CUSIP No.
912803AG8) that matures on August 15, 2005.
Senior Notes
. Senior notes will have the terms illustrated below:
[FLOW CHART]
(Owed to Holder)
5.75% per year
payable quarterly
(reset for quarterly
payments payable
on and after
reset date)
(Owed to Holder)
$50 at Maturity
(August 16, 2007)
S-17
. If you hold a senior note that is a component of an Equity Unit, you have
the option to either:
-- allow the senior note to be included in the remarketing process, the
proceeds of which will be used to purchase the treasury portfolio, if
the remarketing is successful prior to the fourth business day
preceding the stock purchase date, in which case the proceeds of the
treasury portfolio will be applied to settle the forward purchase
contract, or, if the remarketing occurs on or after the fourth
business day preceding the stock purchase date, the proceeds will be
used in direct settlement of the holders' obligations to purchase our
common stock; or
-- elect not to participate in the remarketing by delivering treasury
securities in substitution for the senior note, in which case the
proceeds of the treasury securities will be applied to settle the
forward purchase contract.
. If you hold a senior note that is separate and not a component of an
Equity Unit, you have the option to either:
-- continue to hold the senior note whose rate has been reset for the
quarterly payments payable on and after the stock purchase date; or
-- deliver the senior note to the remarketing agent to be included in
the remarketing.
Transforming Equity Units into Stripped Units and senior notes
. To create a Stripped Unit, you may combine the forward purchase contract
with the specified zero-coupon U.S. treasury security that matures on
August 15, 2005. You will then own the zero-coupon U.S. treasury security
but will pledge it to us to secure your obligations under the forward
purchase contract.
. The zero-coupon U.S. treasury security together with the forward purchase
contract would then constitute a Stripped Unit. The senior notes which
were previously a component of the Equity Units, would be tradable as
separate securities.
[FLOW CHART]
Zero-Coupon
Treasury
Equity Units Substitution
Forward Purchase Senior Note Substitute
Contract Zero-Coupon
Treasury Security
(Owed to Holder) (Owed to Holder)
Common Stock 5.75% per year
and contract payable quarterly
adjustment payments + +
(reset for quarterly
3.50% per annum payments payable
payable quarterly on and after
reset date)
(Owed to American (Owed to Holder) (Owed to Holder)
Electric Power)
$50 at Maturity $50 at Maturity
(August 16, 2007) (August 15, 2005)
$50 at Stock
Purchase Date
Equity Units
Separately Traded
Stripped Units Senior Note
Forward Purchase Substitute Senior Note
Contract Zero-Coupon
Treasury Securities
(Owed to Holder) (Owed to Holder)
Common Stock 5.75% per year
and contract payable quarterly
adjustment payments + +
(reset for quarterly
3.50% per annum payments payable
payable quarterly on and after
reset date)
(Owed to American (Owed to Holder) (Owed to Holder)
Electric Power)
$50 at Maturity $50 at Maturity
$50 at Stock (August 15, 2005) (August 16, 2007)
Purchase Date
Stripped Units
. After a successful remarketing, the Equity Units will include the
treasury portfolio in lieu of senior notes.
. You can also transform Stripped Units and senior notes into Equity Units.
Following that transformation, the specified zero-coupon U.S. treasury
security, which was previously a component of the Stripped Units, would
be tradable as a separate security.
. You may generally only transform Equity Units into Stripped Units and
senior notes and transform Stripped Units and senior notes into Equity
Units in integral multiples of 20 Equity Units.
S-18
CONCURRENT OFFERING
We are also offering, in a concurrent offering (by a separate prospectus
supplement), 16,000,000 shares of our common stock, plus up to an additional
2,400,000 shares of our common stock if the over-allotment option for that
offering is exercised in full. We expect to close that offering at the same
time this offering is closed. Neither offering is conditioned on the completion
of the other.
S-19
RISK FACTORS
Investing in the Equity Units involves risks, including the risks described
below that are specific to the Equity Units and those that could affect us and
our business. You should not purchase Equity Units unless you understand these
investment risks. Because an Equity Unit consists of a forward purchase
contract to acquire shares of our common stock and a senior note issued by us,
you are making an investment decision with regard to our common stock and
senior notes, as well as the Equity Units. Although we have tried to discuss
key factors, please be aware that other risks may prove to be important in the
future. New risks may emerge at any time and we cannot predict such risks or
estimate the extent to which they may affect our financial performance. Before
purchasing any Equity Units, you should carefully consider the following
discussion of risks and the other information in this prospectus supplement and
the accompanying prospectus, and carefully read the risks described in the
documents incorporated by reference in this prospectus supplement and on page 2
of the accompanying prospectus.
You will bear the entire risk of a decline in the price of our common stock.
The market value of the shares of our common stock that you will receive on
the stock purchase date may be materially different from the effective price
per share paid by you on the stock purchase date. If the average trading price
of our common stock on the stock purchase date is less than $40.90 per share,
which we refer to as the reference price, you will, on the stock purchase date,
be required to purchase shares of common stock at a loss. Accordingly, a holder
of Equity Units assumes the entire risk that the market value of our common
stock may decline. The market price of our common stock may decline
substantially.
You will receive only a portion of any appreciation in our common stock price.
The aggregate market value of the shares of our common stock that you will
receive upon settlement of a forward purchase contract generally will exceed
the stated amount of $50 only if the average closing price per share of our
common stock over the 20-trading day period preceding settlement equals or
exceeds $49.08, which we refer to as the threshold appreciation price. The
threshold appreciation price represents an appreciation of 20% over $40.90.
Therefore, during the period before the stock purchase date, an investment in
the Equity Units affords less opportunity for equity appreciation than a direct
investment in our common stock. If the average closing price exceeds $40.90,
which we refer to as the reference price, but falls below the threshold
appreciation price, you will realize no equity appreciation on the common stock
for the period during which you own the forward purchase contract. Furthermore,
if the applicable average closing price exceeds the threshold appreciation
price, the value of the shares you will receive under the forward purchase
contract will be approximately 83% of the value of the shares you could have
purchased with $50 at the time of this offering.
The trading price for our common stock, the general level of interest rates and
our creditworthiness will directly affect the trading price for the Equity
Units.
It is impossible to predict whether the price of our common stock or
interest rates will rise or fall. Our creditworthiness, operating results and
prospects and economic, financial and other factors will affect trading prices
of our common stock. In addition, market conditions can affect the capital
markets generally, therefore affecting the price of our common stock. These
conditions may include the level of, and fluctuations in, the trading prices of
stocks generally and sales of substantial amounts of our common stock in the
market after this offering of the Equity Units or the perception that those
sales could occur. Fluctuations in interest rates may affect the trading price
of our common stock or the relative value of the senior notes underlying the
Equity Units, which could, in turn, affect the trading price of the Equity
Units.
S-20
You may suffer dilution of our common stock issuable upon settlement of your
forward purchase contract.
The number of shares of our common stock issuable upon settlement of your
forward purchase contract will be adjusted only for stock splits and
combinations, stock dividends and other specified transactions. The number of
shares of our common stock issuable upon settlement of each forward purchase
contract will not be adjusted for other events, such as employee stock option
grants, offerings of common stock for cash, or acquisitions or other
transactions which may adversely affect the price of our common stock. The
terms of the Equity Units do not restrict our ability to offer common stock in
the future or to engage in other transactions that could dilute our common
stock. We have no obligation to consider the interests of the holders of the
Equity Units in engaging in any offering or transaction.
You will have no rights as a common stockholder.
Until you acquire shares of our common stock upon settlement of your forward
purchase contract, you will have no rights with respect to our common stock,
including voting rights, rights to respond to tender offers and rights to
receive any dividends or other distributions on our common stock. Upon
settlement of your forward purchase contract, you will be entitled to exercise
the rights of a holder of common stock only as to actions for which the record
date occurs after the stock purchase date.
Your pledged securities will be encumbered.
Although holders of Equity Units will be beneficial owners of the underlying
pledged senior notes or treasury securities, the holders will pledge those
securities to the collateral agent to secure their obligations under the
related forward purchase contracts. Therefore, for so long as the forward
purchase contracts remain in effect, holders will not be allowed to withdraw
their pledged senior notes or treasury securities from this pledge arrangement,
unless they substitute other securities.
We may defer contract adjustment payments.
We have the option to defer the payment of contract adjustment payments on
the forward purchase contracts forming a part of the Equity Units until August
16, 2005. However, deferred installments of contract adjustment payments will
bear interest at the rate of 5.75% per year (compounded quarterly) until paid.
If the forward purchase contracts are settled early or terminated due to our
bankruptcy, insolvency or reorganization, the right to receive contract
adjustment payments and deferred contract adjustment payments, if any, will
also terminate.
The forward purchase contract agreement will not be qualified under the Trust
Indenture Act of 1939; the obligations of the forward purchase contract agent
will be limited.
The forward purchase contract agreement relating to the Equity Units will
not be qualified under the Trust Indenture Act of 1939. The forward purchase
contract agent under the forward purchase contract agreement, who will act as
the agent and the attorney-in-fact for the holders of the Equity Units, will
not be qualified as a trustee under the Trust Indenture Act of 1939.
Accordingly, holders of the Equity Units will not have the benefits of the
protections of the Trust Indenture Act of 1939 other than to the extent
applicable to a senior note included in an Equity Unit. Under the forward
purchase contract agreement, the forward purchase contract agent will have only
limited obligations to the holders of the Equity Units.
S-21
The secondary market for the Equity Units may be illiquid.
We are unable to predict how the Equity Units will trade in the secondary
market or whether that market will be liquid or illiquid. There is currently no
secondary market for the Equity Units. We have applied to list the Equity Units
on the NYSE. We will not initially list either the Stripped Units or the senior
notes; however, if either of these securities are separately traded to a
sufficient extent that they meet applicable exchange listing requirements, we
will attempt to list those securities on the exchange on which the Equity Units
are then listed. The underwriters have advised us that they presently intend to
make a market for the Equity Units; however, they are not obligated to do so
and may discontinue any market making at any time. Any market that may develop
for the Equity Units, the Stripped Units or the senior notes may be illiquid,
you may not be able to sell the securities and a trading market, if it
develops, may not continue. In addition, if sufficient numbers of Equity Units
are converted to Stripped Units, the liquidity of Equity Units could be
adversely affected. Any listing application for Equity Units, Stripped Units or
senior notes may not be accepted and, if accepted, the Equity Units, Stripped
Units or senior notes may be delisted from the NYSE or trading in the Equity
Units, Stripped Units or senior notes may be suspended as a result of elections
to create Stripped Units or recreate Equity Units by substituting collateral
that causes the number of these securities to fall below the applicable
requirements for listing securities on the NYSE.
We may redeem the senior notes upon the occurrence of a tax event.
We have the option to redeem the senior notes, on not less than 30 days' nor
more than 60 days' prior written notice, in whole but not in part, at any time
if a tax event occurs under the circumstances described in this prospectus
supplement. If we exercise this option, we will redeem the senior notes at the
redemption price described later in this prospectus supplement. If we redeem
the senior notes, we will pay that redemption in cash to the holders of the
senior notes. In the case of senior notes held as part of an Equity Unit at the
time a tax event redemption occurs before the earlier of a successful
remarketing of the senior notes or the stock purchase date, the redemption
price payable to you as a holder of the Equity Units will be distributed to the
collateral agent, who in turn will apply an amount equal to the redemption
price in respect of those senior notes to purchase a portfolio of zero-coupon
U.S. treasury securities on your behalf, and will remit the remainder of the
redemption price, if any, to you, and the treasury portfolio will be
substituted for the senior notes as collateral to secure your obligations under
the forward purchase contracts related to the Equity Units. If your senior
notes are not components of Equity Units, you, rather than the collateral
agent, will receive redemption payments. The market prices for the Equity Units
may be affected if we substitute the treasury portfolio as collateral in place
of any senior notes so redeemed. A tax event redemption will be a taxable event
to the holders of the senior notes.
The U.S. federal income tax consequences of the purchase, ownership and
disposition of the Equity Units are unclear.
No statutory, judicial or administrative authority directly addresses the
treatment of Equity Units or instruments similar to Equity Units for U.S.
federal income tax purposes. As a result, the U.S. federal income tax
consequences of the purchase, ownership and disposition of the Equity Units are
unclear.
We will treat the senior notes as contingent payment debt instruments and you
will be required to accrue original issue discount.
Under the indenture, we and each holder agree, for U.S. federal income tax
purposes, to treat the senior notes as indebtedness that is subject to the
regulations governing contingent payment debt instruments. As a result, you
will be required to include original issue discount in income during your
ownership of the senior notes, subject to some adjustments. Additionally, you
will generally be
S-22
required to recognize ordinary income on the gain, if any, realized on a sale,
exchange or other disposition of the senior notes at any time up to six months
after the date on which the interest rate on the senior notes is reset; thus,
the ability to offset such ordinary income with a loss, if any, on a forward
purchase contract may be limited. See "United States Federal Income Tax
Consequences."
The senior notes are our obligations and not obligations of our subsidiaries
and will be effectively subordinated to the claims of our subsidiaries'
creditors.
The Equity Units are exclusively our obligations and not those of our
subsidiaries. We are a holding company and, accordingly, substantially all of
our operations are conducted through our subsidiaries. As a result, our cash
flow and our ability to service our debt, including the Equity Units, depends
upon the earnings of our subsidiaries. In addition, we depend on the
distribution of earnings or other payments by our subsidiaries to us.
Our subsidiaries are separate and distinct legal entities. Our subsidiaries
have no obligation to pay any amounts due on the Equity Units or to provide us
with funds for our payment obligations, whether by dividends, distributions or
other payments. Payments to us by our subsidiaries will also be contingent upon
our subsidiaries' earnings and business considerations. In addition, any
payment of dividends, distributions or advances by our subsidiaries to us would
be subject to regulatory or contractual restrictions, including those described
under "Price Range of Common Stock and Dividend Policy--Dividend Policy" in
this prospectus supplement. Payments to us by our subsidiaries will also be
contingent upon our subsidiaries' earnings and business considerations.
Our right to receive any assets of any of our subsidiaries upon their
liquidation or reorganization, and therefore the right of the holders of the
Equity Units to participate in those assets, will be effectively subordinated
to the claims of that subsidiary's creditors, including senior and subordinated
debtholders and general trade creditors. In addition, even if we were a
creditor of any of our subsidiaries, our rights as a creditor would be
subordinate to any security interest in the assets of our subsidiaries and any
indebtedness of our subsidiaries senior to that held by us.
Delivery of the securities under the pledge agreement may be delayed if we
become subject to a bankruptcy proceeding.
Notwithstanding the automatic termination of the forward purchase contracts,
if we become the subject of a case under the U.S. bankruptcy code, imposition
of an automatic stay under the U.S. bankruptcy code may delay the delivery to
you of your securities being held as collateral under the pledge agreement, and
this delay may continue until the automatic stay has been lifted. The automatic
stay will not be lifted until the bankruptcy judge agrees to lift it and return
your collateral to you. In addition, it is possible that at the conclusion of
such a bankruptcy case, the claim represented by the senior notes will receive
substantially less than the face amount of such claim or indeed receive no
recovery at all.
S-23
FORWARD-LOOKING STATEMENTS
Some statements contained or incorporated by reference in this prospectus
supplement, including the discussion of our plans and proposals under
"Summary--American Electric Power Company, Inc." and "American Electric Power
Company, Inc." are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to various risks and uncertainties. Actual results may vary materially.
Factors that could cause actual results to differ materially include, but are
not limited to:
. electric load and customer growth;
. abnormal weather conditions;
. available sources of and prices for coal and gas;
. availability of generating capacity;
. litigation concerning our merger with Central and South West Corporation;
. the timing of the implementation of our restructuring plan;
. risks related to energy trading and construction under contract;
. the speed and degree to which competition is introduced to our power
generation business;
. the ability to recover net regulatory assets, other stranded costs and
implementation costs in connection with deregulation of generation in
certain states;
. new legislation and government regulations;
. the structure and timing of a competitive market for electricity and its
impact on prices;
. our ability to successfully control costs;
. the success of new business ventures;
. international developments affecting our foreign investments;
. the effects of fluctuations in foreign currency exchange rates;
. the economic climate and growth in our service and trading territories,
both domestic and foreign;
. our ability to comply with or to challenge successfully new environmental
regulations and to litigate successfully claims that we violated the
Clean Air Act;
. inflationary trends;
. changes in electricity and gas market prices and interest rates; and
. other risks and unforeseen events.
In light of these risks, uncertainties and assumptions, the forward-looking
statements contained or incorporated by reference in this prospectus supplement
might not occur. Neither AEP nor the underwriters undertakes any obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.
S-24
USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering of Equity
Units of $290,370,000, after deducting expenses and underwriting discounts and
commissions, or $334,020,000 if the underwriters exercise in full their option
to purchase additional Equity Units. The net proceeds to us from the concurrent
common stock offering are estimated to be $634,398,000, after deducting
expenses and underwriting discounts and commissions, or $729,613,200 if the
underwriters exercise in full their option to purchase additional shares of
common stock. We are not required to sell the common stock in order to sell the
Equity Units in this offering.
We intend to use the net proceeds of this offering to repay up to $290
million of our commercial paper and for general corporate purposes, which may
include, but are not limited to, working capital and capital expenditures.
S-25
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2002:
. on an actual basis; and
. on an as adjusted basis to give effect to the sale of 6,000,000 Equity
Units and our concurrent offering of 16,000,000 shares of our common
stock (assuming no exercise of the over-allotment option in either
offering), after deducting the underwriting discounts and estimated
offering expenses.
Since March 31, 2002, there has not been any material change in the
information set forth below, except as may be described elsewhere in this
prospectus supplement, in the accompanying prospectus or in any of the
documents incorporated by reference therein. You should read the information in
this table along with the financial information included or incorporated by
reference in this prospectus supplement and the accompanying prospectus.
March 31, 2002
------------------
Actual As Adjusted
------- -----------
(in millions)
Debt:
Short-term debt, including commercial paper................................... $ 3,984 $ 3,060(a)
Long-term debt, including current maturities.................................. 11,802 11,829(b)
Senior Notes offered hereby................................................... -- 300
------- -------
Total debt.............................................................. 15,786 15,189
------- -------
Certain subsidiary obligated, mandatorily redeemable, preferred securities of
subsidiary trusts holding solely junior subordinated debentures of such
subsidiaries................................................................ 321 321
------- -------
Minority interest in finance subsidiary....................................... 750 750
------- -------
Cumulative preferred stock of subsidiaries...................................... 156 156
------- -------
Common shareholders' equity:
Common stock, par value $6.50; 600 million shares authorized, 331,618,850
shares issued at 3/31/02 (8,999,992 shares were held in treasury at 3/31/02) 2,156 2,260
Paid-in capital............................................................... 2,912 3,406(b)
Accumulated other comprehensive income (loss)................................. (170) (170)
Retained earnings............................................................. 3,288 3,288
------- -------
Total common shareholders' equity......................................... 8,186 8,784
------- -------
Total capitalization.................................................... $25,199 $25,200
======= =======
--------
(a)Assumes repayment with respect to the Equity Units offering of $290,370,000
and with respect to the common stock offering of $634,398,000 of commercial
paper.
(b)Reflects the present value of the obligation to make contract adjustment
payments in connection with the forward purchase contracts included as part
of the Equity Units. This amount is included as a liability in long-term
debt and as a reduction in paid-in capital.
If the entire over-allotment of Equity Units and common stock were
exercised, the as adjusted amount of senior notes would be $345 million and the
as adjusted amount of total common shareholders' equity would be $8,875
million. The capitalization set forth above assumes that the proceeds from the
exercise of the entire over-allotment, after deducting the underwriting
discounts, would be applied to reduce commercial paper by $139 million.
S-26
AMERICAN ELECTRIC POWER COMPANY, INC.
The following discussion highlights certain important facts regarding us and
our subsidiaries and does not contain all of the information that may be
important to you. We encourage you to read the documents referred to in the
accompanying prospectus under "Where You Can Find More Information," which
contain more complete descriptions of us and our business. In this prospectus
supplement and the accompanying prospectus, "AEP," "we," "us" and "our" refer
to American Electric Power Company, Inc. and all of its subsidiaries.
We are one of the largest investor owned electric public utility holding
companies in the U.S. We provide generation, transmission and distribution
service to over 4.9 million retail customers in eleven states (Arkansas,
Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Tennessee, Texas,
Virginia and West Virginia) through our electric utility operating companies.
We are also one of the largest marketers and traders of electricity and natural
gas in the United States. In 2000, we established an energy trading operation
in Europe.
We have a significant presence throughout the domestic energy value chain.
Our U.S. electric assets include:
. 38,000 megawatts of generation capacity;
. over 38,000 miles of transmission lines; and
. 186,000 miles of distribution lines.
Our natural gas assets include:
. 128 billion cubic feet (Bcf) of gas storage facilities; and
. 6,400 miles of gas pipelines in Louisiana and Texas.
Through our coal and transportation assets we:
. control over 7,000 railcars;
. control over 1,800 barges and 37 tug boats;
. operate two coal handling terminals with 20 million tons of capacity; and
. produce over 7 million tons of coal annually in the U.S.
We are one of the largest traders of electricity and natural gas in the U.S.
with:
. over 576 million megawatt hours (MWH) of electricity trades in 2001; and
. over 3,800 Bcf of gas trades in 2001.
In addition we:
. consume 80 million tons of coal annually; and
. consume 310 Bcf of natural gas annually.
Our focus is in the U.S., but we also have smaller operations in other parts of
the world, including:
. a growing energy trading operation in Europe based in the United Kingdom;
and
. 4,000 megawatts of generating capacity in England, which represents
approximately 16% of the total coal-fired generation capacity of England
and Wales.
Our other foreign investments currently include distribution operations in
the United Kingdom, Australia, and Brazil. We have additional generating
facilities in China and Mexico. We also offer engineering and construction
services worldwide. Please refer to "Summary--Recent Developments" in this
prospectus supplement for a discussion of possible divestitures of some of our
investments.
S-27
Strategy and Corporate Restructuring
Our strategy is a balanced business model of regulated and unregulated
businesses backed by assets and supported by enterprise-wide risk management
and a strong balance sheet. Our goal is to combine a predictable earnings
stream and cash flow from our regulated business with greater growth
opportunities from our unregulated business.
We are currently in the process of restructuring our assets and operations
to comply with state restructuring laws and to ensure greater differentiation
between the regulated operations and the unregulated operations.
We expect corporate restructuring will provide:
. transparency and clarity to investors;
. a simpler structure to conduct business, and to anticipate and monitor
performance;
. compliance with states' restructuring laws promoting customer choice; and
. more efficient financing.
The new corporate structure will consist of a regulated holding company and
an unregulated holding company. The regulated holding company will own our
integrated utilities and Ohio and Texas transmission and distribution assets.
The unregulated holding company will own our Ohio and Texas generation,
independent power producers, our gas pipeline and storage, United Kingdom
generation, barging and coal mining assets and our marketing and trading
operations.
Approval is needed from the SEC and the FERC to make these organizational
changes. We are awaiting the SEC's and the FERC's decisions in this matter.
[FLOW CHART]
Corporate Structure Today
American Electric Power
Company, Inc.
Central and AEP AEP AEP Regulated
South West Service Corp. Energy Resources Operating
Corporation Services Companies
Central Power Light
Regulated Public Service Company of Oklahoma
Operating Southwestern Electric Power Company Citipower Appalachian Power
Companies West Texas Utilities AEP Gas Holding Columbus Southern
MEMCO Power
CSW Barge Line Indiana Michigan
International SEEBOARD AEP Coal Kentucky Power
UK Generation Kingsport Power
CSW Ohio Power
Energy, Inc. Wheeling Power
AEP Generating
S-28
[FLOW CHART]
Corporate Structure Post Restructuring
AEP
Regulated Holdco AEP Enterprises Service Corp
(CSW Corp) Wholesale Holdco
CPL Wires WTU Wires
OPCo Wires CSPCo Wires Domestic Generating
Southwestern Electric
Power Company Public Service OPCo Genco
of Oklahoma CPL Genco
Kingsport Wheeling CSPCo Genco
Indiana Michigan Kentucky Power WTU Genco
Appalachian CSW Energy
Power AEP Generating AEPES Gas Holding
Company Energy Services
AEPES UK Limited
UK Generation
Other Diversified
MEMCO
AEP Coal
We have developed specific strategies for each of our regulated and
unregulated operations:
. Regulated Operations
- Maintain moderate but steady earnings growth;
- Maximize value of transmission assets and protect revenue stream
through regional transmission organization membership;
- Continue process improvement to maintain distribution service quality
while enhancing financial performance;
- Optimize generation assets through enhanced availability of
off-system sales; and
- Manageregulatory process to maximize retention of earnings improvement.
. Unregulated Operations
- Disciplined approach to asset acquisition and disposition;
- Value-driven asset optimization through the linkage of superior
commercial, analytical and technical skills;
- Broad participation across all energy markets with a disciplined and
opportunistic allocation of risk capital;
- Continued investment in both technology and process improvement to
enhance our competitiveness;
- Stringent risk management procedures with independent, internal risk
oversight; and
- Continued expansion of intellectual capital through ongoing
recruiting, performance-linked compensation and the development of a
structure that promotes sound decision-making and innovation at all
levels.
S-29
Current Regulated Operations
Our electric utility subsidiaries, which do business as "American Electric
Power," have traditionally provided electric service, consisting of generation,
transmission and distribution, on an integrated basis to their retail
customers. These operating subsidiaries provide electric service to over 4.9
million customers in 11 states through our electric networks of over 38,000
miles of transmission lines and 186,000 miles of distribution lines. Our
operating subsidiaries are:
Operating Subsidiary Service Territory Customers MW Owned/Leased
-------------------- ----------------------- --------- ------------------------
Appalachian Power Company (APCo) Southwestern Virginia 917,000 5,858
and
Southern West Virginia
Central Power and Light Company* Southern Texas 689,000 4,497
Columbus Southern Power Company* Ohio 678,000 2,595
Indiana Michigan Power Company Northern and Eastern 567,000 4,416
Indiana and
Southwestern
Michigan
Kentucky Power Company Eastern Kentucky 173,000 1,060
Kingsport Power Company Kingsport and a 45,000 Purchases electric power
portion of Northeastern distributed to its
Tennessee customers from APCo
Ohio Power Company (OPCo)* Northwestern, East 698,000 8,512
Central, Eastern and
Southern Sections of
Ohio
Public Service Company of Oklahoma Eastern and 502,000 4,237
Southwestern
Oklahoma
Southwestern Electric Power Company Northeastern Texas, 431,000 4,487
Northwestern
Louisiana and Western
Arkansas
Wheeling Power Company Northern West Virginia 41,000 Purchases electric power
distributed to its
customers from OPCo
West Texas Utilities Company* West and Central 189,000 1,392
Texas
AEP Generating Company Sells Power to Indiana N/A 1,300
Michigan Power
Company and
Kentucky Power
Company
--------
* Note: Corporate restructuring contemplates the transfer of historically
regulated generation in Ohio and Texas to an unregulated intermediate
holding company. Corporate restructuring is still subject to FERC and SEC
approval.
S-30
Unregulated Operations
We have expanded our business to unregulated activities through several
subsidiaries. We are active in unregulated businesses via AEP Energy Services,
Inc., AEP Resources, Inc. and AEP Pro Serv, Inc. and AEP Communications, Inc.
Unregulated business operations focus on value-driven asset optimization at
each link of the energy chain through the following activities:
. A diversified portfolio of owned assets and structured third party
arrangements, including:
- Power generation facilities and renewable energy sources;
- Natural gas pipeline, storage and processing facilities;
- Coal mines and related facilities; and
- Barge, rail and other fuel transportation related assets.
. Trade and market energy commodities, including electric power, natural
gas, natural gas liquids, oil, coal, and SO\\2\\ allowances in North
America and Europe;
. Provide price-risk management services and liquidity through a variety
of energy-related financial instruments, including exchange-traded
futures and over-the-counter forward, option, and swap agreements; and
. Enter into long-term transactions to buy or sell capacity, energy, and
ancillary services of electric generating facilities, either existing or
to be constructed, at various locations in North America and Europe.
S-31
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is listed on the New York Stock Exchange under the symbol
"AEP". The following table sets forth the high and low sale prices, as reported
on the New York Stock Exchange and the cash dividends declared on the common
shares for the periods indicated. As of March 31, 2002, there were 322,618,858
shares of our common stock outstanding.
Common Stock
-----------------------
Period High Low Dividends
------ ------ ------ ---------
2000:
First Quarter........................ $34.94 $25.94 $0.60
Second Quarter....................... 38.50 29.44 0.60
Third Quarter........................ 40.00 29.94 0.60
Fourth Quarter....................... 48.94 36.19 0.60
2001:
First Quarter........................ $48.10 $39.25 $0.60
Second Quarter....................... 51.20 45.10 0.60
Third Quarter........................ 48.90 41.50 0.60
Fourth Quarter....................... 46.95 39.70 0.60
2002:
First Quarter........................ $47.08 $39.70 $0.60
Second Quarter (through June 5, 2002) 48.06 40.87 --
Shareholders
On June 5, 2002 the last reported sale price of our common stock on the NYSE
was $40.90. As of June 5, 2002, there were approximately 150,000 holders of
record of our common stock.
Dividend Policy
The holders of our common stock are entitled to receive the dividends
declared by our board of directors provided funds are legally available for
such dividends. Our income derives from our common stock equity in the earnings
of our subsidiaries. Various financing arrangements, charter provisions and
regulatory requirements may impose certain restrictions on the ability of our
subsidiaries to transfer funds to us in the form of cash dividends, loans or
advances. We have paid a cash dividend of $0.60 per share each quarter since
the third quarter of 1989.
S-32
ACCOUNTING TREATMENT
The net proceeds from the sale of the Equity Units will be allocated between
the forward purchase contracts and the senior notes in our financial statements
based on the underlying fair value of each instrument. We expect to report the
fair market value of each senior note as $50 and the fair market value of each
forward purchase contract as $0. The present value of the Equity Units'
contract adjustment payments will be initially charged to common stockholders'
equity, with an offsetting credit to liabilities. As the contract adjustment
payments are made, they will be allocated between the liability account and
interest expense based on a constant rate calculation over the life of the
transaction.
The forward purchase contracts are forward transactions in our common stock.
Upon settlement of a forward purchase contract, we will receive $50 on that
forward purchase contract and will issue the requisite number of shares of our
common stock. The consideration we receive at that time will be credited to
stockholders' equity allocated between our common stock and additional paid-in
capital accounts.
Before the issuance of shares of our common stock upon anticipated
settlement of the forward purchase contracts for cash, the forward purchase
contracts will be reflected in our diluted earnings per share calculations
using the treasury stock method in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." Under this method, the
number of shares of our common stock used in calculating diluted earnings per
share is deemed to be increased by the excess, if any, of the number of shares
of our common stock that would be issued upon settlement of the forward
purchase contracts less the number of shares of our common stock that could be
purchased by us in the market, at the average market price during the period,
using the proceeds received upon settlement of the forward purchase contracts.
Consequently, we anticipate that there will be no dilutive effect on our
earnings per share except during periods when the average market price of our
common stock is above $49.08.
The Emerging Issues Task Force of the Financial Accounting Standards Board
is considering proposals related to accounting for certain securities and
financial instruments, including securities such as the Equity Units. The
current proposals being considered include rulemaking that, if adopted, would
endorse the method of accounting discussed above. Alternatively, other
proposals being considered could result in the common shares issuable pursuant
to the forward purchase contracts to be deemed outstanding and included in the
calculation of diluted earnings per share, and could result in periodic
"marking to market" of the forward purchase contracts, causing periodic charges
or credits to income. If this latter approach were adopted, our diluted
earnings per share could increase and decrease from quarter to quarter to
reflect the lesser and greater number of shares issuable upon satisfaction of
the forward purchase contracts.
S-33
DESCRIPTION OF THE EQUITY UNITS
We summarize below the principal terms of the Equity Units and the forward
purchase contracts and senior notes that comprise the Equity Units. The
following description is only a summary, and we refer you to the agreements
which will govern your rights as a holder of Equity Units. See "Where You Can
Find More Information" in the accompanying prospectus for information about how
to obtain copies of those documents, which we will file with the SEC as
exhibits to the registration statement of which this prospectus supplement
forms a part. In addition, to the extent that the following description is not
consistent with those contained in the accompanying prospectus under
"Description of Debt Securities," "Description of Common Stock" and
"Description of the Stock Purchase Contracts and the Stock Purchase Units," you
should rely on this description.
Overview
Each Equity Unit will have a stated amount of $50. Each Equity Unit will
initially consist of:
(1)a forward purchase contract under which
. you will agree to purchase, and we will agree to sell, for $50,
shares of our common stock on August 16, 2005; we will determine the
number of shares you will purchase based on an average trading price
of our common stock for a period preceding the stock purchase date,
calculated in the manner described below; and
. we will pay you contact adjustment payments at the annual rate of
3.50% of the stated amount of $50 as specified below (subject to our
right of deferral); and
(2)a senior note due August 16, 2007, with a principal amount of $50, on
which we will pay interest quarterly at the initial annual rate of 5.75%
until a successful remarketing of the senior notes and at the reset
rate, as described below, after the settlement date of a successful
remarketing or if the senior notes are not successfully remarketed,
after the stock purchase date.
The senior notes will initially be pledged to secure your obligations under
the forward purchase contract. We refer to the forward purchase contracts,
together with the pledged senior notes or, after a successful remarketing or a
tax event redemption, the treasury portfolio, as Equity Units. Prior to a
successful remarketing or a tax event redemption, each holder of Equity Units
may elect to withdraw the pledged senior notes underlying the Equity Units by
substituting, as pledged securities, specifically identified treasury
securities that will pay $50 on or before August 15, 2005, which is the amount
due under each forward purchase contract. If a holder of Equity Units elects to
substitute treasury securities as pledged securities, the pledged senior notes
will be released from the pledge agreement and delivered to the holder. The
Equity Units would then become "Stripped Units." Holders of Stripped Units may
recreate Equity Units by resubstituting the senior notes for the treasury
securities underlying the Stripped Units prior to a successful remarketing or a
tax event redemption.
By accepting the Equity Units, you will be treated as if you:
. irrevocably have agreed to be bound by the terms of the forward purchase
contract agreement, pledge agreement and forward purchase contract for so
long as you remain a beneficial owner of the Equity Units; and
. have appointed the forward purchase contract agent under the forward
purchase contract agreement as your agent and attorney-in-fact to enter
into and perform the forward purchase contract on your behalf.
S-34
In addition, by accepting the Equity Units, you will be treated as if you
have agreed to treat the Equity Units as the purchase of a unit consisting of
the senior note and the forward purchase contract, to allocate the purchase
price of each Equity Unit between the senior note and the forward purchase
contract as $50 and $0, respectively, to treat yourself as the owner of the
forward purchase contract and the related senior notes, the treasury portfolio
or the treasury securities underlying the Equity Units or Stripped Units, as
the case may be, and for U.S. federal income tax purposes to treat the senior
notes as our indebtedness subject to the contingent payment debt regulations.
At the closing of this offering of the Equity Units, the underwriters will
purchase the Equity Units. The purchase price of each Equity Unit will be
allocated by us between the related forward purchase contract and the related
senior note. The senior notes will then be pledged to the collateral agent to
secure the obligations owed to us under the forward purchase contracts.
We will enter into:
. a forward purchase contract agreement with The Bank of New York, as
forward purchase contract agent, governing the appointment of the forward
purchase contract agent as the agent and attorney-in-fact for the holders
of the Equity Units, the forward purchase contracts, the transfer,
exchange or replacement of certificates representing the Equity Units and
certain other matters relating to the Equity Units; and
. a pledge agreement with The Bank of New York, as collateral agent,
custodial agent and securities intermediary, creating a pledge and
security interest for our benefit to secure the obligations of holders of
Equity Units under the forward purchase contracts.
The obligations of each holder of Equity Units to pay the purchase price for
our common stock under the forward purchase contract included in the Equity
Units are non-recourse obligations. Except to the extent that a holder elects
to pay these obligations upon early settlement as described below under
"--Early Settlement," with cash as described below under "--Notice to Settle
with Cash," or upon merger early settlement as described below under "--Early
Settlement upon Cash Merger," these obligations will be paid solely out of the
proceeds of the collateral pledged to secure these obligations, and no holder
will be liable for any deficiency between those proceeds and the purchase price
for our common stock under the forward purchase contracts.
Creating Stripped Units and Recreating Equity Units
Holders of Equity Units will have the ability to "strip" those Equity Units
and take delivery of the pledged senior notes creating "Stripped Units," as
described in more detail below under "--Creating Stripped Units." Holders of
Stripped Units will have the ability to recreate Equity Units from their
Stripped Units by depositing senior notes as described in more detail below
under "--Recreating Equity Units." Holders who elect to create Stripped Units
or recreate Equity Units will be responsible for any related fees or expenses.
Creating Stripped Units
Each holder of Equity Units may create Stripped Units and withdraw the
pledged senior notes underlying the Equity Units by substituting, as pledged
securities, the treasury securities described below that will pay $50 on or
before August 16, 2005, the amount due under the forward purchase
S-35
contract. Holders of Equity Units may create Stripped Units at any time on or
before the tenth business day before the stock purchase date, unless a
successful remarketing or a tax event redemption has occurred; provided,
however, that they may not create Stripped Units during the period from four
business days before any remarketing period until the expiration of three
business days after the end of that period.
In order to create Stripped Units, a holder of Equity Units must substitute,
as pledged securities, zero-coupon U.S. treasury securities (CUSIP No.
912803AG8) that mature on August 15, 2005. Upon creation of the Stripped Units,
the treasury securities will be pledged with the collateral agent to secure the
holder's obligation to purchase our common stock under the forward purchase
contract, and the pledged senior notes underlying the Equity Units will be
released. Because treasury securities are issued in integral multiples of
$1,000, holders of Equity Units may make the substitution only in integral
multiples of 20 Equity Units.
To create Stripped Units, you must:
. deposit with the collateral agent the treasury securities described
above, which will be substituted for the pledged senior notes underlying
your Equity Units and pledged with the collateral agent to secure your
obligation to purchase our common stock under the forward purchase
contract;
. transfer the Equity Units to the forward purchase contract agent; and
. deliver a notice to the forward purchase contract agent stating that you
have deposited the specified treasury securities with the collateral
agent and are requesting that the forward purchase contract agent
instruct the collateral agent to release to you the pledged senior notes
underlying the Equity Units.
Upon that deposit and the receipt of an instruction from the forward
purchase contract agent, the collateral agent will effect the release to the
forward purchase contract agent of the underlying pledged senior notes from the
pledge under the pledge agreement free and clear of our security interest. The
forward purchase contract agent will:
. cancel the Equity Units;
. transfer to you the underlying pledged senior notes; and
. deliver to you the Stripped Units.
Any senior notes released to you will be tradable separately from the
resulting Stripped Units. Interest on the senior notes will continue to be
payable in accordance with their terms.
Recreating Equity Units
Each holder of Stripped Units may recreate Equity Units by substituting, as
pledged securities, senior notes then constituting a part of the Equity Units
for the treasury securities underlying the Stripped Units. Holders may recreate
Equity Units at any time on or before the tenth business day before the stock
purchase date, unless a successful remarketing or a tax event redemption has
occurred; provided, however, they may not recreate Equity Units during the
period from four business days before any remarketing period until the
expiration of three business days after that period.
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Upon recreation of the Equity Units, the senior notes will be pledged with
the collateral agent to secure the holder's obligation to purchase our common
stock under the forward purchase contract, and the treasury securities
underlying the Stripped Units will be released. Because treasury securities are
issued in integral multiples of $1,000, holders of Stripped Units may make the
substitution only in integral multiples of 20 Stripped Units.
To recreate Equity Units from Stripped Units, you must:
. deposit with the collateral agent senior notes having an aggregate
principal amount equal to the aggregate stated amount of your Stripped
Units;
. transfer the Stripped Units to the forward purchase contract agent; and
. deliver a notice to the forward purchase contract agent stating that you
have deposited the senior notes with the collateral agent and are
requesting that the forward purchase contract agent instruct the
collateral agent to release to you the pledged treasury securities
underlying those Stripped Units.
The senior notes will be substituted for the treasury securities underlying
your Stripped Units and will be pledged with the collateral agent to secure
your obligation to purchase our common stock under your forward purchase
contract.
Upon that deposit and the receipt of an instruction from the forward
purchase contract agent, the collateral agent will effect the release to the
forward purchase contract agent of the underlying pledged treasury securities
from the pledge under the pledge agreement free and clear of our security
interest. The forward purchase contract agent will:
. cancel the Stripped Units;
. transfer to you the underlying treasury securities; and
. deliver to you the Equity Units.
Current Payments
If you hold Equity Units, we will pay you quarterly contract adjustment
payments on the forward purchase contracts at the annual rate of 3.50% of the
$50 stated amount through and including the stock purchase date and quarterly
interest payments on the senior notes at the annual rate of 5.75% of the
principal amount of $50 per senior note. After the senior notes are
successfully remarketed or, if not remarketed, after the stock purchase date,
they will pay interest to the holders of such senior notes at the reset rate
from the date of the settlement of the successful remarketing or stock purchase
date until their maturity on August 16, 2007. On the stock purchase date, if
your senior notes were successfully remarketed, you will receive a quarterly
payment from the proceeds of the treasury portfolio at the same annual rate as
was initially paid on the senior notes prior to the remarketing.
If you hold Stripped Units, you will only be entitled to receive quarterly
contract adjustment payments payable by us at the annual rate of 3.50% of the
$50 stated amount through and including the stock purchase date. However, you
will be required for U.S. federal income tax purposes to recognize original
issue discount on the treasury securities on a constant yield basis, regardless
of your method of tax accounting, or acquisition discount on the treasury
securities when it is paid or accrues generally in accordance with your regular
method of tax accounting.
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The contract adjustment payments are subject to deferral by us until the
stock purchase date as described below. If we defer any of these payments, we
will pay or accrue additional payments on the deferred amounts in cash at the
annual rate of 5.75% until paid.
If you hold senior notes separately from the Equity Units, you will only
receive the interest payments on the senior notes. The senior notes, whether
held separately or as part of the Equity Units, will initially pay interest at
the annual rate of 5.75% of the principal amount of $50 per senior note for the
quarterly payments payable on and before the earlier of the settlement date of
a successful remarketing or the stock purchase date. After that date, interest
payments on the senior notes will be made at the reset rate until their
maturity on August 16, 2007. If no successful remarketing occurs before the
stock purchase date, the reset rate will be equal to a market rate of interest
as described under "--Market Rate Reset."
Contract adjustment payments and interest payments on the senior notes
payable for any period will be computed (1) for any full quarterly period on
the basis of a 360-day year of twelve 30-day months and (2) for any period
shorter than a full quarterly period, on the basis of a 30-day month and, for
periods of less than a month, on the basis of the actual number of days elapsed
per 30-day month. Contract adjustment payments and interest on the senior notes
will accrue from June 11, 2002 and will be payable quarterly in arrears on
February 16, May 16, August 16 and November 16 of each year, commencing August
16, 2002. If the forward purchase contracts are settled early, at your option,
or terminated, you will have no right to receive any accrued and deferred
contract adjustment payments.
Our obligations with respect to the senior notes will be unsecured and will
rank equally with all our other unsecured and unsubordinated indebtedness. See
"Description of the Senior Notes" below.
Contract adjustment payments and interest payments on the senior notes will
be payable to the holders of Equity Units as they are registered on the books
and records of the forward purchase contract agent on the record dates. So long
as the Equity Units remain in book-entry only form, the record date will be the
business day before the relevant payment dates. Contract adjustment payments
will be paid through the purchase contract agent, which will hold amounts
received in respect of the contract adjustment payments for the benefit of the
holders of the forward purchase contracts that are a part of such Equity Units.
Subject to any applicable laws and regulations, each payment will be made as
described under "Description of the Senior Notes--Book-Entry System" below. If
the Equity Units do not remain in book-entry only form, the record date will be
the 15th day before the relevant payment date. If any date on which these
payments and distributions are to be made is not a business day, then amounts
payable on that date will be made on the next day that is a business day
without any interest or other payment in respect of the delay, except that, if
the business day is in the next calendar year, payment will be made on the
immediately preceding business day, in each case with the same force and effect
as if made on the scheduled payment date.
Option to Defer Contract Adjustment Payments
We may, at our option and upon prior written notice to the holders of the
Equity Units and Stripped Units and the purchase contract agent, defer the
payment of contract adjustment payments on the purchase contracts forming a
part of the Equity Units and Stripped Units until no later than the stock
purchase date. However, we will pay additional contract adjustment payments on
any deferred installments of contract adjustment payments at the rate of 5.75%
per year (compounded quarterly) until paid. If we have deferred contract
adjustment payments until the stock purchase date, we will pay
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those deferred installments plus accrued interest in cash to holders of Equity
Units and Stripped Units on the stock purchase date. If the purchase contracts
are terminated (upon the occurrence of certain events of bankruptcy, insolvency
or reorganization with respect to us), the right to receive contract adjustment
payments and deferred contract adjustment payments will also terminate. If the
forward purchase contracts are settled early, at your option, or terminated,
you will have no right to receive any accrued and deferred contract adjustment
payments.
In the event we exercise our option to defer the payment of contract
adjustment payments, then until the deferred contract adjustment payments have
been paid, we will not declare or pay dividends on, make distributions with
respect to, or redeem, purchase or acquire, or make a liquidation payment with
respect to, our common stock other than:
. purchases, redemptions or acquisitions of shares of our common stock in
connection with any employment contract, benefit plan or other similar
arrangement with or for the benefit of employees, officers or directors
or a stock purchase or dividend reinvestment plan, or the satisfaction by
us of our obligations pursuant to any contract or security outstanding on
the date of such event;
. as a result of a reclassification of our capital stock or the exchange or
conversion of one class or series of our capital stock for another class
or series of the capital stock;
. the purchase of fractional interests in shares of our common stock
pursuant to the conversion or exchange provisions of the security being
converted or exchanged;
. dividends or distributions in our common stock (or rights to acquire our
common stock), or repurchases, redemptions or acquisitions of our common
stock in connection with the issuance or exchange of common stock (or
securities convertible into or exchangeable for shares of our common
stock); or
. redemptions, exchanges or repurchases of any rights outstanding under a
shareholder rights plan or the declaration or payment thereunder of a
dividend or distribution of or with respect to rights in the future.
Description of the Forward Purchase Contracts
Each forward purchase contract underlying an Equity Unit, unless earlier
terminated, or earlier settled at your option or upon specified mergers and
other transactions described below, will obligate you to purchase, and us to
sell, for $50, on the stock purchase date a number of newly issued shares of
our common stock equal to the settlement rate.
The settlement rate, which is the number of newly issued shares of our
common stock issuable upon settlement of a forward purchase contract on the
stock purchase date, will, subject to adjustment under certain circumstances as
described under "--Anti-dilution Adjustments" below, be as follows:
. If the "applicable market value" of our common stock is equal to or
greater than the threshold appreciation price of $49.08, which is 20%
above the reference price, the settlement rate, which is equal to $50
divided by $49.08, will be 1.0187 shares of our common stock per forward
purchase contract. Accordingly, if the market price for our common stock
increases to an amount that is greater than $49.08 on the settlement
date, the aggregate market value of the shares of our common stock issued
upon settlement of each forward purchase contract,
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assuming that this market value is the same as the applicable market
value of our common stock, will be greater than $50, and if the market
price equals $49.08, the aggregate market value of those shares, assuming
that this market value is the same as the applicable market value of our
common stock, will equal $50.
. If the applicable market value of our common stock is less than $49.08
but greater than $40.90, the settlement rate will be equal to $50 divided
by the applicable market value of our common stock per forward purchase
contract. Accordingly, if the market price for our common stock increases
but that market price is less than $49.08 on the settlement date, the
aggregate market value of the shares of our common stock issued upon
settlement of each forward purchase contract, assuming that this market
value is the same as the applicable market value of our common stock,
will equal $50.
. If the applicable market value of our common stock is less than or equal
to $40.90, the settlement rate, which is equal to $50 divided by $40.90,
will be 1.2225 shares of our common stock per forward purchase contract.
Accordingly, if the market price for our common stock decreases to an
amount that is less than $40.90 on the settlement date, the aggregate
market value of the shares of our common stock issued upon settlement of
each forward purchase contract, assuming that the market value is the
same as the applicable market value of our common stock, will be less
than $50, and if the market price equals $40.90, the aggregate market
value of those shares, assuming that this market value is the same as the
applicable market value of our common stock, will equal $50.
The "applicable market value" of our common stock is the average of the
closing price per share of our common stock on each of the 20 consecutive
trading days ending on the third trading day immediately preceding the stock
purchase date.
For purposes of determining the applicable market value for our common
stock, the closing price of our common stock on any date of determination means
the closing sale price or, if no closing price is reported, the last reported
sale price of our common stock on the NYSE on that date. If our common stock is
not listed for trading on the NYSE on any date, the closing price of our common
stock on any date of determination means the closing sale price as reported in
the composite transactions for the principal U.S. securities exchange on which
our common stock is so listed, or if our common stock is not so listed on a
U.S. national or regional securities exchange, as reported by the Nasdaq stock
market, or, if our common stock is not so reported, the last quoted bid price
for our common stock in the over-the-counter market as reported by the National
Quotation Bureau or similar organization or, if that bid price is not
available, the market value of our common stock on that date as determined by a
nationally recognized independent investment banking firm retained by us for
this purpose.
A trading day is a day on which our common stock (1) is not suspended from
trading on any national or regional securities exchange or association or
over-the-counter market at the close of business and (2) has traded at least
once on the national or regional securities exchange or association or
over-the-counter market that is the primary market for the trading of our
common stock.
Settlement
Settlement of the forward purchase contracts will occur on August 16, 2005,
unless:
. you have settled the forward purchase contracts before the stock purchase
date through the early delivery of cash to the forward purchase contract
agent, in the manner described in "--Early Settlement";
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. we are involved in a merger before the stock purchase date in which at
least 30% of the consideration for our common stock consists of cash or
cash equivalents, and you have settled the forward purchase contracts
through an early settlement as described in "--Early Settlement upon Cash
Merger"; or
. an event described under "--Termination of Forward Purchase Contracts"
below has occurred.
The settlement of the forward purchase contracts on the stock purchase date
will occur as follows:
. for the Equity Units or Stripped Units that include the treasury
portfolio or the pledged treasury securities, the cash payments on the
treasury portfolio or the treasury securities will automatically be
applied to satisfy in full your obligation to purchase our common stock
under the forward purchase contracts; and
. for the Equity Units in which the related senior notes remain a part of
the Equity Units because of a failed remarketing, we will exercise our
rights as a secured party to retain or dispose of the senior notes in
accordance with applicable law in satisfaction of your obligation to
purchase our common stock under the forward purchase contracts.
In any event, our common stock will then be issued and delivered to you or
your designee, upon payment of the applicable consideration, presentation and
surrender of the certificate evidencing the Equity Units, if the Equity Units
are held in certificated form, and payment by you of any transfer or similar
taxes payable in connection with the issuance of our common stock to any person
other than you.
Before the date on which shares of our common stock are issued in settlement
of forward purchase contracts, our common stock underlying the related forward
purchase contracts will not be treated as outstanding for any purpose and you
will have no rights with respect to our common stock, including voting rights,
rights to respond to tender offers and rights to receive any dividends or other
distributions on our common stock, by virtue of holding the forward purchase
contracts.
We will not issue any fractional shares of our common stock under the
forward purchase contracts. In place of fractional shares otherwise issuable,
you will be entitled to receive an amount of cash equal to the fractional
share, calculated on an aggregate basis in respect of the forward purchase
contracts you are settling, multiplied by the applicable market value.
Remarketing
The senior notes held by each holder of Equity Units will be subject to a
remarketing on the third business day before May 16, 2005, the last quarterly
payment date before the stock purchase date, unless the holder elects not to
participate in the remarketing. The proceeds of the remarketing will be used to
purchase the treasury portfolio, which will be pledged to secure the
obligations of the participating holder of Equity Units under the related
forward purchase contract. The remarketing proceeds received on the pledged
treasury portfolio underlying the Equity Units of the holder will be used to
satisfy the participating holder's obligation to purchase our common stock on
the stock purchase date.
If a holder does not deliver treasury securities in a kind and amount
designated by the remarketing agent, as described below, the senior notes that
are included in the Equity Units will be remarketed on the remarketing date.
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We will enter into a remarketing agreement with Salomon Smith Barney Inc.
under which Salomon Smith Barney Inc. will agree, as remarketing agent, to use
its commercially reasonable best efforts to sell the senior notes that are
included in Equity Units and that are participating in the remarketing and the
senior notes that are not included in Equity Units and that are participating
in the remarketing as described below under "--Optional Remarketing of Senior
Notes Which Are Not Included in Equity Units," at a price equal to
approximately, but not less than, 100.25% of the remarketing value.
The "remarketing value" will be equal to the sum of:
(1) the value at the remarketing date of either (a) a portfolio of treasury
securities that will pay, on or before the quarterly payment date falling on
August 16, 2005, an amount of cash equal to the aggregate interest payment that
is scheduled to be payable on the quarterly payment date on the senior notes
that are participating in the remarketing, if the remarketing occurs prior to
the fourth business day immediately preceding the stock purchase date, or (b)
an amount of cash equal to the aggregate interest payment that is scheduled to
be payable on the relevant quarterly payment date on the senior notes that are
participating in the remarketing, if the remarketing occurs on or after the
fourth business day immediately preceding the stock purchase date, assuming for
both (a) and (b), even if not true, that the interest rate on the senior notes
remains at the initial rate; and
(2) the value at the remarketing date of either (a) the amount of treasury
securities that will pay, on or before August 16, 2005, an amount of cash equal
to $50 for each senior note that is participating in the remarketing, if the
remarketing occurs prior to the fourth business day immediately preceding the
stock purchase date, or (b) an amount of cash equal to $50 for each senior note
that is participating in the remarketing, if the remarketing occurs on or after
the fourth business day immediately preceding the stock purchase date.
For purposes of (1) and (2) above, the value on the remarketing date of the
treasury securities will assume that (a) the treasury securities are highly
liquid treasury securities maturing on or within 35 days before August 16,
2005, as determined in good faith by the remarketing agent in a manner intended
to minimize the cash value of the treasury securities, and (b) those treasury
securities are valued based on the ask-side price of the treasury securities at
a time between 9:00 a.m. and 11:00 a.m., New York City time, selected by the
remarketing agent, on the remarketing date, as determined on a third-day
settlement basis by reasonable and customary means selected in good faith by
the remarketing agent, plus accrued interest to that date.
In the event the remarketing occurs prior to the fourth business day
preceding the stock purchase date the remarketing agent will use the proceeds
from the sale of the senior notes in a successful remarketing to purchase, in
the discretion of the remarketing agent, in open market transactions or at
treasury auction, the amount and the types of treasury securities described in
(1) and (2) above, which comprise the treasury portfolio. The remarketing agent
will deliver the treasury portfolio through the forward purchase contract agent
to the collateral agent to secure the obligations under the related forward
purchase contracts of holders of the Equity Units whose senior notes
participated in the remarketing. In the event that a remarketing occurs on or
after the fourth business day prior to the stock purchase date, the proceeds of
the remarketing will not be used to purchase the treasury portfolio, but such
proceeds will be paid in direct settlement of the obligations of the holders of
Equity Units to purchase our common stock. The remarketing agent will deduct an
amount not exceeding 25 basis points (0.25%) of the total proceeds from the
remarketing as a remarketing fee. The remarketing agent will remit the
remaining portion of the proceeds, if any, to the holders of the Equity Units
participating in the remarketing.
Alternatively, a holder of Equity Units may elect not to participate in the
remarketing and retain the senior notes underlying those Equity Units by
delivering the treasury securities described in (1) and (2)
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above, in the amount and types specified by the remarketing agent, to the
forward purchase contract agent on the fourth business day before the
remarketing date. In this case, the interest rate on the holder's note would be
reset to the reset rate, even though the holder did not participate in the
remarketing.
The forward purchase contract agent will give holders notice of remarketing,
including the specific treasury securities and the CUSIP numbers or the
principal terms of the treasury securities, that must be delivered by holders
that elect not to participate in the remarketing, on the seventh business day
before the initial remarketing date or the first day of any subsequent
remarketing period, as applicable. A holder electing not to participate in the
remarketing must notify the forward purchase contract agent of this election
and deliver the specified treasury securities to the forward purchase contract
agent not later than 10:00 a.m. on the fourth business day before the initial
remarketing date or the first day of any subsequent remarketing period, as
applicable. A holder that notifies the forward purchase contract agent of this
election but does not so deliver the treasury securities and a holder that does
not notify the forward purchase contract agent will be treated as if the holder
elected to participate in the remarketing. On the stock purchase date, the
forward purchase contract agent will apply the cash payments received on the
pledged treasury portfolio to pay the purchase price under the forward purchase
contracts.
If the remarketing agent cannot establish a reset rate on the initial
remarketing date that will be sufficient to cause the then current aggregate
market value of the senior notes being remarketed to be equal to approximately,
but not less than, 100.25% of the remarketing value, and the remarketing agent
cannot remarket the senior notes offered for remarketing on the initial
remarketing date at a price equal to approximately, but not less than, 100.25%
of the remarketing value, determined on the basis of the senior notes being
remarketed, the remarketing agent will attempt to establish a reset rate
meeting these requirements on each of the two immediately following business
days. If the remarketing agent cannot establish a reset rate during the initial
remarketing so as to remarket the senior notes offered for remarketing on such
date at a price equal to approximately, but not less than, 100.25% of the
remarketing value, the remarketing agent will attempt to establish a reset rate
meeting these requirements on each of the three business day periods
immediately preceding June 16, 2005, July 16, 2005 and the second business day
preceding the stock purchase date. We refer to each of these three business day
periods as remarketing periods. Any remarketing will be at a price equal to
approximately, but not less than, 100.25% of the remarketing value, determined
on the basis of the senior notes being remarketed, on the subsequent
remarketing date.
If the remarketing agent fails to remarket the senior notes offered for
remarketing at the price specified in the preceding paragraph on or prior to
the third business day immediately preceding the stock purchase date, we will
retain and dispose of the senior notes pledged as collateral of any holder who
has not otherwise settled its forward purchase contract in cash by the close of
business on the seventh business day immediately preceding the stock purchase
date (but without regard to the notice requirements described below under
"--Notice to Settle with Cash"), in satisfaction of the holder's obligations
under the forward purchase contract.
We will cause a notice of the last failed remarketing period to be published
on the fourth business day immediately following that period, by publication in
a daily newspaper of general circulation in the English language in New York
City, which is expected to be The Wall Street Journal. We will also release
this information in respect of any failed remarketing period by means of
Bloomberg and Reuters newswire. In addition, we will request, not later than
seven nor more than 15 calendar days before any remarketing period, that The
Depository Trust Company, which we refer to as DTC, notify its participants
holding senior notes, Equity Units and Stripped Units of the remarketing. Any
notice of
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the failure of any remarketing period and the DTC notification of any
remarketing period will provide the procedures that must be followed if we
exercise our rights to retain or dispose of the senior notes as described above.
Market Rate Reset
If the remarketing is not successful on or prior to the third business day
preceding the stock purchase date, the remarketing agent will cause the
interest rate on the senior notes to be reset according to the following
method, provided that in no event shall the reset rate exceed the maximum rate
permitted by state usury laws and other applicable laws. The remarketing agent
will take the average of the interest rates quoted to it by three nationally
recognized investment banks selected by us, which are underwriters or dealers
in debt securities similar to the senior notes, that in its judgment reflects
an accurate market rate of interest applicable to the senior notes at that
time. Following receipt of these quotes, the remarketing agent will have the
right, in its sole judgment, to either recalculate the average based on only
two of the quoted interest rates if one of the three quotes, in the remarketing
agent's sole discretion, does not reflect market conditions or, alternatively,
determine a consensus among the investment banks rather than a strict
mathematical average by taking into account relevant qualitative and
quantitative factors. These factors may include, but shall not be limited to,
maturity of the senior notes, our credit rating and our credit risk and the
credit rating and credit risk of companies in similar industries, the then
yield to maturity of the senior notes and the state of the market for primary
and secondary sales of similar debt securities.
By approximately 4:30 p.m., New York City time, on the reset date, the
remarketing agent will advise the depositary, the trustee and us of the reset
rate and on the following business day we will cause a notice of the reset rate
to be published in a daily newspaper in the English language of general
circulation in The City of New York, which is expected to be The Wall Street
Journal.
Optional Remarketing of Senior Notes Which Are Not Included in Equity Units
Under the remarketing agreement, on or before the fourth business day
immediately preceding the beginning of a remarketing period, holders of senior
notes that are not included in Equity Units may elect to have their senior
notes included in the remarketing by delivering their senior notes along with a
notice of this election to the collateral agent before the beginning of a
remarketing period, but no earlier than the payment date immediately preceding
the last quarterly payment date before the stock purchase date. The collateral
agent will hold these senior notes in an account separate from the collateral
account in which the securities pledged to secure the holders' obligations
under the forward purchase contracts will be held. Holders of senior notes
electing to have their senior notes remarketed will also have the right to
withdraw that election on or before the fourth business day immediately
preceding the first day of the relevant remarketing period.
On the third business day immediately before the relevant remarketing
period, the collateral agent will deliver these separate senior notes to the
remarketing agent for remarketing. The remarketing agent will use its
commercially reasonable best efforts to remarket the separately held senior
notes included in the remarketing at a price equal to approximately, but not
less than, 100.25% of the remarketing value, determined on the basis of the
separately held senior notes being remarketed. After deducting an amount not
exceeding 25 basis points (0.25%) of the total proceeds from the remarketing as
the remarketing fee, the remarketing agent will remit to the collateral agent
the remaining portion of the proceeds for payment to the participating holders.
If, as described above, the remarketing agent cannot remarket the senior
notes during any remarketing period, the remarketing agent will promptly return
the senior notes to the collateral agent to
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release to the holders. Holders of senior notes that are not components of
Equity Units may elect to have their senior notes remarketed during any
subsequent remarketing period under the procedures described above. In
addition, if the remarketing agent fails to remarket the senior notes on or
prior to the third business day immediately preceding the stock purchase date,
your senior notes will be returned to you and the interest rate on the senior
notes will be reset to the reset rate as described above in "--Market Rate
Reset."
Early Settlement
At any time not later than 10:00 a.m. on the seventh business day before
August 16, 2005, a holder of Equity Units may settle the related forward
purchase contracts by delivering to the forward purchase contract agent
immediately available funds in an amount equal to $50 multiplied by the number
of forward purchase contracts being settled; provided that, at that time, if so
required under the U.S. federal securities laws, a registration statement is in
effect and a current prospectus is available covering the shares of our common
stock to be delivered in respect of the forward purchase contracts being
settled. Holders may settle early only in units of 20 and integral multiples of
20. If a treasury portfolio has replaced the senior notes as a component of the
Equity Units as a result of a successful remarketing or a tax event redemption,
holders may settle early only in integral multiples of $1,000 treasury
securities.
We have agreed that, if required under the U.S. federal securities laws, we
will use commercially reasonable efforts to (1) have in effect a registration
statement covering the shares of our common stock to be delivered in respect of
the forward purchase contracts being settled and (2) provide a prospectus in
connection therewith, in each case in a form that may be used in connection
with the early settlement process.
No later than the third business day after an early settlement, we will
issue, and the holder will be entitled to receive, 1.0187 shares of our common
stock for each Equity Unit, regardless of the market price of our common stock
on the date of early settlement, subject to adjustment under the circumstances
described under "--Anti-dilution Adjustments" below. At that time, the holder's
right to receive future contract adjustment payments will terminate. The holder
will also receive the senior notes or other securities underlying those Equity
Units.
Notice to Settle with Cash
Unless the treasury portfolio has replaced the senior notes as a component
of Equity Units as a result of a successful remarketing of the senior notes or
a tax event redemption, a holder of Equity Units may settle the related forward
purchase contract with cash before 11:00 a.m., New York City time, on the
seventh business day immediately preceding the stock purchase date. A holder of
Equity Units wishing to settle the related forward purchase contract with cash
must notify the forward purchase contract agent by presenting and surrendering
the Equity Units certificate evidencing the Equity Units at the offices of the
forward purchase contract agent with the form of "Notice to Settle by Cash" on
the reverse side of the certificate completed and executed as indicated on or
before 5:00 p.m., New York City time, on the tenth business day immediately
preceding the stock purchase date. If a holder of Equity Units who has given
notice of its intention to settle the related forward purchase contract with
cash fails to deliver the cash to the collateral agent on the seventh business
day immediately preceding the stock purchase date, the holder will be deemed to
have elected to participate in the final remarketing.
Early Settlement upon Cash Merger
Before the stock purchase date, if we are involved in a merger in which at
least 30% of the consideration for our common stock consists of cash or cash
equivalents, which we call a cash merger, then each holder of the Equity Units
and Stripped Units will have the right to accelerate and settle the
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related forward purchase contracts at the settlement rate in effect immediately
before the cash merger. We refer to this right as the merger early settlement
right. We will provide each of the holders with a notice of the completion of a
cash merger within five business days of the completion. The notice will
specify a date, which will not be less than 20 nor more than 30 days after the
date of the notice, on which the optional early settlement will occur and a
date by which each holder's merger early settlement right must be exercised.
The notice will state, among other things, the applicable settlement rate and
the amount of the cash, securities and other consideration receivable by the
holder upon settlement. To exercise the merger early settlement right, you must
deliver to the forward purchase contract agent, on or prior to one business day
before the merger early settlement date, the certificate evidencing your Equity
Units, if the Equity Units are held in certificated form, and payment of the
applicable purchase price in the form of a certified or cashier's check. If you
exercise the merger early settlement right, we will deliver to you on the
merger early settlement date the kind and amount of securities, cash or other
property that you would have been entitled to receive if you had settled the
forward purchase contract immediately before the cash merger at the settlement
rate in effect at that time. You will also receive the senior notes or treasury
securities underlying those Equity Units or Stripped Units. If you do not elect
to exercise your merger early settlement right, your Equity Units or Stripped
Units will remain outstanding and subject to normal settlement on the stock
purchase date.
Holders may settle early only in units of 20 and integral multiples of 20.
If a treasury portfolio has replaced the senior notes as a component of the
Equity Units as a result of a successful remarketing or a tax event redemption,
holders may settle early only in integral multiples of $1,000 treasury
securities.
Anti-dilution Adjustments
The formula for determining the settlement rate and the number of shares of
our common stock to be delivered upon an early settlement may be adjusted if
certain events occur, including:
(1) the payment of a dividend or other distribution in common stock on our
common stock;
(2) the issuance to all holders of our common stock of rights or warrants,
other than any dividend reinvestment or share purchase or similar plans,
entitling them to subscribe for or purchase our common stock at less than the
current market price, as defined below;
(3) subdivisions, splits and combinations of our common stock;
(4) distributions to all holders of our common stock of evidences of our
indebtedness, shares of capital stock, securities, cash or other assets,
excluding (a) any dividend or distribution covered by clause (1) or (2) above
and (b) any dividend or distribution paid exclusively in cash;
(5) distributions consisting exclusively of cash to all holders of our
common stock in an aggregate amount that, when combined with (a) other all-cash
distributions made within the preceding 12 months and (b) the cash and the fair
market value, as of the date of expiration of the tender or exchange offer
referred to below, of the consideration paid in respect of any tender or
exchange offer by us or a subsidiary of ours for our common stock concluded
within the preceding 12 months, exceeds 15% of the product of the current
market price of our common stock multiplied by the number of shares of common
stock then outstanding on the date fixed for the determination of stockholders
entitled to receive the distribution; and
(6) the successful completion of a tender or exchange offer made by us or
any subsidiary of ours for our common stock that involves an aggregate
consideration that, when combined with (a) any cash and the fair market value
of other consideration payable in respect of any other tender or exchange offer
by us or a subsidiary of ours for our common stock concluded within the
preceding 12 months and (b) the aggregate amount of any all-cash distributions
to all holders of our common stock made within the preceding 12 months, exceeds
15% of the product of the current market price of our
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common stock multiplied by the number of shares of common stock then
outstanding on the date of expiration of the tender or exchange offer.
The "current market price" per share of our common stock on any day means
the average of the daily closing prices for the five consecutive trading days
preceding the earlier of the day preceding the day in question and the day
before the "ex date" with respect to the issuance or distribution requiring the
computation. The term "ex date," when used with respect to any issuance or
distribution, means the first date on which our common stock trades without the
right to receive the issuance or distribution.
In the case of reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions that cause our common stock to be
converted into the right to receive other securities, cash or property, each
forward purchase contract then outstanding would, without the consent of the
holders of Equity Units, become a contract to purchase those other securities,
cash or property instead of our common stock. In this case the settlement rate
will be determined based upon the value of the portfolio of other securities,
cash or property into which one share of our common stock was converted. The
value of the portfolio is to be calculated based upon the 20-day average
closing price ending the third trading day before the stock purchase date. On
the stock purchase date the settlement rate will be applied to that portfolio
of other securities, cash or property. Holders have the right to settle their
obligations under the forward purchase contracts early in the event of certain
cash mergers as described above under "--Early Settlement upon Cash Merger."
If at any time we make a distribution of property to our common stockholders
that would be taxable to the stockholders as a dividend for U.S. federal income
tax purposes--that is, distributions, evidences of indebtedness or assets, but
generally not stock dividends or rights to subscribe for capital stock -- and,
under the settlement rate adjustment provisions of the forward purchase
contract agreement, the settlement rate is increased, that increase may be
deemed to be the receipt of taxable income to holders of Equity Units. See
"United States Federal Income Tax Consequences--Forward Purchase
Contracts--Adjustment to Settlement Rate" for more information about these
matters.
In the case of the payment of a dividend or other distribution on our common
stock of shares of capital stock of any class or series, or similar equity
interests, of or relating to a subsidiary or other business unit, which we
refer to as a spin-off, the settlement rate in effect immediately before the
close of business on the record date fixed for determination of stockholders
entitled to receive that distribution will be increased by multiplying:
. the settlement rate by
. a fraction, the numerator of which is the current market price of our
common stock plus the fair market value, determined as described below,
of the portion of those shares of capital stock or similar equity
interests so distributed applicable to one share of our common stock and
the denominator of which is the current market price of our common stock.
The adjustment to the settlement rate under the preceding paragraph will
occur at the earlier of:
. the tenth trading day following the effective date of the spin-off; and
. the date of the securities being offered in the initial public offering
of the spin-off, if that initial public offering is effected
simultaneously with the spin-off.
For purposes of this section, "initial public offering" means the first time
securities of the same class or type as the securities being distributed in the
spin-off are bona fide offered to the public for cash.
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In the event of a spin-off that is not effected simultaneously with an
initial public offering of the securities being distributed in the spin-off,
the fair market value of the securities to be distributed to holders of our
common stock means the average of the sale prices of those securities over the
first 10 trading days after the effective date of the spin-off. Also, for
purposes of a spin-off of this kind, the current market price of our common
stock means the average of the sales prices of our common stock over the first
10 trading days after the effective date of the spin-off.
If, however, an initial public offering of the securities being distributed
in the spin-off is to be effected simultaneously with the spin-off, the fair
market value of the securities being distributed in the spin-off means the
initial public offering price, while the current market price of our common
stock means the sale price of our common stock on the trading day on which the
initial public offering price of the securities being distributed in the
spin-off is determined.
In addition, we may increase the settlement rate if our board of directors
deems it advisable to avoid or diminish any income tax to holders of our common
stock resulting from any dividend or distribution of shares or rights to
acquire shares or from any event treated as a dividend or distribution for
income tax purposes or for any other reasons.
Adjustments to the settlement rate will be calculated to the nearest
1/10,000th of a share. No adjustment in the settlement rate will be required
unless the adjustment would require an increase or decrease of at least one
percent in the settlement rate. If any adjustment is not required to be made
because it would not change the settlement rate by at least one percent, then
the adjustment will be carried forward and taken into account in any subsequent
adjustment.
We will be required, as soon as practicable following the occurrence of an
event that requires or permits an adjustment in the settlement rate, to provide
written notice to the holders of Equity Units of the occurrence of that event.
We will also be required to deliver a statement describing in reasonable detail
the method by which the adjustment to the settlement rate was determined and
stating the revised settlement rate.
Each adjustment to the settlement rate will result in a corresponding
adjustment to the number of shares of our common stock issuable upon early
settlement of a forward purchase contract.
Pledged Securities and Pledge Agreement
The senior notes or treasury portfolio underlying the Equity Units will be
pledged to the collateral agent for our benefit. Under the pledge agreement,
the pledged securities will secure the obligations of holders of Equity Units
to purchase our common stock under the forward purchase contract. A holder of
Equity Units cannot separate or separately transfer the forward purchase
contract from the pledged securities underlying the Equity Units. Your rights
to the pledged securities will be subject to our security interest created by
the pledge agreement. You will not be permitted to withdraw the pledged
securities related to the Equity Units from the pledge arrangement except:
. to substitute specified treasury securities for the related pledged
senior notes upon creation of a Stripped Unit;
. to substitute senior notes for the related pledged treasury securities
upon the recreation of an Equity Unit;
. upon delivering specified treasury securities when electing not to
participate in a remarketing; or
. upon the termination, early settlement or cash settlement of the forward
purchase contracts.
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Subject to our security interest and the terms of the forward purchase
contract agreement and the pledge agreement:
. each holder of Equity Units that include senior notes will retain
ownership of the senior notes and will be entitled through the forward
purchase contract agent and the collateral agent to all of the rights of
a holder of the senior notes, including interest payments, voting,
redemption and repayment rights; and
. each holder of Equity Units that include the treasury portfolio will
retain ownership of the treasury portfolio.
We will have no interest in the pledged securities other than our security
interest.
Quarterly Payments on Pledged Securities
The collateral agent, upon receipt of quarterly interest payments on the
pledged securities underlying the Equity Units, will distribute those payments
to the forward purchase contract agent, which will, in turn, distribute that
amount to persons who were the holders of Equity Units on the record date for
the payment. As long as the Equity Units remain in book-entry only form, the
record date for any payment will be one business day before the payment date.
Termination of Forward Purchase Contracts
The forward purchase contracts, our related rights and obligations and those
of the holders of the Equity Units, including their rights to receive contract
adjustment payments or deferred contract adjustment payments and obligations to
purchase our common stock, will automatically terminate upon the occurrence of
particular events of our bankruptcy, insolvency or reorganization.
Upon a termination of the forward purchase contracts of this kind, the
collateral agent will release the securities held by it to the forward purchase
contract agent for distribution to the holders. If a holder would otherwise
have been entitled to receive less than $1,000 principal amount at maturity of
any treasury security upon termination of the forward purchase contract, the
forward purchase contract agent will dispose of the security for cash and pay
the cash to the holder. Upon termination, however, the release and distribution
may be subject to a delay. If we become the subject of a case under the U.S.
bankruptcy code, a delay in the release of the pledged senior notes or treasury
securities may occur as a result of the automatic stay under the U.S.
bankruptcy code and continue until the automatic stay has been lifted. The
automatic stay will not be lifted until the bankruptcy judge agrees to lift it
and return your collateral to you. In addition, it is possible that at the
conclusion of such a bankruptcy case, the claim represented by the senior notes
will receive substantially less than the face amount of such claim or indeed
receive no recovery at all.
The Forward Purchase Contract Agreement
Distributions on the Equity Units will be payable, forward purchase
contracts will be settled and transfers of the Equity Units will be
registerable at the office of the forward purchase contract agent in the
Borough of Manhattan, The City of New York. In addition, if the Equity Units do
not remain in book-entry form, payment of distributions on the Equity Units may
be made, at our option, by check mailed to the address of the persons shown on
the Equity Units register.
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If any quarterly payment date or the stock purchase date is not a business
day, then any payment required to be made on that date must be made on the next
business day and so long as the payment is made on the next business day,
without any interest or other payment on account of this delay, except that if
the next business day is in the next calendar year, the payment or settlement
will be made on the prior business day with the same force and effect as if
made on the payment date. A "business day" means any day other than Saturday,
Sunday or any other day on which banking institutions and trust companies in
the State of New York or at a place of payment are authorized or required by
law, regulation or executive order to be closed.
If your Equity Units are held in certificated form and you fail to surrender
the certificate evidencing your Equity Units to the forward purchase contract
agent on the stock purchase date, the shares of our common stock issuable in
settlement of the related forward purchase contracts will be registered in the
name of the forward purchase contract agent. These shares, together with any
distributions on them, will be held by the forward purchase contract agent as
agent for your benefit, until the certificate is presented and surrendered or
you provide satisfactory evidence that the certificate has been destroyed, lost
or stolen, together with any indemnity that may be required by the forward
purchase contract agent and us.
If your Equity Units are held in certificated form and (1) the forward
purchase contracts have terminated before the stock purchase date, (2) the
related pledged securities have been transferred to the forward purchase
contract agent for distribution to the holders and (3) you fail to surrender
the certificate evidencing your Equity Units to the forward purchase contract
agent, the pledged securities that would otherwise be delivered to you and any
related payments will be held by the forward purchase contract agent as agent
for your benefit, until you present and surrender the certificate or provide
the evidence and indemnity described above.
The forward purchase contract agent will not be required to invest or to pay
interest on any amounts held by it before distribution.
No service charge will be made for any registration of transfer or exchange
of the Equity Units, except for any applicable tax or other governmental charge.
Modification
The forward purchase contract agreement, the pledge agreement and the
forward purchase contracts may be amended with the consent of the holders of a
majority of the forward purchase contracts at the time outstanding. However, no
modification may, without the consent of the holder of each outstanding Equity
Unit affected by the modification (in addition to the consent of the holders of
a majority of the Equity Units at the time outstanding):
. change any payment date;
. change the amount or type of pledged securities required to be pledged to
secure obligations under the forward purchase contracts unless not
adverse to the holders;
. impair the right of the holder of any forward purchase contract to
receive distributions on the pledged securities underlying the forward
purchase contract or otherwise adversely affect the holder's rights in or
to the pledged securities;
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. reduce any contract adjustment payment or change the place or currency of
that payment;
. impair the right to institute suit for the enforcement of any forward
purchase contract;
. reduce the number of shares of our common stock purchasable under any
forward purchase contract, increase the price to purchase shares of our
common stock on settlement of any forward purchase contract, change the
stock purchase date or otherwise adversely affect the holder's rights
under any forward purchase contract; or
. reduce the above stated percentage of outstanding forward purchase
contracts the consent of whose holders is required for the modification
or amendment of the provisions of the forward purchase contract
agreement, the pledge agreement or the forward purchase contracts.
Consolidation, Merger, Sale or Conveyance
The forward purchase contract agreement generally permits us to consolidate
with or merge into another company. It also permits us to sell substantially
all our assets to another company. However, we may not take any of these
actions unless the following conditions are met:
. If we merge out of existence or sell our assets, the other company may
not be organized under a foreign country's laws. In other words, the
other company must be a corporation, partnership, limited liability
company or trust organized under U.S. state or federal law or the laws of
the District of Columbia. In addition, the other company must agree to be
legally responsible for our obligations under the forward purchase
contract agreement, the pledge agreement, the remarketing agreement and
the forward purchase contracts; and
. The merger, sale of assets or other transaction must not cause a default
under the forward purchase contract agreement, the pledge agreement, the
remarketing agreement or the forward purchase contracts.
If we merge out of existence or sell substantially all our assets, the
surviving or acquiring entity will be substituted for us in the forward
purchase contract agreement with the same effect as if it had been an original
party to that agreement. After a merger or sale of substantially all our
assets, the surviving or acquiring entity may exercise our rights and powers
under the forward purchase contract agreement, and we will be released from all
its liabilities and obligations under the forward purchase contract agreement
and the Equity Units.
Title
We, the forward purchase contract agent and the collateral agent may treat
the registered holder of any Equity Units as the absolute owner of those Equity
Units for the purpose of making payment and settling the related forward
purchase contracts and for all other purposes.
Governing Law
The forward purchase contract agreement, the pledge agreement, the
remarketing agreement and the forward purchase contracts will be governed by,
and construed in accordance with, the laws of the State of New York.
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Book-Entry System
DTC will act as securities depositary for the Equity Units. The Equity Units
will be issued only as fully-registered securities registered in the name of
Cede & Co., DTC's nominee. One or more fully-registered global security
certificates, representing the total aggregate number of Equity Units, will be
issued and deposited with DTC and will bear a legend regarding the restrictions
on exchanges and registration of transfer referred to below.
The laws of some jurisdictions require that some purchasers of securities
take physical delivery of securities in definitive form. Those laws may impair
the ability to transfer beneficial interests in the Equity Units so long as the
Equity Units are represented by global security certificates.
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 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 deposit with DTC. DTC also
facilitates the settlement among participants of securities transactions,
including transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participants' accounts, thus eliminating the
need for physical movement of securities certificates. Direct participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. DTC is owned by a number of its
direct participants and by the NYSE, the American Stock Exchange, Inc., and the
National Association of Securities Dealers, Inc., collectively referred to as
participants. Access to the DTC system is also available to others,
collectively referred to as indirect participants, including securities brokers
and dealers, banks and trust companies that clear transactions through or
maintain a direct or indirect custodial relationship with a direct participant
either directly or indirectly. The rules applicable to DTC and its participants
are on file with the SEC.
No Equity Units represented by global security certificates may be exchanged
in whole or in part for certificated Equity Units registered, and no transfer
of global security certificates will be made in whole or in part for
certificated Equity Units registered, and no transfer of global security
certificates in whole or part may be registered, in the name of any person
other than DTC or any nominee of DTC, unless DTC has notified us that it is
unwilling or unable to continue as depositary for the global security
certificates and no successor depositary has been appointed within 90 days
after this notice, DTC has ceased to be qualified to act as required by the
forward purchase contract agreement and no successor depositary has been
appointed within 90 days after we learn that DTC is no longer qualified or we
determine that we will no longer have debt securities represented by global
securities or we will permit any of the global securities certificates to be
exchangeable or there is a continuing default by us in respect of our
obligations under one or more forward purchase contracts, the indenture, the
forward purchase contract agreement, the senior notes, the Equity Units, the
pledge agreement or any other principal agreements or instruments executed in
connection with this offering. All Equity Units represented by one or more
global security certificates or any portion of them will be registered in the
names directed by DTC.
As long as DTC or its nominee is the registered owner of the global security
certificates, DTC or that nominee will be considered the sole owner and holder
of the global security certificates and all Equity Units represented by those
certificates for all purposes under the Equity Units and the forward
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purchase contract agreement. Except in the limited circumstances referred to
above, owners of beneficial interests in global security certificates will not
be entitled to have the global security certificates or the Equity Units
represented by those certificates registered in their names, will not receive
or be entitled to receive physical delivery of Equity Units certificates in
exchange and will not be considered to be owners or holders of the global
security certificates or any Equity Units represented by those certificates for
any purpose under the Equity Units or the forward purchase contract agreement.
All payments on the Equity Units represented by the global security
certificates and all related transfers and deliveries of senior notes, treasury
securities and common stock will be made to DTC or its nominee as their holder.
Ownership of beneficial interests in the global security certificates will
be limited to participants or persons that may hold beneficial interests
through institutions that have accounts with DTC or its nominee. Ownership of
beneficial interests in global security certificates will be shown only on, and
the transfer of those ownership interests will be effected only through,
records maintained by DTC or its nominee with respect to participants'
interests or by the participants with respect to interests of persons held by
the participants on their behalf.
Procedures for settlement of forward purchase contracts on the stock
purchase date or upon early settlement will be governed by arrangements among
DTC, participants and persons that may hold beneficial interests through
participants designed to permit the settlement without the physical movement of
certificates. Payments, transfers, deliveries, exchange and other matters
relating to beneficial interests in global security certificates may be subject
to various policies and procedures adopted by DTC from time to time.
Neither we or any of our agents, nor the forward purchase contract agent or
any of its agents, nor the collateral agent or any of its agents, will have any
responsibility or liability for any aspect of DTC's or any participant's
records relating to, or for payments made on account of, beneficial interests
in global security certificates, or for maintaining, supervising or reviewing
any of DTC's records or any participant's records relating to those beneficial
ownership interests.
The information in this section concerning DTC and its book-entry system has
been obtained from sources that we believe to be reliable, but we do not take
responsibility for its accuracy.
Replacement of Equity Units Certificates
If physical certificates are issued, we will replace any mutilated
certificate at your expense upon surrender of that certificate to the forward
purchase contract agent. We will replace certificates that become destroyed,
lost or stolen at your expense upon delivery to us and the forward purchase
contract agent of satisfactory evidence that the certificate has been
destroyed, lost or stolen, together with any indemnity that may be required by
the forward purchase contract agent and us.
We are not required, however, to issue any certificates representing Equity
Units on or after the stock purchase date or after the forward purchase
contracts have terminated. In place of the delivery of a replacement
certificate following the stock purchase date, the forward purchase contract
agent, upon delivery of the evidence and indemnity described above, will
deliver the shares of our common stock issuable under the forward purchase
contracts included in the Equity Units evidenced by the certificate, or, if the
forward purchase contracts have terminated before the stock purchase date,
transfer the pledged securities related to the Equity Units evidenced by the
certificate.
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Information Concerning the Forward Purchase Contract Agent
The Bank of New York will initially act as forward purchase contract agent.
The forward purchase contract agent will act as the agent and attorney-in-fact
for the holders of Equity Units from time to time. The forward purchase
contract agreement will not obligate the forward purchase contract agent to
exercise any discretionary authority in connection with a default under the
forward purchase contract agreement, the pledge agreement, the forward purchase
contracts or the pledged securities.
The forward purchase contract agreement will contain provisions limiting the
liability of the forward purchase contract agent. The forward purchase contract
agreement will also contain provisions under which the forward purchase
contract agent may resign or be replaced. Resignation or replacement of the
forward purchase contract agent would be effective upon the appointment of a
successor.
The forward purchase contract agent is one of a number of banks with which
we and our subsidiaries maintain ordinary banking and trust relationships.
Information Concerning the Collateral Agent
The Bank of New York will initially act as collateral agent. The collateral
agent will act solely as our agent and will not assume any obligation or
relationship of agency or trust for or with any of the holders of the Equity
Units except for the obligations owed by a pledgee of property to the owner of
the property under the pledge agreement and applicable law.
The pledge agreement will contain provisions limiting the liability of the
collateral agent. The pledge agreement will also contain provisions under which
the collateral agent may resign or be replaced. Resignation or replacement of
the collateral agent would be effective upon the appointment of a successor.
The collateral agent is one of a number of banks with which we and our
subsidiaries maintain ordinary banking and trust relationships.
Fees and Expenses
The forward purchase contract agreement will provide that we will pay all
fees and expenses related to:
. the offering of the Equity Units;
. the retention of the collateral agent;
. the enforcement by the forward purchase contract agent of the rights of
the holders of the Equity Units; and
. stock transfer and similar taxes attributable to the initial issuance and
delivery of our common stock to you upon settlement of the forward
purchase contracts.
Should you elect to create Stripped Units or recreate Equity Units, you will
be responsible for any fees or expenses payable in connection with the
substitution of the applicable pledged securities, as well as any commissions,
fees or other expenses incurred in acquiring the pledged securities to be
substituted. We will not be responsible for any of those fees or expenses.
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DESCRIPTION OF THE SENIOR NOTES
The following description of the particular terms of the senior notes, which
are referred to in the accompanying prospectus as "notes," supplements and, to
the extent it is inconsistent with the description in the accompanying
prospectus, replaces the description of the general terms and provisions of the
notes in the prospectus. The senior notes will be issued under an indenture
dated as of May 1, 2001 between us and The Bank of New York, as trustee, as
supplemented by supplemental indentures and references in this prospectus
supplement to the indenture will mean the indenture as so supplemented. This
summary is qualified in its entirety by reference to the indenture.
The trustee will act as our U.S. paying agent, our authenticating agent and
registrar, and, if and when such notes are issued in definitive form, our U.S.
transfer agent.
Any money that we deposit with the trustee or any paying agent for the
payment of principal, premium, if any, or any interest on the senior notes that
remains unclaimed for two years after the date upon which the principal,
premium, if any, and interest are due and payable, will be repaid to us upon
our request unless otherwise required by mandatory provisions of any applicable
unclaimed property law. After that time, unless otherwise required by mandatory
provisions of any applicable unclaimed property law, the holder of senior notes
will be able to seek any payment to which that holder may be entitled to
collect only from us.
General
The senior notes are being offered in the principal amount of $300,000,000
(or $345,000,000 if the underwriters exercise in full their option to purchase
additional Equity Units). We may, without the consent of the holders of the
senior notes, create and issue additional debt securities under the indenture,
ranking equally with the senior notes.
The senior notes will mature on August 16, 2007. The senior notes will
initially pay interest at the annual rate of 5.75% in arrears on each February
16, May 16, August 16 and November 16, commencing on August 16, 2002, for
quarterly payments due on or before the earlier of the settlement date of a
successful remarketing or the stock purchase date. After that date, they will
pay interest at the reset rate from that date until they mature on August 16,
2007. If the remarketing agent cannot establish a reset rate meeting the
requirements described under "Description of the Equity Units--Remarketing,"
the remarketing agent will not reset the interest rate on the senior notes and
the reset rate will continue to be the initial annual rate of 5.75%, until the
remarketing agent can establish a reset rate meeting those requirements on a
later remarketing date before the stock purchase date. If no successful
remarketing occurs before the stock purchase date, the reset rate will be a
market rate of interest as described above in "Description of the Equity
Units--Market Rate Reset." The senior notes are not redeemable before their
stated maturity except as described below.
The amount of interest payable for any period will be computed (1) for any
full quarterly period on the basis of a 360-day year of twelve 30-day months
and (2) for any period shorter than a full quarterly period, on the basis of a
30-day month and, for periods of less than a month, on the basis of the actual
number of days elapsed per 30-day month. If any date on which interest is
payable on the senior notes is not a business day, the payment of the interest
payable on that date will be made on the next day that is a business day,
without any interest or other payment in respect of the delay, except that, if
the business day is in the next calendar year, then the payment will be made on
the immediately preceding business day, in each case with the same force and
effect as if made on the scheduled payment date.
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The senior notes will be issued in denominations of $50 and integral
multiples of $50.
The senior notes will not have the benefit of a sinking fund -- that is, we
will not deposit money on a regular basis into any separate custodial account
to repay the senior notes.
Payment of the principal and interest on the senior notes will rank equally
with all of our other unsecured and unsubordinated debt. As of March 31, 2002,
there existed approximately $1.25 billion principal amount of indebtedness
issued under the indenture that would have ranked equally with the senior
notes. The indenture does not limit the amount of additional senior
indebtedness that we or any of our subsidiaries may incur. The senior notes
will be our exclusive obligations.
Because we are a holding company, the claims of creditors of our
subsidiaries will have a priority over our equity rights and the rights of our
creditors (including holders of the senior notes) to participate in the assets
of the subsidiary upon the subsidiary's liquidation. As of March 31, 2002, our
subsidiaries had approximately $10.6 billion principal amount of outstanding
long-term debt (including debt due within one year). Since our operations are
conducted through subsidiaries, our cash flow and our consequent ability to
service debt, including our senior notes, are partially dependent upon the
earnings of our subsidiaries and the distribution of those earnings to us or
upon other payments of funds by those subsidiaries to us. The subsidiaries are
separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts due on the senior notes or to make funds
available for payments on the senior notes, whether by dividends or other
payments. In addition, the payment of dividends and the making of advances to
us by our subsidiaries may be subject to statutory, regulatory or contractual
restrictions, are contingent upon the earnings of those subsidiaries, and are
subject to various business considerations.
Any right we have to receive assets of any of our subsidiaries upon their
liquidation or reorganization and the resulting right of the holders of the
senior notes to participate in those assets will be effectively subordinated to
the claims of that subsidiary's creditors, including trade creditors, except to
the extent that we are ourself recognized as a creditor of the subsidiary, in
which case our claims would be subordinated to any security interests in the
assets of the subsidiary and any indebtedness of the subsidiary senior to the
debt held by us.
Remarketing
The senior notes will be remarketed as described under "Description of the
Equity Units--Remarketing."
Optional Remarketing of Senior Notes Which Are Not Included in Equity Units
On or before the fourth business day immediately preceding the first day of
a remarketing period, holders of senior notes that are not components of Equity
Units may elect to have their senior notes remarketed in the same manner as
senior notes that are components of Equity Units by delivering their senior
notes along with a notice of this election to the collateral agent. The
collateral agent will hold the senior notes in an account separate from the
collateral account in which the pledged securities will be held. Holders of
senior notes electing to have their notes remarketed will also have the right
to withdraw the election on or before the fourth business day immediately
preceding the first day of the relevant remarketing period.
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Tax Event Redemption
If a tax event occurs, we may, at our option, redeem the senior notes in
whole, but not in part, at any time at a price, which we refer to as the
redemption price, equal to, for each senior note, the redemption amount
referred to below. Installments of interest on senior notes that are due and
payable on or before a redemption date will be payable to holders of the senior
notes registered as holders at the close of business on the relevant record
dates. If, following the earlier of a successful remarketing of the senior
notes or the stock purchase date, we exercise our option to redeem the senior
notes, the proceeds of the redemption will be payable in cash to the holders of
the senior notes. If the tax event redemption occurs before the earlier of a
successful remarketing of the senior notes or the stock purchase date, the
redemption price for the senior notes forming part of Equity Units at the time
of the tax event redemption will be distributed to the collateral agent, who in
turn will purchase the applicable treasury portfolio described below on behalf
of the holders of Equity Units and remit the remainder of the redemption price,
if any, to the forward purchase contract agent for payment to the holders. The
treasury portfolio will be substituted for corresponding senior notes and will
be pledged to the collateral agent to secure the obligations of the holders of
the Equity Units to purchase shares of our common stock under the forward
purchase contracts.
"Tax event" means the receipt by us of an opinion of nationally recognized
independent tax counsel experienced in matters of this kind, which may be
Simpson Thacher & Bartlett, to the effect that there is more than an
insubstantial risk that interest payable by us on the senior notes would not be
deductible, in whole or in part, by us for United States federal income tax
purposes as a result of (1) any amendment to, change in, or announced proposed
change in, the laws, or any regulations under the laws, of the United States or
any political subdivision or taxing authority of or in the United States
affecting taxation, (2) any amendment to or change in an official
interpretation or application of any laws or regulations of this kind by any
legislative body, court, governmental agency or regulatory authority or (3) any
interpretation or pronouncement that provides for a position with respect to
any laws or regulations that differs from the generally accepted position on
the issue date, which amendment, change, or proposed change is effective or
which interpretation or pronouncement is announced on or after the issue date.
"Redemption amount" means in the case of a tax event redemption occurring
before the earlier of a successful remarketing of the senior notes or the stock
purchase date, for each senior note the product of the principal amount of the
note and a fraction whose numerator is the treasury portfolio purchase price
and whose denominator is the aggregate principal amount of senior notes
outstanding on the tax event redemption date, and in the case of a tax event
redemption date occurring after the earlier of a successful remarketing of the
senior notes or the stock purchase date, the principal amount of the senior
notes plus accrued and unpaid interest, if any.
"Treasury portfolio" means a portfolio of zero-coupon U.S. treasury
securities consisting of principal or interest strips of U.S. treasury
securities that mature on or prior to the stock purchase date in an aggregate
amount equal to the aggregate principal amount of the senior notes outstanding
on the tax event redemption date or the date of a successful remarketing, as
the case may be, and with respect to each scheduled interest payment date on
the senior notes that occurs after the tax event redemption date or the date of
a successful remarketing, as the case may be, and no later than the stock
purchase date interest or principal strips of U.S. treasury securities that
mature on or before that interest payment date in an aggregate amount equal to
the aggregate interest payment that would be due on the aggregate principal
amount of the senior notes outstanding on that date. These treasury securities
are non-callable by us.
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"Treasury portfolio purchase price" means the lowest aggregate price quoted
by a primary U.S. government securities dealer in New York City to the
quotation agent on the third business day immediately preceding the tax event
redemption date for the purchase of the treasury portfolio for settlement on
the tax event redemption date.
"Quotation agent" means J.P. Morgan Securities Inc. or its successor or any
other primary U.S. government securities dealer in New York City selected by us.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each registered holder of senior notes to
be redeemed at its registered address. Unless we default in payment of the
redemption price, on and after the redemption date interest will cease to
accrue on the senior notes. If any senior notes are called for redemption,
neither we nor the trustee will be required to register the transfer of or
exchange the senior notes to be redeemed.
Restrictive Covenants
Limitation upon Liens on Stock of Certain Subsidiaries
For so long as any senior notes remain outstanding, we will not create or
incur or allow any of our subsidiaries to create or incur any pledge or
security interest on any of the capital stock of a public utility subsidiary
held by us or one of our subsidiaries or a significant subsidiary.
For purposes of this covenant, a public utility subsidiary means, at any
particular time, a direct or indirect subsidiary of ours that, as a substantial
part of its business, distributes or transmits electric energy to retail or
wholesale customers at rates or tariffs that are regulated by either a state or
Federal regulatory authority.
For purposes of this covenant, significant subsidiary means, at any
particular time, any direct subsidiary of ours whose consolidated gross assets
or consolidated gross revenues (having regard to our direct beneficial interest
in the shares, or the like, of that subsidiary) represent approximately 25% of
our consolidated gross assets or our consolidated gross revenues.
Limitation upon Mergers, Consolidations and Sale of Assets
Nothing in the indenture or the senior notes prevents us from consolidating
or merging with or into, or selling or otherwise disposing of all or
substantially all of our property to another entity, provided that (1) we agree
to obtain a supplemental indenture pursuant to which the surviving entity or
transferee agrees to assume our obligations relating to all outstanding debt
securities issued under the indenture and (2) the surviving entity or
transferee is organized under the laws of the United States, any state thereof
or the District of Columbia.
Defeasance and Discharge
The defeasance provisions of the indenture described under "Description of
Debt Securities--Legal Defeasance" and "Description of Debt
Securities--Covenant Defeasance" in the accompanying prospectus will not apply
to the senior notes.
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Same-day Settlement and Payment
Settlement by purchasers of the senior notes will be made in immediately
available funds. All payments by us to the depositary of principal and interest
will be made in immediately available funds. So long as any senior notes are
represented by global securities registered in the name of the depositary or
its nominee, those senior notes will trade in the depositary's Same-Day Funds
Settlement System and secondary market trading in those senior notes will
therefore be required by the depositary to settle in immediately available
funds. No assurance can be given as to the effect, if any, of settlement in
immediately available funds on trading activity in senior notes.
Book-Entry and Settlement
Senior notes that are released from the pledge following substitution or
early settlement will be issued in the form of one or more global certificates,
which we refer to as global securities, registered in the name of DTC or its
nominee. Except as provided below, owners of beneficial interests in a global
security will not be entitled to receive physical delivery of notes in
certificated form and will not be considered the holders of the senior notes
for any purpose under the indenture, and no global security representing notes
will be exchangeable, except for another global security of the same
denomination and tenor to be registered in the name of DTC or its nominee or a
successor depositary or its nominee. Accordingly, each beneficial owner must
rely on the procedures of DTC and if the beneficial owner is not a participant,
on the procedures of the participant through which the beneficial owner owns
its interest to exercise any rights of a holder under the indenture.
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of the securities in certificated form. These
laws may impair the ability to transfer beneficial interests in a global
security.
Certificates for the senior notes will be printed and delivered in exchange
for beneficial interests in the global securities if:
. DTC notifies us that it is unwilling or unable to continue as a
depositary for the global security certificates and no successor
depositary has been appointed within 90 days after this notice, or
. DTC at any time ceases to be a clearing agency registered under the
Securities Exchange Act and no successor depositary has been appointed
within 90 days after we learn that DTC has ceased to be so registered, or
. we determine in our sole discretion that we will no longer have senior
debt securities represented by global securities or will permit any of
the global security certificates to be exchangeable or an event of
default under the indenture has occurred and is continuing.
Any global note that is exchangeable as described in the preceding sentence
will be exchangeable for note certificates registered in the names directed by
DTC. We expect that these instructions will be based upon directions received
by DTC from its participants with respect to ownership of beneficial interests
in the global security certificates.
Trustee
The Bank of New York will serve as the indenture trustee with respect to the
senior notes. The trustee is one of a number of banks with which we and our
subsidiaries maintain ordinary banking and trust relationships.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the material United States federal income
tax consequences, as of the date of this prospectus supplement, of the
purchase, ownership and disposition of Equity Units, Stripped Units, senior
notes, and our common stock acquired under the forward purchase contracts.
Except where otherwise stated, this summary deals only with Equity Units,
Stripped Units, senior notes, and our common stock held as a capital asset by a
holder who:
. is a United States person (as defined below); and
. purchases the Equity Units upon original issuance at their original issue
price.
A "United States person" is a holder who is, for U.S. federal income tax
purposes, one of the following:
. a citizen or resident of the United States;
. a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision of the
United States;
. an estate the income of which is subject to United States federal income
taxation regardless of its source; or
. a trust if it (1) 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 (2) has a
valid election in effect under applicable United States Treasury
regulations to be treated as a United States person.
Your tax treatment may vary depending on your particular situation. This
summary does not address all of the tax consequences that may be relevant to
holders that are subject to special tax treatment, such as:
. dealers in securities or currencies;
. financial institutions;
. tax-exempt investors;
. traders in securities that elect to use a mark-to-market method of
accounting for their securities holdings;
. persons liable for alternative minimum tax;
. insurance companies;
. real estate investment trusts;
. regulated investment companies;
. persons holding Equity Units, Stripped Units, senior notes, or our common
stock as part of a hedging, conversion, integrated or constructive sale
transaction or a straddle; or
. U.S. persons whose functional currency is not the United States dollar.
In addition, if a partnership holds Equity Units, Stripped Units, senior notes
or our common stock, 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 the above instruments, you should consult your
tax advisors.
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This summary is based on the Internal Revenue Code of 1986, as amended
(which we refer to as the "Code"), the Treasury regulations promulgated under
the Code and administrative and judicial interpretations as of the date of this
prospectus supplement. These income tax laws, regulations and interpretations,
however, may change at any time. Any change could be retroactive to the
issuance date of the Equity Units.
No statutory, administrative or judicial authority directly addresses the
treatment of Equity Units or instruments similar to Equity Units for United
States federal income tax purposes. As a result, we cannot assure you that the
Internal Revenue Service or the courts will agree with the tax consequences
described herein. A different treatment from that assumed below could adversely
affect the amount, timing and character of income, gain or loss in respect of
an investment in the Equity Units. You should consult your own tax advisor
regarding the tax consequences to you of the purchase, ownership and
disposition of Equity Units, Stripped Units, senior notes and our common stock,
including the tax consequences under state, local, foreign and other tax laws.
Equity Units
Allocation of Purchase Price
Your acquisition will be treated as an acquisition of the senior note and
the forward purchase contract constituting the Equity Units and, by purchasing
Equity Units, you will be deemed to have agreed to such treatment. The
remainder of this discussion assumes that the acquisition of Equity Units will
be treated as an acquisition of a senior note and forward purchase contract.
The purchase price of each Equity Unit will be allocated between the senior
note and the forward purchase contract in proportion to their respective fair
market values at the time of purchase. Such allocation will establish your
initial tax basis in the senior note and the forward purchase contract. We will
report the initial fair market value of each senior note as $50 and the initial
fair market value of each forward purchase contract as $0, and by purchasing
Equity Units, you will be deemed to agree to such allocation. The remainder of
this discussion assumes that this allocation of the purchase price will be
respected.
Senior Notes
Accrual of Interest
Because of the manner in which the interest rate on the senior notes is
reset, the senior notes will be classified as contingent payment debt
obligations under the Treasury regulations. Under the indenture governing the
senior notes, we and each holder of the senior notes agree, for U.S. federal
income tax purposes, to treat the senior notes as indebtedness that is subject
to the regulations governing contingent payment debt obligations in the manner
described below. As discussed more fully below, the effect of these Treasury
regulations will be to:
. require you, regardless of your usual method of tax accounting, to use
the accrual method with respect to the senior notes;
. possibly result in the accrual of original issue discount by you in
excess of stated interest payments actually received by you; and
. generally result in ordinary rather than capital treatment of any gain,
and to some extent loss, on the sale, exchange, or other disposition of
the senior notes.
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Under the contingent payment debt rules, you will be required to include
original issue discount in income each year, regardless of your usual method of
tax accounting, based on the comparable yield of the senior notes. Actual cash
payments of interest on the senior notes will not be reported separately as
taxable income. In order to determine your income, these rules require us to
determine, as of the issue date, the comparable yield for the senior notes. The
comparable yield of the senior notes will generally be the rate at which we
would issue a fixed rate debt instrument with terms and conditions similar to
the senior notes.
We are required to provide the comparable yield to you and, solely for tax
purposes, are also required to provide a projected payment schedule that
includes the actual interest payments on the senior notes and estimates the
amount and timing of contingent payments on the senior notes. We have
determined that the comparable yield is an annual rate of 6.70%, compounded
quarterly. Based on the comparable yield, the projected payment schedule per
senior note is $0.52 for the period ending on August 16, 2002, $0.72 for each
subsequent quarter ending on or prior to the remarketing date and $1.02 for
each quarter ending after the remarketing date (which does not include the
payment of principal at maturity). By acceptance of a beneficial interest in
the senior notes you will be deemed to have agreed in the indenture, for U.S.
federal income tax purposes, to be bound by our determination of the comparable
yield and projected payment schedule. For U.S. federal income tax purposes, you
must use the comparable yield determined by us and the projected payments set
forth in the projected payment schedule above in determining your interest
accruals, and the adjustments thereto, in respect of the senior notes.
The comparable yield and the projected schedule are not provided for any
purpose other than the determination of your interest accruals thereof in
respect of the senior notes and do not constitute a representation regarding
the actual amount of any payment on a senior note.
The amount of original issue discount on a senior note for each accrual
period is determined by multiplying the comparable yield of the senior note,
adjusted for the length of the accrual period, by the senior note's adjusted
issue price at the beginning of the accrual period, determined in accordance
with the rules set forth in the contingent payment debt regulations. The
adjusted issue price of each senior note at the beginning of each accrual
period will equal $50, increased by any original issue discount previously
accrued on the senior note and decreased by the amount of any fixed payments
and projected amount of any contingent payments previously made on the senior
note during the period you held the senior note. The amount of original issue
discount so determined is then allocated on a ratable basis to each day in the
accrual period. We are required to provide information returns stating the
amount of original issue discount accrued on senior notes held of record by
persons other than corporations and other exempt owners.
If after the remarketing date, the remaining amounts of interest payable on
the senior notes differ from the payments set forth on the foregoing projected
payment schedule, negative or positive adjustments reflecting such differences
should be taken into account by you as adjustments to interest income in a
reasonable manner over the period to which they relate.
Stripped Units
Substitution of Treasury Security to Create Stripped Units
If you deliver a treasury security to the collateral agent in substitution
for the senior note, you generally will not recognize gain or loss upon the
delivery of the treasury security or the release of the senior note. You will
continue to take into account items of income or deduction otherwise includible
or deductible, respectively, with respect to the senior note and treasury
security, and your tax basis in the senior note, treasury security and the
forward purchase contract will not be affected by the delivery and release.
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Ownership of Treasury Securities
By acquiring Stripped Units, you agree to treat yourself as the owner of the
treasury security that is a part of the Stripped Units beneficially owned by
you. We also agree to treat you as the owner of the treasury security. Your
initial tax basis in the treasury security that is a part of the Stripped Units
will be equal to the amount paid for the treasury security. Your adjusted tax
basis in the treasury security will be increased by the amount of any original
issue discount included in income with respect thereto.
Interest Income and Original Issue Discount
A holder of Stripped Units will be required to treat its pro rata portion of
the treasury security as a bond that was originally issued on the date acquired
by such holder and that has original issue discount equal to the holder's pro
rata portion of the excess of the amount payable on such treasury security over
the value of the treasury security at the time the holder acquires it. A holder
whether on the cash or accrual method of tax accounting will be required to
include original issue discount (other than original issue discount on a
short-term U.S. treasury security, as defined below) in income for United
States federal income tax purposes as it accrues on a constant yield to
maturity basis. Consequently, a portion of each scheduled payment to holders
will be treated as a return of such holder's investment in the treasury
security and will not be considered current income for United States federal
income tax purposes.
In the case of any treasury security with a maturity of one year or less
from the date of its issue (a "short-term U.S. treasury security"), in general
only accrual basis taxpayers will be required to include original issue
discount in income as it accrues. Unless you are an accrual basis holder who
elects to accrue the original issue discount on a short-term U.S. treasury
security on a constant yield to maturity basis, you will accrue such original
issue discount on a straight-line basis.
Substitution of Senior Notes to Recreate Equity Units
If you deliver senior notes to the collateral agent to recreate Equity
Units, you generally will not recognize gain or loss upon the delivery of the
senior notes or the release of the treasury security. You will continue to take
into account items of income or deduction otherwise includible or deductible,
respectively, with respect to the treasury security and the senior notes, and
your tax basis in the senior notes, the treasury security and the forward
purchase contract will not be affected by the delivery and release.
Forward Purchase Contracts
Contract Adjustment Payments
There is no direct authority addressing the treatment of the contract
adjustment payments under current law, and their treatment is unclear. Contract
adjustment payments may constitute taxable income to you when received or
accrued, in accordance with your method of tax accounting. To the extent we are
required to file information returns with respect to contract adjustment
payments, we intend to report such payments as taxable income to you. You
should consult your own tax advisor concerning the treatment of contract
adjustment payments. The treatment of contract adjustment payments could affect
your tax basis in a forward purchase contract or our common stock received
under a forward purchase contract or your amount realized upon the sale or
disposition of an Equity Unit or a Stripped Unit or the termination of a
forward purchase contract. See "--Acquisition of Common Stock Under a Forward
Purchase Contract," "--Sale or Disposition of Equity Units or Stripped Units"
and "--Termination of Forward Purchase Contract."
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Acquisition of Common Stock Under a Forward Purchase Contract
You generally will not recognize gain or loss on the purchase of our common
stock under a forward purchase contract, except with respect to any cash paid
in lieu of a fractional share of common stock. Subject to the following
discussion, your aggregate initial tax basis in the common stock received under
a purchase contract generally should equal (a) the purchase price paid for such
common stock, plus (b) your tax basis in the forward purchase contract, if any,
less (c) the portion of such purchase price and tax basis allocable to the
fractional share. The holding period for common stock received under a forward
purchase contract will commence on the day the common stock is acquired.
Early Settlement of Forward Purchase Contract
You will not recognize gain or loss on the receipt of your proportionate
share of the senior notes or treasury security upon early settlement of a
forward purchase contract, and you will have the same tax basis in such senior
notes or treasury security, as the case may be, as before such early settlement.
Termination of Forward Purchase Contract
If a forward purchase contract terminates, you will recognize capital gain
or loss equal to the difference between your amount realized, if any, upon such
termination and your adjusted tax basis, if any, in the forward purchase
contract at the time of such termination. Contract adjustment payments, if any,
received by you, but not includible in income, should either reduce your basis
in the forward purchase contract or result in an amount realized on the
termination of the forward purchase contract. See "--Contract Adjustment
Payments." Capital gains of individuals derived in respect of capital assets
held for more than one year are subject to tax at preferential rates. The
deductibility of capital losses is subject to limitations.
You will not recognize gain or loss on the receipt of your proportionate
share of the senior notes or treasury security upon termination of the forward
purchase contract and you will have the same tax basis in such senior notes or
treasury security, as the case may be, as before such termination. If the
termination of the forward purchase contract occurs when the forward purchase
contract has a negative value, see " --Sale or Disposition of Equity Units or
Stripped Units." You should consult your own tax advisor regarding the
termination of the forward purchase contract when the forward purchase contract
has a negative value.
Adjustment to Settlement Rate
You might be treated as receiving a constructive distribution from us if (i)
the settlement rate is adjusted and as a result of such adjustment your
proportionate interest in our assets or earnings and profits is increased and
(ii) the adjustment is not made pursuant to a bona fide, reasonable
anti-dilution formula. An adjustment in the settlement rate would not be
considered made pursuant to such a formula if the adjustment were made to
compensate you for certain taxable distributions with respect to our common
stock. Thus under certain circumstances, an increase in the settlement rate
might give rise to a taxable dividend to you even though you would not receive
any cash related thereto. In addition, in certain situations, you might be
treated as receiving a constructive distribution if we fail to adjust the
settlement rate.
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Sale or Disposition of Equity Units or Stripped Units
Upon a disposition of Equity Units or Stripped Units, you will be treated as
having sold, exchanged or disposed of the forward purchase contract and the
senior note or treasury security, as the case may be, that constitute such
Equity Units or Stripped Units. You generally will have gain or loss equal to
the difference between the portion of your proceeds allocable to the forward
purchase contract and the senior note or treasury security, as the case may be,
and your respective adjusted tax bases in the forward purchase contract and the
senior note or treasury security. For purposes of determining gain or loss,
your proceeds will not include an amount equal to accrued and unpaid interest
on the treasury security not previously included in income, which amount will
be treated as ordinary interest income. Further, to the extent you are treated
as having received an amount with respect to accrued contract adjustment
payments, such amounts may be treated as ordinary income to the extent not
previously included in income. Alternatively, contract adjustment payments that
you did not previously include in income could either reduce your tax basis in
the forward purchase contract or result in an increase of the amount realized
on the disposition of the forward purchase contract. See "--Contract Adjustment
Payments."
In the case of the forward purchase contracts and the treasury security,
such gain or loss generally will be capital gain or loss. Capital gains of
individuals derived in respect of capital assets held for more than one year
are subject to tax at preferential rates. The deductibility of capital losses
is subject to limitations. If the disposition of Equity Units or Stripped Units
occurs when the forward purchase contract has a negative value, you should be
considered to have received additional consideration for the senior note or
treasury security in an amount equal to such negative value, and to have paid
such amount to be released from your obligation under the forward purchase
contract. You should consult your tax advisor regarding a disposition of Equity
Units or Stripped Units at a time when the forward purchase contract has a
negative value.
Gain or loss on the sale, exchange or other disposition of a senior note
prior to the date six months after the interest rate on the senior note is
reset generally will be treated as ordinary income or loss. Gain or loss on the
sale, exchange or other disposition of a senior note that occurs during the six
month period following the date the interest rate is reset will generally be
treated as ordinary income or loss unless no further payments are due during
the remainder of the six month period. Gain or loss recognized on the sale,
exchange or other disposition of a senior note starting from the earlier of the
date that is six months after the interest rate on the senior notes is reset or
the date when no further payments are due during the six month period after the
interest rate on senior notes is reset will generally be ordinary income or
loss to the extent attributable to the difference, if any, between the present
value of the total remaining principal and interest payments due on the senior
note and the present value of the total remaining payments set forth on the
projected payment schedule for such senior note. The amount of any ordinary
loss may not exceed your prior net interest inclusions (reduced by the total
net negative adjustments previously allowed as an ordinary loss). Any gain or
loss recognized in excess of such amount on such sale, exchange or other
disposition generally will be treated as capital gain or loss. Capital gains of
individuals derived in respect of capital assets held for more than one year
are subject to tax at preferential rates. Because gain or loss on the
disposition of a senior note may be treated as ordinary income or loss,
disposition of Equity Units consisting of a senior note and forward purchase
contract may give rise to capital gain or loss on the forward purchase contract
and ordinary income or loss on the senior note, which must be reported
separately for United States federal income tax purposes.
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Special rules apply in determining the tax basis of a senior note. Your
basis in a senior note is generally increased by original issue discount you
previously accrued on the senior note, and reduced by the fixed payments you
receive and by the contingent payments projected to be made during the period
you held the senior note.
Remarketing or Tax Event Redemption of the Senior Notes
A remarketing or tax event redemption of the senior notes will be a taxable
event for holders of senior notes that will be subject to tax in the manner
described above under "--Sale or Disposition of Equity Units or Stripped Units."
Ownership of the Treasury Portfolio
After the remarketing settlement date or tax event redemption date (if prior
to the purchase contract settlement date), your Equity Units will include a
beneficial interest in a treasury portfolio instead of a senior note. We and,
by acquiring Equity Units, you agree to treat yourself as the owner of the
beneficial interest in the treasury portfolio that is a part of the Equity
Units owned by you. Your initial tax basis in your applicable ownership
interest in the treasury portfolio will equal your pro rata portion of the
amount paid by the remarketing agent or collateral agent, as the case may be,
for the treasury portfolio. Your adjusted tax basis in the treasury portfolio
will be increased by the amount of original issue discount included in income
with respect thereto and decreased by the amount of cash received in respect of
the treasury portfolio.
Interest Income and Original Issue Discount
The treasury portfolio will consist of stripped U.S. treasury securities.
Following a remarketing or tax event redemption of the senior notes, a holder
of Equity Units will be required to treat its pro rata portion of each treasury
security in the treasury portfolio as a bond that was originally issued on the
date the remarketing agent or collateral agent acquired the relevant treasury
securities underlying the treasury portfolio and that has original issue
discount equal to the holder's pro rata portion of the excess of the amounts
payable on such treasury securities over the value of the treasury securities
at the time the remarketing agent or collateral agent acquires them on behalf
of holders of Equity Units. A holder whether on the cash or accrual method of
tax accounting will be required to include original issue discount (other than
original issue discount on short-term U.S. treasury securities, as defined
below) in income for United States federal income tax purposes as it accrues on
a constant yield to maturity basis. Consequently, a portion of each scheduled
payment to holders will be treated as a return of such holder's investment in
the treasury portfolio and will not be considered current income for United
States federal income tax purposes.
In the case of any treasury security with a maturity of one year or less
from the date of its issue (a "short-term U.S. treasury security"), in general
only accrual basis taxpayers will be required to include original issue
discount in income as it accrues. Unless you are an accrual basis holder who
elects to accrue the original issue discount on a short-term U.S. treasury
security on a constant yield to maturity basis, you will accrue such original
issue discount on a straight-line basis.
Non-United States Holders
The following discussion only applies to Non-United States Holders. You are
a "Non-United States Holder" if you are not a United States person. Special
rules may apply to you if you are a "controlled foreign corporation," "passive
foreign investment company," "foreign personal holding company," a corporation
that accumulates earnings to avoid United States federal income tax or, in
certain circumstances, a U.S. expatriate, and such Non-United States Holders
should consult their own tax advisors.
S-66
United States Federal Withholding Tax
The 30% United States federal withholding tax will not apply to any payment
of principal or interest (including original issue discount) on the senior
notes or treasury securities provided that:
. you do not actually (or constructively) own 10% or more of the total
combined voting power of all classes of our voting stock within the
meaning of the Code and the Treasury regulations;
. you are not a controlled foreign corporation that is related to us
through stock ownership;
. you are not a bank whose receipt of interest on the senior notes or
treasury securities is described in section 881(c)(3)(A) of the Code; and
. (a) you provide your name and address on an IRS Form W-8BEN (or other
applicable form), and certify, under penalties of perjury, that you are
not a United States person, or (b) if you hold your Equity Units,
Stripped Units, senior notes or treasury securities through certain
foreign intermediaries, you satisfy the certification requirements of
applicable United States Treasury regulations. Special certification
requirements apply to certain Non-United States Holders that are
pass-through entities rather than individuals.
If you cannot satisfy the requirements described above, payments of interest
(including original issue discount) made to you will be subject to the 30%
United States federal withholding tax, unless you provide us with a properly
executed:
. IRS Form W-8BEN (or other applicable form) claiming an exemption from, or
reduction in the rate of, withholding under the benefit of an applicable
tax treaty; or
. IRS Form W-8ECI (or other applicable form) stating that interest paid on
the senior notes or treasury securities is not subject to withholding tax
because it is effectively connected with your conduct of a trade or
business in the United States.
The 30% United States federal withholding tax will not apply to any gain
that you realize on the sale, exchange, or other disposition of the Equity
Units, Stripped Units, treasury securities, senior notes and our common stock
acquired under the forward purchase contract. However, interest income
including original issue discount and any gain treated as ordinary income that
you realize on the sale, exchange or other disposition of a note will be
subject to withholding in certain circumstances unless the conditions described
in the four bullet points above are satisfied.
We will generally withhold tax at a 30% rate on contract adjustment payments
and dividends paid on our common stock acquired under a forward purchase
contract or such lower rate as may be specified by an applicable income tax
treaty. However, contract adjustment payments or dividends that are effectively
connected with the conduct of a trade or business by the Non-United States
Holder within the United States and, where a tax treaty applies, are
attributable to a United States permanent establishment of the Non-United
States Holder, are not subject to the withholding tax, provided the relevant
certification requirements are satisfied, but instead are subject to United
States federal income tax, as described below.
A Non-United States Holder of our common stock or a forward purchase
contract who wishes to claim the benefit of an applicable treaty rate for
dividends or contract adjustment payments, will be required to satisfy certain
certification and disclosure requirements described in the fourth bullet point
above.
A Non-United States Holder eligible for a reduced rate of United States
withholding tax on payments pursuant to an income tax treaty may obtain a
refund of any excess amounts withheld by filing an appropriate claim for refund
with the IRS.
S-67
United States Federal Income Tax
If you are engaged in a trade or business in the United States and interest
(including original issue discount) on the senior notes or treasury securities,
dividends on our common stock, or to the extent they constitute taxable income,
contract adjustment payments from the forward purchase contracts are
effectively connected with the conduct of that trade or business, you will be
subject to United States federal income tax on the interest, dividends or
contract adjustment payments on a net income basis (although exempt from the
30% withholding tax), in the same manner as if you were a United States person
as defined under the Code. Certain certification and disclosure requirements
must be complied with in order for effectively connected income to be exempt
from withholding. In addition, if you are a foreign corporation, you may be
subject to a branch profits tax equal to 30% (or lower applicable treaty rate)
of your earnings and profits for the taxable year, subject to adjustments, that
are effectively connected with the conduct by you of a trade or business in the
United States. For this purpose, interest on the senior notes or treasury
securities, dividends on our common stock and, to the extent they constitute
taxable income, the contract adjustment payments from the forward purchase
contracts will be included in earnings and profits.
Any gain realized on the disposition of a treasury security, senior note (to
the extent not treated as interest income under the contingent payment debt
rules), forward purchase contract or share of our common stock generally will
not be subject to United States federal income tax unless:
. that gain or income is effectively connected with the conduct of a trade
or business by you in the United States; or
. you are an individual who is present in the United States for 183 days or
more in the taxable year of that disposition, and certain other
conditions are met; or
. in the case of Equity Units, Stripped Units or our common stock, we are
or have been a "United States real property holding corporation" for
United States federal income tax purposes (subject to the discussion
below).
An individual Non-United States Holder described in the first bullet above
will be subject to tax on the net gain derived from the sale under regular
graduated United States federal income tax rates. An individual Non-United
States Holder described in the second bullet point above will be subject to a
flat 30% tax on the gain derived from the sale, which may be offset by United
States source capital losses (even though the individual is not considered a
resident of the United States). If a Non-United States Holder that is a foreign
corporation falls under the first bullet above, it will be subject to tax on
its gain under regular graduated United States federal income tax rates and, in
addition, may be subject to the branch profits tax equal to 30% of its
effectively connected earnings and profits or at such lower rate as may be
specified by an applicable income tax treaty.
We believe we are not and do not anticipate becoming a "U.S. real property
holding corporation" for U.S. federal income tax purposes. If we become a
"United States real property holding corporation," so long as our common stock
continues to be regularly traded on an established securities market:
. you will not be subject to United States federal income tax on the
disposition of our common stock if you hold or held (at any time during
the shorter of the five-year period preceding the date of disposition or
such holder's holding period) less than or equal to 5% of the total
outstanding shares of our common stock; and
S-68
. you will not be subject to United States federal income tax on the
disposition of the forward purchase contracts if on the day you acquired
the forward purchase contracts, the forward purchase contracts you
acquired had a fair market value less than 5% of the fair market value of
all of the forward purchase contracts.
United States Federal Estate Tax
Your estate will not be subject to United States federal estate tax on the
senior notes or treasury securities beneficially owned by you at the time of
your death, provided that:
. you do not own 10% or more of the total combined voting power of all
classes of our voting stock, within the meaning of the Code and United
States Treasury regulations; and
. interest on those senior notes or treasury securities would not have
been, if received at the time of your death, effectively connected with
the conduct by you of a trade or business in the United States.
Our common stock acquired under a forward purchase contract and owned by you
at the time of your death will be subject to United States federal estate tax
unless an applicable estate tax treaty provides otherwise. Forward purchase
contracts owned by you at the time of your death may be subject to United
States federal estate tax unless an applicable estate tax treaty provides
otherwise.
Information Reporting and Backup Withholding
United States Holders
In general, information reporting requirements may apply to payments on
Equity Units, Stripped Units, senior notes, treasury securities, and our common
stock made to you and to the proceeds of the sale or other disposition of such
instruments, unless you are an exempt recipient such as a corporation. Backup
withholding may apply if you fail to supply an accurate taxpayer identification
number or otherwise fail to comply with applicable United States information
reporting or certification requirements.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against your United States federal income tax liability
provided the required information is furnished to the IRS.
Non-United States Holders
The amount of the interest, contract adjustment payments and dividends on
our common stock paid to you and the tax withheld with respect to such
interest, contract adjustment payments and dividends, regardless of whether
withholding was required, must be reported annually to the IRS and to you.
Copies of the information returns reporting the amount of such interest,
contract adjustment payments, dividends and withholding may also be made
available to the tax authorities in the country in which you reside under the
provisions of an applicable income tax treaty.
In general, no backup withholding will be required regarding payments on the
Equity Units, Stripped Units, senior notes, treasury securities, or our common
stock (except possibly with respect to contract adjustment payments) that we
make to you provided that we do not have actual knowledge or reason to know
that you are a United States person and you have delivered the statement
described above under "Non-United States Holders--United States Federal
Withholding Tax."
S-69
In addition, no information reporting or backup withholding will be required
regarding the proceeds of the sale of Equity Units, Stripped Units, senior
notes, treasury securities, or our common stock made within the United States
or conducted through certain United States financial intermediaries if:
. (1) the payor receives the statement described above and (2) does not
have actual knowledge or reason to know that you are a United States
person; or
. you otherwise establish an exemption.
Backup withholding may apply if you fail to comply with applicable United
States information reporting or certification requirements.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against your United States federal income tax liability
provided the required information is furnished to the IRS.
CERTAIN ERISA CONSIDERATIONS
The following is a summary of certain considerations associated with the
purchase of the Equity Units (and the securities underlying the Equity Units)
by employee benefit plans to which Title I of the U.S. Employee Retirement
Income Security Act of 1974, as amended (which we call ERISA), applies; plans,
individual retirement accounts and other arrangements to which Section 4975 of
the Code or provisions under any federal, state, local, non-U.S. or other laws
or regulations that are similar to such provisions of ERISA or the Code (which
we call collectively Similar Laws), apply; and entities whose underlying assets
are considered to include "plan assets" of such plans, accounts and
arrangements (each of which we call a Plan).
Each fiduciary of a Plan should consider the fiduciary standards of ERISA or
any applicable Similar Laws in the context of the Plan's particular
circumstances before authorizing an investment in the Equity Units (and the
securities underlying the Equity Units). Accordingly, among other factors, the
fiduciary should consider whether the investment would satisfy the prudence and
diversification requirements of ERISA or any applicable Similar Laws and would
be consistent with the documents and instruments governing the Plan.
Section 406 of ERISA and Section 4975 of the Code prohibit Plans subject to
such provisions, which we call ERISA Plans, from engaging in certain
transactions involving "plan assets" with persons that are "parties in
interest" under ERISA or "disqualified persons" under the Code with respect to
the ERISA Plans. A violation of these "prohibited transaction" rules may result
in an excise tax or other liabilities under ERISA and/or Section 4975 of the
Code for those persons, unless exemptive relief is available under an
applicable statutory or administrative exemption. Employee benefit plans that
are governmental plans (as defined in Section 3(32) of ERISA), certain church
plans (as defined in Section 3(33) of ERISA) and foreign plans (as described in
Section 4(b) (4) of ERISA) are not subject to the requirements of ERISA or
Section 4975 of the Code, but may be subject to Similar Laws.
Prohibited transactions within the meaning of Section 406 of ERISA or
Section 4975 of the Code could arise if the Equity Units (and the securities
underlying the Equity Units) were acquired by an ERISA Plan with respect to
which we or any of our affiliates are a party in interest or a disqualified
person. For example, if we are a party in interest or disqualified person with
respect to an investing ERISA Plan (either directly or by reason of our
ownership of our subsidiaries), an extension of credit prohibited by Section
406 (a) (1) (B) of ERISA and Section 4975 (c) (1) (B) of the Code (or similar
provisions under Similar Laws) between the investing ERISA Plan and us may be
deemed to occur, unless exemptive relief were available under an applicable
exemption (see below).
S-70
The United States Department of Labor has issued prohibited transaction
class exemptions, or PTCEs, that may provide exemptive relief for direct or
indirect prohibited transactions resulting from the purchase, holding or
disposition of the Equity Units (and the securities underlying the Equity
Units). Those class exemptions include:
. PTCE 96-23--for certain transactions determined by in-house asset
managers,
. PTCE 95-60--for certain transactions involving insurance company general
accounts,
. PTCE 91-38--for certain transactions involving bank collective investment
funds,
. PTCE 90-1--for certain transactions involving insurance company separate
accounts, and
. PTCE 84-14--for certain transactions determined by independent qualified
professional asset managers.
Because of the possibility that direct or indirect prohibited transactions
or violation of Similar Laws could occur as a result of the purchase, holding
or disposition of the Equity Units (and the securities underlying the Equity
Units) by a Plan, the Equity Units may be not purchased by any Plan, or any
person investing "plan assets" of any Plan, unless its purchase, holding and
disposition of the Equity Units (and the securities underlying the Equity
Units) will not result in a non-exempt prohibited transaction under ERISA or
the Code or a violation of any Similar Laws. Any purchaser or holder of the
Equity Units or any interest in the Equity Units will be treated as if it has
represented by its purchase and holding of the Equity Units that either:
. it is not a Plan and is not purchasing the Equity Units or interest in
the Equity Units on behalf of or with "plan assets" of any Plan, or
. its purchase, holding and disposition of the Equity Units or interest in
the Equity Units (and accompanying interests in, and potential
transactions involving, the securities underlying the Equity Units) will
not result in a non-exempt prohibited transaction under ERISA or the Code
or a violation of any Similar Laws.
In addition, no Plan will be permitted to participate in the remarketing
program unless and until the Plan provides the remarketing agent with
assurances, reasonably satisfactory to the remarketing agent, that the Plan's
participation in the remarketing program will not result in a non-exempt
prohibited transaction under ERISA or the Code or a violation of any Similar
Law.
Due to the complexity of these rules and the penalties imposed upon persons
involved in non-exempt prohibited transactions, it is important that any person
considering the purchase of Equity Units (and the securities underlying the
Equity Units) on behalf of or with "plan assets" of any Plan consult with its
counsel regarding the consequences under ERISA, the Code and any applicable
Similar Laws of the acquisition, ownership and disposition of Equity Units (and
the securities underlying the Equity Units), whether any exemption would be
applicable, and whether all conditions of such exemption have been satisfied
such that the acquisition and holding of the Equity Units (and the securities
underlying the Equity Units) by the Plan are entitled to full exemptive relief
thereunder.
S-71
UNDERWRITING
Goldman, Sachs & Co., J.P. Morgan Securities Inc. and Salomon Smith Barney
Inc. are the joint book-running managers of this offering. Subject to the terms
and conditions stated in the underwriting agreement dated the date of this
prospectus supplement, each underwriter named below has severally agreed to
purchase, and we have agreed to sell to that underwriter, the number of Equity
Units set forth opposite the underwriter's name.
Number of
Underwriter Equity Units
----------- ------------
Goldman, Sachs & Co......................................... 1,350,000
J.P. Morgan Securities Inc.................................. 1,350,000
Salomon Smith Barney Inc.................................... 1,350,000
Banc of America Securities LLC.............................. 240,000
Credit Suisse First Boston Corporation...................... 240,000
Lehman Brothers Inc......................................... 240,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... 240,000
UBS Warburg LLC............................................. 240,000
A.G. Edwards & Sons, Inc.................................... 125,000
Danske Securities (US), Inc................................. 125,000
Edward D. Jones & Co., L.P.................................. 125,000
McDonald Investments Inc.................................... 125,000
TD Securities (USA) Inc..................................... 125,000
The Williams Capital Group, L.P............................. 125,000
---------
Total................................................... 6,000,000
=========
The underwriting agreement provides that the obligations of the underwriters
to purchase the Equity Units are subject to approval of legal matters by
counsel and to other conditions. The underwriters are obligated to purchase all
the Equity Units (other than those covered by the over-allotment option
described below, unless and until this option is exercised) if they purchase
any of the Equity Units.
The underwriters propose to offer the Equity Units directly to the public at
the public offering price set forth on the cover page of this prospectus
supplement and some of the Equity Units to dealers at the public offering price
less a concession not to exceed $0.900 per Equity Unit. If all of the Equity
Units are not sold at the initial offering price, the representatives may
change the public offering price and the other selling terms.
We have granted to the underwriters an option, to purchase from us within 13
days from the original issuance of the Equity Units, up to 900,000 additional
Equity Units at the public offering price less the underwriting discount. The
underwriters may exercise the option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent the
option is exercised, each underwriter must purchase a number of additional
Equity Units approximately proportionate to that underwriter's initial purchase
commitment.
The following table shows the underwriting discounts and commissions that we
are to pay to the underwriters in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase 900,000 additional Equity Units.
Paid by American Electric Power
-------------------------------
No Exercise Full Exercise
----------- -------------
Per Equity Unit............... $ 1.50 $ 1.50
Total......................... $9,000,000 $10,350,000
S-72
We have agreed and our executive officers and directors have agreed that,
for a period of 90 days from June 5, 2002, we and they will not, without the
prior written consent of the joint book-running managers, dispose of or hedge
any Equity Units, forward purchase contracts or shares of our common stock or
any securities substantially similar to the Equity Units, forward purchase
contracts or shares of our common stock or any securities convertible into or
exchangeable or exercisable for our common stock or substantially similar
securities (other than the exercise of outstanding options and issuance of
shares issuable under plans for employees or shareholders in effect on the date
of this prospectus supplement). However, we may issue shares of our common
stock in the concurrent offering. The joint book-running managers in their sole
discretion may release any of the securities subject to these lock-up
agreements at any time without notice.
Our common stock is listed on the NYSE under the symbol "AEP." We have been
approved to list the Equity Units on the NYSE under the symbol "AEP PrA."
The Equity Units are a new issue of securities with no established trading
market. We have been advised by the underwriters that the underwriters intend
to make a market in the Equity Units but are not obliged to do so and may
discontinue market making at any time without notice. No assurance can be given
as to the liquidity of the trading market for the Equity Units.
In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may purchase and sell Equity Units in the open market. These
transactions may include short sales, syndicate covering transactions and
stabilizing transactions. Short sales involve syndicate sales of Equity Units
in excess of the number of Equity Units to be purchased by the underwriters in
the offering, which creates a syndicate short position. "Covered" short sales
are sales of Equity Units made in an amount up to the number of Equity Units
represented by the underwriters' over-allotment option. In determining the
source of Equity Units to close out the covered syndicate short position, the
underwriters will consider, among other things, the price of Equity Units
available for purchase in the open market as compared to the price at which
they may purchase Equity Units through the over-allotment option. Transactions
to close out the covered syndicate short involve either purchases of the Equity
Units in the open market after the distribution has been completed or the
exercise of the over-allotment option. The underwriters may also make "naked"
short sales of Equity Units in excess of the over-allotment option. The
underwriters must close out any naked short position by purchasing Equity Units
in the open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
the Equity Units in the open market after pricing that could adversely affect
investors who purchase in the offering. Stabilizing transactions consist of
bids for or purchases of Equity Units made for the purpose of preventing or
retarding a decline in the market price of the Equity Units while the offering
is in progress.
The underwriters may also impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases Equity Units originally sold by that
syndicate member.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of the Equity Units. They may also cause the price
of the Equity Units to be higher than the price that otherwise would exist in
the open market in the absence of these transactions. The underwriters may
conduct these transactions on the NYSE, in the over-the-counter market or
otherwise. If the underwriters commence any of these transactions, they may
discontinue them at any time.
S-73
Each underwriter has represented, warranted and agreed that: (i) it has not
offered or sold and, prior to the expiry of a period of six months from the
closing date, will not offer or sell any Equity Units to persons in the United
Kingdom except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995; (ii) it
has only communicated or caused to be communicated and will only communicate or
cause to be communicated any invitation or inducement to engage in investment
activity (within the meaning of section 21 of the Financial Services and
Markets Act 2000 ("FSMA")) received by it in connection with the issue or sale
of any Equity Units in circumstances in which section 21(1) of the FSMA does
not apply to us; and (iii) it has complied and will comply with all applicable
provisions of the FSMA with respect to anything done by it in relation to the
Equity Units in, from or otherwise involving the United Kingdom.
The Equity Units may not be offered, sold, transferred or delivered in or
from The Netherlands, as part of their initial distribution or as part of any
re-offering, and neither this prospectus supplement nor any other document in
respect of the offering may be distributed or circulated in the Netherlands,
other than to individuals or legal entities which include, but are not limited
to: banks, brokers, dealers, institutional investors and undertakings with a
treasury department, who or which trade or invest in securities in the conduct
of a business or profession.
This prospectus supplement and the accompanying prospectus will be made
available in electronic format on the websites maintained by one or more of the
underwriters. The representatives may agree to allocate a number of Equity
Units to underwriters for sale to their online brokerage account holders. The
representatives will allocate Equity Units to underwriters that may make
Internet distributions on the same basis as other allocations. In addition,
Equity Units may be sold by the underwriters to securities dealers who resell
Equity Units to online brokerage account holders.
We estimate that our portion of the total expenses of this offering of
Equity Units, exclusive of underwriting discounts and commissions, will be
approximately $630,000.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make because of any of those
liabilities.
This prospectus supplement, as amended or supplemented, may be used by the
remarketing agent for remarketing the senior notes or upon early settlement of
the forward purchase contracts.
The underwriters and certain of their affiliates have performed investment
banking, advisory, general financing and commercial banking services for us and
our subsidiaries from time to time for which they have received customary fees
and expenses. The underwriters may, from time to time in the future, engage in
transactions with and perform services for us and our subsidiaries in the
ordinary course of their business.
S-74
LEGAL MATTERS
Certain legal matters with respect to this offering of Equity Units will be
passed on for us by Thomas G. Berkemeyer, Esq., Associate General Counsel of
American Electric Power Service Corporation, one of our affiliates, or William
E. Johnson, Esq., Senior Counsel of American Electric Power Service Corporation
and Simpson Thacher & Bartlett, New York, New York and for the underwriters by
Dewey Ballantine LLP, New York, New York. From time to time, Dewey Ballantine
LLP acts as counsel to our affiliates for some matters.
EXPERTS
The financial statements of the Company and its subsidiaries (including
Central and South West Corporation and its subsidiaries, as of December 31,
2001 and 2000, and for the years then ended) and the related financial
statement schedule incorporated in this prospectus by reference from the
Company's Annual Report on Form 10-K for the year ended December 31, 2001 have
been audited by Deloitte & Touche LLP, as stated in their reports dated
February 22, 2002 (which report on the financial statements expresses an
unqualified opinion and includes an explanatory paragraph referring to the
restatement of the 1999 financial statements to give retroactive effect to the
conforming change in the method of accounting for vacation pay accruals), which
are incorporated herein by reference.
The financial statements of Central and South West Corporation and its
subsidiaries (excluding CSW UK Holdings), as of December 31, 1999, and for the
year then ended, have been audited by Arthur Andersen LLP, as stated in their
reports, which are incorporated herein by reference. The financial statements
of CSW UK Holdings, as of December 31, 1999, and for the year then ended, have
been audited by KPMG Audit Plc, as stated in their report, which is
incorporated herein by reference.
Such financial statements of the Company and its subsidiaries have been so
incorporated herein in reliance upon the respective reports of such firms given
upon their authority as experts in accounting and auditing. All of the
foregoing firms are independent auditors.
S-75
PROSPECTUS
$3,000,000,000
American Electric Power Company, Inc.
1 RIVERSIDE PLAZA
COLUMBUS, OHIO 43215
(614) 223-1000
SENIOR NOTES
COMMON STOCK
JUNIOR SUBORDINATED DEBENTURES
STOCK PURCHASE CONTRACTS
STOCK PURCHASE UNITS
AEP CAPITAL TRUST I
AEP CAPITAL TRUST II
AEP CAPITAL TRUST III
TRUST PREFERRED SECURITIES
Guaranteed as described herein by
American Electric Power Company, Inc.
-------------
TERMS OF SALE
This prospectus contains summaries of the general terms of the securities.
You will find the specific terms of these securities, and the manner in which
they are being offered, in supplements to this prospectus. You should read this
prospectus and the available prospectus supplement carefully before you invest.
The common stock of American Electric Power Company, Inc. is listed on the
New York Stock Exchange under the symbol "AEP". The last reported sale of the
common stock on the New York Stock Exchange on May 15, 2002 was $44.86 per
share.
In this prospectus, unless the context indicates otherwise, the words "we",
"ours" and "us" refer to American Electric Power Company, Inc. and its
consolidated subsidiaries. "Trusts" refer to AEP Capital Trust I, AEP Capital
Trust II and AEP Capital Trust III.
Investing In These Securities Involves Risks. See The Section Entitled "Risk
Factors" Beginning On Page 2 For More Information.
The Securities have not been approved 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 17, 2002.
THE COMPANY
We are a public utility holding company that owns, directly or indirectly,
all of the outstanding common stock of our domestic electric utility
subsidiaries and varying degrees of other subsidiaries. Substantially all of
our operating revenues derive from the furnishing of electric service. In
addition, in recent years we have been pursuing various unregulated business
opportunities in the U.S. and worldwide. We were incorporated under the laws of
New York in 1906 and reorganized in 1925. Our principal executive offices are
located at 1 Riverside Plaza, Columbus, Ohio 43215, and our telephone number is
(614) 223-1000.
We own, directly or indirectly, all the outstanding common stock of the
following operating public utility companies: Appalachian Power Company
("APCo"), Central Power and Light Company ("CPL"), Columbus Southern Power
Company ("CSP"), Indiana Michigan Power Company ("I&M"), Kentucky Power
Company, Kingsport Power Company, Ohio Power Company ("OPCo"), Public Service
Company of Oklahoma ("PSO"), Southwestern Electric Power Company ("SWEPCo"),
West Texas Utilities Company ("WTU") and Wheeling Power Company. These
operating public utility companies supply electric service in portions of
Arkansas, Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Tennessee,
Texas, Virginia and West Virginia. We also own all of the outstanding common
stock of American Electric Power Service Corporation, which provides
accounting, administrative, information systems, engineering, financial, legal,
maintenance and other services to us and our subsidiaries.
PROSPECTUS SUPPLEMENTS
We will provide information to you about the securities 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 securities,
(b) the accompanying prospectus supplement provides more specific terms of your
securities, and (c) the pricing supplement, if any, provides the final terms of
your securities. It is important for you to consider the information contained
in this prospectus, the prospectus supplement, and the pricing supplement, if
any, in making your investment decision.
RISK FACTORS
You should carefully consider the risks described below as well as other
information contained in this prospectus before buying the securities
registered herein. These are risks we consider to be material to your decision
whether to invest in our securities at this time. There may be risks that you
view in a different way than we do, and we may omit a risk that we consider
immaterial, but you consider important. If any of the following risks occur,
our business, financial condition or results of operations could be materially
harmed. In that case, the value or trading price of the securities registered
herein could decline, and you may lose all or part of your investment.
Risks Related to Our Energy Trading and Wholesale Businesses
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, natural gas and coal as part of our
power marketing and energy trading operations. With respect to such
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transactions, we are not guaranteed any rate of return on our capital
investments through mandated rates, and our revenues and results of operations
are likely to depend, in large part, upon prevailing market prices for power in
our regional markets and other competitive markets. These market prices may
fluctuate substantially over relatively short periods of time. It is reasonable
to expect that trading margins may erode as markets mature and that there may
be diminished opportunities for gain should volatility decline. In addition,
the Federal Energy Regulatory Commission (the "FERC"), which has jurisdiction
over wholesale power rates, as well as independent system operators that
oversee some of these markets, may impose price limitations, bidding rules and
other mechanisms to address some of the volatility in these markets. Fuel
prices may also be volatile, and the price we can obtain for power sales may
not change at the same rate as changes in fuel costs. These factors could
reduce our margins and therefore diminish our revenues and results of
operations.
Volatility in market prices for fuel and power may result from:
. weather conditions;
. seasonality;
. power usage;
. illiquid markets;
. transmission or transportation constraints or inefficiencies;
. availability of competitively priced alternative energy sources;
. demand for energy commodities;
. natural gas, crude oil and refined products, and coal production levels;
. natural disasters, wars, embargoes and other catastrophic events; and
. federal, state and foreign energy and environmental regulation and
legislation.
Our energy trading (including fuel procurement and power marketing) and risk
management policies cannot eliminate the risk associated with these activities.
Our energy 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 energy 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 energy 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
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the judgments and assumptions underlying those calculations prove to be wrong
or inaccurate. Our policies and procedures do not typically require us to hedge
the multitude of new trading positions taken daily in these activities.
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 energy
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.
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 our customers.
We depend on transmission facilities owned and operated by other 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 products.
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 and gas transmission initiatives that require
electric and gas transmission services to be offered unbundled from commodity
sales. Although these initiatives are designed to encourage wholesale market
transactions for electricity and gas, 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, natural
gas and coal as part of our power marketing and energy 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.
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Risks Related to Our Regulated Business and Evolving Regulation
We operate in a non-uniform and fluid regulatory environment.
AEP is subject to regulation by the SEC under the Public Utility Holding
Company Act of 1935 ("PUHCA"). The rates charged by the domestic utility
subsidiaries are approved by the FERC and the eleven state utility commissions.
The FERC regulates wholesale electricity operations and transmission rates and
the state commissions regulate retail generation and distribution rates. The
prices charged by foreign subsidiaries located in the UK, Australia, China,
Mexico and Brazil are regulated by the authorities of those respective
countries and are generally subject to price controls. Seven of the eleven
state retail jurisdictions in which our domestic electric utilities operate
have enacted restructuring legislation. The restructuring legislation of two of
the seven states, Texas and Ohio, require the legal separation of generation
and related assets and liabilities from the other utility assets and
liabilities of the electric utilities in those states. Once legal separation
occurs in Texas and Ohio, approximately one half of our domestic generation
will not be regulated by state utility commissions as to rates. The remaining
five states of the seven that have enacted restructuring legislation
contemplate some level of regulatory reform without currently requiring legal
separation of assets. Our utility operations in the four state retail
jurisdictions that have not enacted any restructuring legislation currently
plan to adhere to the vertically-integrated utility model with cost recovery
through regulated rates.
Our business plan is based on the regulatory framework as described and
assumes that deregulated generation will not be re-regulated. There can be no
assurance that the states that have pursued restructuring will not reverse such
policies; nor can there be assurance that the states that have not enacted
restructuring legislation will not do so in the future. In addition to the
multiple levels of regulation at the state level in which we operate, our
business is subject to extensive federal regulation. There can be no assurance
that recent federal legislative and regulatory initiatives which have generally
facilitated competition in the energy sector will continue or will not be
reversed. Critical press coverage of supply problems and price volatility in
the California power markets--a state which enacted restructuring legislation
in favor of competition--as well as critical press coverage of the bankruptcy
of Enron Corp. would suggest that conditions for additional deregulation may
not be favorable.
Further alteration of the regulatory landscape in which we operate will
impact the effectiveness of our business plan and may, because of the continued
uncertainty, harm our financial condition and results of operations.
Risks relating to state restructuring
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 and natural
gas used to generate power where generation is no longer regulated or where
existing fuel clauses are suspended or frozen. The protection afforded by
retail fuel clause recovery mechanisms has been eliminated by the
implementation of customer choice in Ohio (effective January 1, 2001) and in
the Electric Reliability Council of Texas ("ERCOT") area of Texas (effective
January 1, 2002). We expect that there may be similar risks should customer
choice be similarly implemented in other states. Because the risk of fuel price
increases, increased environmental compliance costs and generating unit outage
cannot be passed through to customers during the transition period in Ohio and
only partially in Texas upon regulatory approval, we retain these risks.
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The protection afforded by fuel clause recovery mechanisms has been frozen
by settlement agreements currently in place in Indiana (through 2007) and
Michigan (through January 1, 2004). To the extent all of the fuel supply of the
generating units in these states are not under fixed price long-term contracts
we are subject to market price risk. We continue to be protected against market
price changes by active fuel clauses in Oklahoma, Arkansas, Louisiana,
Kentucky, Virginia (through the transition to competition on July 1, 2007) and
the Southwest Power Pool ("SPP") area of Texas (until the implementation of
restructuring). A fuel clause in West Virginia has been suspended per a
settlement reached in a state restructuring proceeding. However, as
restructuring has not been implemented in West Virginia, the fuel clause may be
reactivated.
Ohio: Until the transition to full market competition is complete in Ohio
on December 31, 2005, our Ohio regulated utility subsidiaries there are
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. To satisfy this default service obligation, these regulated utility
subsidiaries will source power from our to-be-formed power marketing affiliate
("PMA"), under contract. The power sales agreements PMA will have with our Ohio
regulated utilities have a fixed price, which may have little or no
relationship to the cost of supplying this power. This means that our PMA will
absorb the risk of fuel and power price increases, increased costs of
environmental compliance and generating unit outage. Following the transition,
it is anticipated that the PMA will no longer be obligated to sell to the Ohio
regulated subsidiaries, permitting it to sell power previously committed to
serving this obligation at market rates.
Texas: Under Texas restructuring, beginning January 1, 2002, all retail
electric customers in the ERCOT region will purchase electricity from retail
electric providers ("REPs"). Each restructured utility in Texas has an
obligation to organize a REP which will provide electricity to customers
located in the restructured utility's former franchise area ("Affiliate REPs").
All Affiliate REPs must offer fixed rates for electricity referred to as the
Price to Beat ("PTB") to customers of less than 1 MW peak demand who do not
choose an alternative supplier during a transition period from 2002 through
2006. The PTB may be below current market rates. The fuel cost component of an
Affiliate REPs' PTB will be permitted prospective adjustment twice a year based
upon changes in a natural gas price index. We currently own two Affiliate REPs
that will provide PTB service in the former franchise area of our regulated
utilities situated in the ERCOT area of Texas. We have entered into an
agreement to sell these Affiliate REPs, subject to regulatory approval and
other conditions. In the event we do not sell these Affiliate REPs, because the
Affiliate REPs must sell at fixed PTB rates to eligible customers, our
Affiliate REPs will absorb the risk of fuel and power price increases,
increased costs of environmental compliance and generating unit outage, subject
to the biannual prospective fuel cost adjustment. AEP has established a
separate REP that provides electric service to customers of greater than 1MW
peak demand throughout Texas. In addition, AEP has established a REP that
offers provider-of-last-resort ("POLR") service to customers both inside and
outside the former franchise area of our regulated utilities. POLR service is
provided to customers when they cannot obtain service from another REP
including the Affiliate REP providing PTB service. Our POLR REP provides
service at fixed rates to customers of greater than 1MW demand in the franchise
area of our regulated utilities and to PTB customers in their service territory
of an unaffiliated utility. Our PMA may enter into agreements to sell power to
our REP and Affiliate REPs and such agreements may assume the risk of fuel
price increases, increased costs of environmental compliance and generating
unit outage--however, if that were the case, on a consolidated basis, we would
still retain such risks. Following the transition, all REPs and Affiliate REPs
will be permitted to sell to retail customers at market rates. Although
6
currently delayed, it is anticipated that the foregoing framework will be
extended to the SPP area of Texas in a similar fashion.
The default service, price to beat and provider-of-last-resort obligations do
not restrict customers from switching suppliers of power.
Those default service, PTB and POLR customers that we serve in Ohio and
Texas 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 switch to our default service, PTB or POLR
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 the PMA to meet the default service, PTB or POLR obligations
could have been sold to third parties at more favorable wholesale prices, we
will have incurred potentially significant lost opportunity costs.
Some laws and regulations governing restructuring of the wholesale generation
market in Oklahoma, Arkansas, Virginia and West Virginia have not yet been
interpreted or adopted and could harm our business, operating results and
financial condition.
While the electric restructuring laws in Oklahoma, Arkansas, Virginia and
West Virginia established the general framework governing the retail electric
market, the laws required the utility commission in each state to issue rules
and determinations implementing the laws. Some of the regulations governing the
retail electric market have not yet been adopted by the utility commission in
each state. These laws, when they are interpreted and when the regulations are
developed and adopted, may harm our business, results of operations and
financial condition. In June 2001, Oklahoma enacted legislation delaying
competition indefinitely.
In Virginia, the laws requires APCo to make compliance filings with the
Virginia State Corporation ("VSCC") to implement the law. APCo's compliance
filing is pending but we are unable to predict the outcome of the VSCC's review
of our filing. It is possible that the VSCC could limit APCo's ability to
transfer generation assets in connection with corporate separation. The West
Virginia legislature approved electricity restructuring; however, the West
Virginia Public Service Commission ("WVPSC") cannot implement the restructuring
plan until the legislature makes tax law changes necessary to preserve the
revenues of state and local governments. We cannot predict the timing of the
passage of such legislation. Therefore, it is also possible that the
legislation could be revisited. We cannot predict the impact of such a
development.
Recovery of deferred fuel balances and stranded costs
The Public Utility Commission of Texas ("PUCT") review and reconciliation of
retail fuel clause recovery was eliminated in the ERCOT area of Texas effective
January 1, 2002. During 2002 CPL and WTU will file final fuel reconciliations
with the PUCT to reconcile their fuel costs through the period ending December
31, 2001. The ultimate recovery of deferred fuel balances at December 31, 2001
will be decided as part of PUCT-required true-up proceedings in 2004. If the
final under-recovered fuel balances or any amounts incurred but not yet
reconciled are disallowed, it would harm our financial condition and diminish
our results of operations.
As a part of restructuring in Texas, electric utilities are allowed to
recover stranded generation costs including generation-related regulatory
assets. CPL included regulatory assets not approved for
7
securitization in its request for recovery of $1.1 billion of stranded costs.
In a 1997 CPL PUCT rate proceeding, $800 million of nuclear unit costs included
in property, plant and equipment-electric and regulatory assets on the
consolidated balance sheets was determined to be excess cost over market
("ECOM"). The PUCT provided for a lower return on ECOM assets and ECOM assets
are being amortized on an accelerated basis for rate-making purposes.
After hearings on the issue of stranded costs in a proceeding to establish
restructured rates for CPL, the PUCT ruled in October 2001 that its current
estimate of CPL's stranded costs was negative $615 million. The final amount of
stranded costs will be established by the PUCT in a 2004 true-up proceeding. If
our total stranded costs determined in the 2004 true-up are less than the
amount of securitized regulatory assets, the PUCT can implement an offsetting
credit to transmission and distribution rates charged of the CPL transmission
and distribution utility. An offsetting credit, if imposed, would limit our
recovery of regulatory assets and may harm our results of operations.
Management believes that CPL will have stranded costs in 2004, and that the
current treatment of excess earnings will be amended at that time. CPL has
appealed the PUCT's estimate of stranded costs and refund of excess earnings to
the Travis County District Court. Unaffiliated parties also appealed the PUCT's
refund order contending the entire $615 million of negative stranded costs
should be refunded presently. Management is unable to predict the outcome of
this litigation. An unfavorable ruling would diminish our results of
operations, cash flows and possibly financial condition.
The FERC and/or the SEC may not approve the corporate separation plans we have
submitted to comply with the unbundling laws enacted in Texas and Ohio.
Seven of the eleven state retail jurisdictions in which our domestic
electric utility companies operate have enacted restructuring legislation. In
general, the legislation provides for a transition from cost-based regulation
of bundled electric service to customer choice and market pricing for the
supply of power. Texas and Ohio have each enacted laws that generally require
the legal separation of previously vertically integrated electric utilities
into non-regulated and regulated components. We have filed requests with the
FERC and SEC to complete our corporate separation unbundling restructuring plan
to separate our regulated and non-regulated businesses. Significant portions of
those requests incorporate the unbundling plans which have been approved in
Texas and Ohio to bring our utility companies that operate in those states into
compliance with their respective restructuring laws. Certain industrial and
wholesale customers and state utility commissions have intervened to oppose our
corporate separation filings at the FERC. A settlement agreement has been
reached in the FERC proceeding with a majority of the active intervenors,
including all state utility commissions. The agreement was filed with the FERC
in December 2001 to obtain final approval. We believe that the agreement meets
the requirements of the FERC and expect the matter to be resolved favorably. We
can give no assurance, however, that the FERC and/or the SEC will approve the
action necessary to
complete the corporate separations. Failure to approve may limit our ability to
efficiently operate our business.
In addition, while not a condition to implementation of corporate
separation, we are seeking to exempt our deregulated generation assets in Ohio
and Texas from regulation as utilities under PUHCA. This generation comprises
about one half of our domestic generation. To obtain this exemption, each of
the eleven state utility commissions in which we operate must make certain
findings regarding the impact of the exemption in their respective states. The
SEC and the FERC must also act before the exemption is granted. We believe we
will obtain all necessary approvals for the exemption; we can
8
give no assurance, however, that the states, the FERC, the SEC and/or the
relevant state utility commissions will approve the action necessary. Failure
to do so may limit our ability to maximize the return on our deregulated
generation assets.
We may not be able to respond effectively to competition.
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. These regulatory initiatives may include
deregulation of the electric utility industry in some markets and privatization
of the electric utility industry in others. To the extent that competition
increases, our profit margins may be negatively affected. Industry deregulation
and privatization 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 or pursue our growth strategy.
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 the regional markets in which we
have facilities could increase competition in the wholesale power market in
those regions, which could harm our business, results of operations and
financial condition. Also, industry restructuring in regions in which we have
substantial operations 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.
General risks of our regulated operations
We are exposed to nuclear generation risk.
Through I&M and CPL, we have interests in four nuclear generating units,
which interests equal 2,740 MW, or 7% of our generation capacity. We are,
therefore, also subject to the risks of nuclear generation, which include the
following:
. the potential harmful effects on the environment and human health
resulting from the operation of nuclear facilities and the storage,
handling and disposal of radioactive materials;
. limitations on the amounts and types of insurance commercially available
to cover losses that might arise in connection with our nuclear
operations or those of others in the United States;
. uncertainties with respect to contingencies and assessment amounts if
insurance coverage is inadequate; and
. uncertainties with respect to the technological and financial aspects of
decommissioning nuclear plants at the end of their licensed lives.
The Nuclear Regulatory Commission ("NRC") has broad authority under federal
law to impose licensing and safety-related requirements for the operation of
nuclear generation facilities. In the event of non-compliance, the NRC has the
authority to impose fines or shut down a unit, or both, depending upon its
assessment of the severity of the situation, until compliance is achieved.
Revised safety requirements promulgated by the NRC could necessitate
substantial capital expenditures at nuclear plants such as ours. In addition,
although we have no reason to anticipate a serious nuclear incident at
9
our plants, if an incident did occur, it could harm our results of operations
or financial condition. A major incident at a nuclear facility anywhere in the
world could cause the NRC to limit or prohibit the operation or licensing of
any domestic nuclear unit.
The different regional power markets in which we compete or will compete in the
future have changing transmission regulatory structures, which could affect our
performance in these regions.
Our results are likely to be affected by differences in the market and
transmission regulatory structures in various regional power markets. Problems
or delays that may arise in the formation and operation of new regional
transmission organizations, or "RTOs", may restrict our ability to sell power
produced by our generating capacity to certain markets if there is insufficient
transmission capacity otherwise available. The rules governing the various
regional power markets may also change from time to time which could affect our
costs or revenues. Because it remains unclear which companies will be
participating in the various regional power markets, or how RTOs will develop
or what regions they will cover, we are unable to assess fully the impact that
these power markets may have on our business.
We are participating with four unaffiliated utilities in the formation of
the Alliance RTO. In 2001 the Alliance companies and MISO entered into a
settlement addressing transmission pricing and other "seam" issues between the
two RTOs. On December 19, 2001 the FERC approved the proposal of the MISO for a
regional transmission organization and instructed the Alliance companies, which
had submitted a separate RTO proposal, to explore joining the MISO
organization. The FERC's order is intended to facilitate the establishment of a
single RTO in the Midwest and support the establishment of viable for-profit
transmission companies under an RTO umbrella. In its order, the FERC concluded
that the proposed Alliance RTO lacks sufficient scope to exist
as a stand-alone RTO and directed the Alliance companies to explore how their
business plan can be accommodated within MISO. We recently announced our
intention to join the PJM Interconnection, LLC, the mid-Atlantic grid operator.
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.
We are subject to regulation under the Public Utility Holding Company Act of
1935.
Our system is subject to the jurisdiction of the SEC under PUHCA. The rules
and regulations under PUHCA impose a number of restrictions on the operations
of registered holding company systems. These restrictions include a requirement
that the SEC approve in advance securities issuances, sales and acquisitions of
utility assets, sales and acquisitions of securities of utility companies and
acquisitions of other businesses. PUHCA also generally limits the operations of
a registered holding company to a single integrated public utility system, plus
additional energy-related businesses. PUHCA rules limit the dividends that our
subsidiaries may pay from unearned surplus.
Our merger with CSW may ultimately be found to violate PUHCA.
We acquired CSW in a merger completed on June 15, 2000. Among the more
significant assets we acquired as a result of the merger were four additional
domestic electric utility companies--CPL, PSO, SWEPCo and WTU. 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
10
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 us to take
remedial actions or divest assets which may harm our results of operations or
financial condition.
Risks Related To Market, Economic Or International Financial 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 achievement
of our growth targets is dependent, at least in part, upon our ability to
access capital at rates and on terms we determine to be attractive. If our
ability to access capital becomes significantly constrained, our interest costs
will likely increase and our financial condition could be harmed and future
results of operations could be significantly harmed.
The insurance industry has also been disrupted by these events. As a result,
the availability of insurance covering risks we and our competitors typically
insure against may decrease. In addition, the insurance we are able to obtain
may have higher deductibles, higher premiums and more restrictive policy terms.
A downgrade in our credit rating could negatively affect our ability to access
capital and/or to operate our power and gas trading businesses.
Standard & Poor's and Moody's rate our senior, unsecured debt at BBB+ and
Baa1, respectively. However, on April 19, 2002, Moody's placed the credit
ratings of our senior unsecured indebtedness on review for possible downgrade
pending corporate separation. 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 our 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 our access to the commercial paper market.
Our power and gas trading businesses rely on the investment grade ratings
(with respect to senior, unsecured debt) of our public utility subsidiaries and
us, respectively. Most of our counterparties
11
require the creditworthiness of an investment grade entity to stand behind
transactions. If our rating or those of our public utility subsidiaries were to
decline below investment grade, our ability to profitably operate our power and
gas trading businesses would be diminished because we would likely have to
deposit cash or cash related instruments which would reduce our profits.
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 nature and location of facilities we acquire and 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 of doing business outside the United States
We currently own and may acquire and/or dispose of material energy-related
investments and projects outside the United States. The economic and political
conditions in certain countries where we have interests or in which we may
explore development, acquisition or investment opportunities present risks of
delays in construction and interruption of business, as well as risks of war,
expropriation nationalization, renegotiation, trade sanctions or nullification
of existing contracts and changes in law or tax policy, that are greater than
in the United States. The uncertainty of the legal environment in certain
foreign countries in which we develop or acquire projects or make investments
could make it more difficult to obtain non-recourse project or other financing
on suitable terms, could adversely affect the ability of certain customers to
honor their obligations with respect to such projects or investments and could
impair our ability to enforce our rights under agreements relating to such
projects or investments.
Operations in foreign countries also can present currency exchange rate and
convertibility, inflation and repatriation risk. In certain countries in which
we develop or acquire projects, or make investments, economic and monetary
conditions and other factors could affect our ability to convert our earnings
denominated in foreign currencies to United States dollars or other hard
currencies or to move funds offshore from such countries. Furthermore, the
central bank of any such country may have the authority in certain
circumstances to suspend, restrict or otherwise impose conditions on foreign
exchange transactions or to approve distributions to foreign investors.
Although we intend to structure
12
our power purchase agreements, joint venture agreements and other project
revenue agreements to provide for payments or contributions to be made in, or
indexed to, United States dollars or a currency freely convertible into United
States dollars, there can be no assurance that we will be able to achieve this
structure in all cases or that a power purchaser or other customer will be able
to obtain sufficient United States dollars or other hard currency or that
available United States dollars will be allocated to pay such obligations or
make such contributions.
Changes in commodity prices may increase our cost of producing power or
decrease the amount we receive from selling power, harming our financial
performance.
We are heavily exposed to changes in the price and availability of coal
because most of our generating capacity is coal-fired. We have contracts of
varying durations for the supply of coal for most of our existing generation
capacity, but as these contracts end, we may not be able to purchase coal on
terms as favorable as the current contracts.
We also own natural gas-fired facilities, which increases our exposure to
the more volatile market prices of natural gas.
Changes in the cost of coal or natural gas and changes in the relationship
between those costs and the market prices of power will affect our financial
results. Since the price we obtain for electricity may not change at the same
rate as the change in coal or natural gas 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 some jurisdictions are capped and our fuel recovery
mechanisms in other states are frozen for various periods of time.
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.
At times, demand for power could exceed our supply capacity.
We are currently obligated to supply power in parts of eleven states. From
time to time the demand for power required to meet these obligations could
exceed our available generation capacity. If this occurs, we would have to buy
power on the market. We may not always have the ability to pass these costs on
to our customers because some of the states we operate in do not allow us to
increase our rates in response to increased fuel cost charges. Since these
situations most often occur during periods of peak demand, it is possible that
the market price for power at that time would be very high. Unlike the cooler
weather over the summer of 2000, the hotter-than-normal summer of 1999 saw
market prices for power in regions in which certain of our regulated utility
subsidiaries have supply obligations peak in excess of $5,000 per megawatt
hour. Utilities that did not own or purchase sufficient available capacity
during those periods incurred significant losses in sourcing incremental power.
Even if a supply shortage was brief, we could suffer substantial losses that
could diminish our results of operations.
13
Risks Related To Environmental Regulation
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 compliance.
Most of our generating capacity is coal burning. We plan to install new
emissions control equipment and may be required to upgrade existing equipment,
purchase emissions allowances or reduce operations. We expect to spend
approximately $1.6 billion in connection with the installation of emission
control equipment at our facilities to comply with the new NOx rule (of which
approximately $450 million has already been expended), the Section 126 Rule and
certain environmental requirements of Texas. 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 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 have been involved in litigation regarding generating plant
emissions under the Clean Air Act. Federal EPA and a number of states alleged
that we and eleven unaffiliated utilities modified certain units at coal-fired
generating plants in violation of the Clean Air Act. Federal EPA filed
complaints against certain AEP subsidiaries in U.S. District Court for the
Southern District of Ohio. A separate lawsuit initiated by certain special
interest groups was consolidated with the Federal EPA case. The alleged
modification of the generating units occurred over a 20 year period.
If these actions are resolved against us, substantial modifications of our
existing coal-fired power plants would be required. In addition, we could be
required to invest significantly in additional emission control equipment,
accelerate the timing of capital expenditures, pay penalties and/or halt
operations. Moreover, our results of operations and financial position could be
reduced due to the consequent distraction of management and the expense of
ongoing litigation.
Other parties have settled similar lawsuits. An unaffiliated utility which
operates certain plants jointly owned by CSPCo reached a tentative agreement to
settle litigation regarding generating plant
14
emissions under the Clean Air Act. Negotiations are continuing and a settlement
could impact the operation of certain of the jointly owned plants. Until a
final settlement is reached, CSPCo will be unable to determine the settlement's
impact on its jointly owned facilities and its future results of operations and
cash flows.
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 Texas, Ohio
and Virginia, we cannot recover through rates additional capital and other
costs incurred by us to comply with new environmental regulations with respect
to our generation previously regulated in those jurisdictions. As a result of
rate freezes in effect in Michigan and Indiana (expiring January 1, 2005) we
generally cannot recover through rates additional capital and other costs
incurred by us to comply with new environmental regulations with respect to our
generation subject to those jurisdictions. A settlement currently on file with
the FERC in connection with our corporate separation proceeding would extend
Indiana's rate freeze through 2007.
15
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....................... 2.22
December 31, 1998....................... 2.25
December 31, 1999....................... 2.14
December 31, 2000....................... 1.59
December 31, 2001....................... 2.23
March 31, 2002.......................... 2.13
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 and the trusts filed
with the SEC. We also file annual, quarterly and special reports and other
information with the SEC. You may read and copy any document we file at the
SEC's Public Reference Room at 450 Fifth Street, N. W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. You may also examine our SEC filings through the SEC's web
site at http://www.sec.gov or at the offices of the New York Stock Exchange, 20
Broad Street, New York, New York 10005.
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 securities registered herein.
Annual Report on Form 10-K for the year ended December 31, 2001; and
Quarterly Report on Form 10-Q for the period ended March 31, 2002.
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 securities 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.
16
USE OF PROCEEDS
The net proceeds from the sale of any of the offered securities will be used
for general corporate purposes relating to our business. Unless stated
otherwise in a prospectus supplement, these purposes include redeeming or
repurchasing outstanding debt, replenishing working capital, financing our
subsidiaries' ongoing construction and maintenance programs. If we do not use
the net proceeds immediately, we temporarily invest them in short-term,
interest-bearing obligations. At March 31, 2002, our outstanding short-term
debt was $3,984,000,000.
The prospectus supplement of a particular offering of securities will
identify the use of proceeds for the offering. The proceeds from the sale of
Trust Preferred Securities by a trust will be invested in Debt Securities
issued by us. Except as we may otherwise describe in the related prospectus
supplement, we expect to use the net proceeds of the sale of such Debt
Securities to the applicable trust for the above purposes.
THE TRUSTS
AEP Capital Trust I, AEP Capital Trust II and AEP Trust III (each a "trust")
are statutory business trusts created under the Delaware Business Trust Act
pursuant to amended and restated declarations of trust, among AEP, Wilmington
Trust Company, as the Property Trustee and Delaware Trustee and two employees
of AEP as Administrative Trustees. In this prospectus, we refer to these
declarations as the trust agreements.
Each trust exists solely to:
. issue and sell its Trust Preferred Securities and Trust Common Securities
(the "Trust Securities");
. use the proceeds from the sale of its Trust Securities to purchase and
hold a series of our Debt Securities;
. maintain its status as a grantor trust for federal income tax purposes;
and
. engage in other activities that are necessary or incidental to these
purposes.
We will purchase all of the Trust Common Securities. The Trust Common
Securities will represent an aggregate liquidation amount equal to at least 3%
of the total capital of the trust. Payments will be made on the Trust Common
Securities pro rata with the Trust Preferred Securities, except that the Trust
Common Securities' right to payment will be subordinated to the rights of the
Trust Preferred Securities if there is a default under the trust agreement
resulting from an event of default under the applicable indenture.
We will guarantee the Trust Preferred Securities as described later in this
prospectus.
Each trust's business and affairs will be conducted by its Administrative
Trustees, as set forth in the trust agreement. The office of the Delaware
Trustee in the State of Delaware is 1100 North Market Street, Wilmington,
Delaware 19890. The trust's offices are located at 1 Riverside Plaza, Columbus,
Ohio 43215; the telephone number is (614) 223-1000.
17
ACCOUNTING TREATMENT OF TRUSTS
For financial reporting purposes, the trusts will be treated as our
subsidiaries and, accordingly, the accounts of the trusts will be included in
our consolidated financial statements. The Trust Preferred Securities will be
presented as a separate line item in our consolidated balance sheet, and
appropriate disclosures concerning the Trust Preferred Securities, the
Guarantees, the Senior Notes and the junior subordinated debentures will be
included in the notes to the consolidated financial statements. For financial
reporting purposes, we will record distributions payable on the Trust Preferred
Securities as an expense.
DESCRIPTION OF THE SENIOR NOTES
General
We will issue the Senior Notes directly to the public, to a trust or as part
of a Stock Purchase Unit, under an Indenture dated May 1, 2001 between us and
the Trustee, The Bank of New York. This prospectus briefly outlines some
provisions of the Indenture. If you would like more information on these
provisions, you should review the Indenture and any supplemental indentures or
company orders that we have filed or will file with the SEC. See Where You Can
Find More Information on how to locate these documents. You may also review
these documents at the Trustee's offices at 5 Penn Plaza, New York, New York.
The Indenture does not limit the amount of Senior Notes that may be issued.
The Indenture permits us to issue Senior 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 Senior Notes may
differ as to their terms. The Indenture also gives us the ability to reopen a
previous issue of a series of Senior Notes and issue additional Senior Notes of
such series.
Because we are a holding company, the claims of creditors of our
subsidiaries will have a priority over our equity rights and the rights of our
creditors (including the holders of the Senior Notes) to participate in the
assets of the subsidiary upon the subsidiary's liquidation.
The Senior Notes are unsecured and will rank equally with all our unsecured
unsubordinated debt. For current information on our debt outstanding see our
most recent Form 10-K and 10-Q. See Where You Can Find More Information.
A prospectus supplement or pricing supplement will include the final terms
for each Senior Note. If we decide to list upon issuance any Senior Note or
Senior 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 of the Senior Notes that we may sell at one or more
times will be established in the applicable pricing or prospectus supplement:
. Maturity
. Fixed or floating interest rate
. Remarketing features
. Certificate or book-entry form
18
. Redemption
. Not convertible, amortized or subject to a sinking fund
. Interest paid on fixed rate Senior Notes quarterly or semi-annually
. Interest paid on floating rate Senior Notes monthly, quarterly,
semi-annually, or annually
. Issued in multiples of a minimum denomination
. Ability to defer payment of interest
. Any other terms not inconsistent with the Indenture
. Issued with Original Issue Discount
The Senior 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 Senior Notes will not be subject to
any conversion, amortization, or sinking fund. We expect that the Senior Notes
issued to the public will be "book-entry," represented by a permanent global
Senior Note registered in the name of The Depository Trust Company, or its
nominee. We reserve the right, however, to issue Senior Note certificates
registered in the name of the Senior Noteholders.
The interest rate and interest and other payment dates of each series of
Senior Notes issued to a trust will correspond to the rate at which
distributions will be paid and the distribution and other payment dates of the
Trust Preferred Securities.
In the discussion that follows, whenever we talk about paying principal on
the Senior 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 Indenture does not protect holders of the Senior Notes if we engage in a
highly leveraged transaction.
The following terms may apply to each Senior Note as specified in the
applicable pricing or prospectus supplement and the Senior Note:
Redemptions
If we issue redeemable Senior Notes, we may redeem such Senior 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 Senior Notes in whole or in part by delivering written notice to the
Senior Noteholders no more than 60, and not less than 30, days prior to
redemption. If we do not redeem all the Senior Notes of a series at one time,
the Trustee selects the Senior Notes to be redeemed in a manner it determines
to be fair.
Remarketed Notes
If we issue Senior Notes with remarketing features, an applicable pricing or
prospectus supplement will describe the terms for the Senior Notes including:
interest rate, remarketing provisions, our right to purchase or redeem Senior
Notes, the holders' right to tender Senior Notes, and any other provisions.
19
Note Certificates--Registration, Transfer, and Payment of Interest and Principal
Unless otherwise indicated in the applicable prospectus supplement, each
series of Senior Notes issued to the public will be issued initially in the
form of one or more global notes, in registered form, without coupons, as
described under Book-Entry System. However, if we issue Senior Note
certificates, they will be registered in the name of the Senior Noteholder. The
Senior 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 to public holders of Senior Note certificates will be made by check.
Original Issue Discount
We may issue the Senior 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 Senior 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 Senior Notes.
Interest Rate
The interest rate on the Senior 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 Senior 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 Senior 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.
For a discussion of our ability to defer interest payments on the Senior
Notes, see Description of Trust Preferred Securities--Option to Extend Interest
Payment Period.
Fixed Rate Senior Notes
A pricing or prospectus supplement will designate the record dates, payment
dates, our ability to defer interest payments and the fixed rate of interest
payable on a Senior 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 Senior Note will have an interest rate formula. The
applicable prospectus supplement or pricing supplement will state the initial
interest rate or interest rate formula on each Senior 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.
20
Events of Default
The following are events of default under the Indenture with respect to any
series of Senior Notes, unless we state otherwise in the applicable prospectus
supplement:
. failure to pay for three business days the principal of (or premium, if
any, on) any Senior Note of a series when due and payable;
. failure to pay for 30 days any interest on any Senior Note of any series
when due and payable;
. failure to perform any other requirements in such Senior Notes, or in the
Indenture in regard to such Senior Notes, for 90 days after notice;
. certain events of our bankruptcy or insolvency; or
. any other event of default specified in a series of Senior Notes.
An event of default for a particular series of Senior Notes does not
necessarily mean that an event of default has occurred for any other series of
Senior 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 Senior Notes of the series affected may require us to repay the entire
principal of the Senior Notes of such series immediately ("Repayment
Acceleration"). In most instances, the holders of at least a majority in
aggregate principal amount of the Senior 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. For a
discussion of remedies in the event Senior Notes are issued to a trust, see
Description of Trust Preferred Securities--Enforcement of Certain Rights of
Holders of Trust Preferred Securities.
The Trustee must within 90 days after a default occurs, notify the holders
of the Senior 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 Senior 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 Senior Notes.
Modification of Indenture
Under the Indenture, our rights and obligations and the rights of the
holders of any Senior Notes may be changed. Any change affecting the rights of
the holders of any series of Senior Notes requires the consent of the holders
of not less than a majority in aggregate principal amount of the outstanding
Senior 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 Senior 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 Senior Noteholders.
21
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 (i) is organized
and existing under the laws of the United States, any state thereof or the
District of Columbia and (ii) expressly assumes the payment of principal,
premium, if any, and interest on the Senior Notes.
Legal Defeasance
We will be discharged from our obligations on the Senior Notes of any series
at any time if:
. 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 Senior Note of the
series, and
. we deliver to the Trustee an opinion of counsel stating that the federal
income tax obligations of Senior Noteholders of that series will not
change as a result of our performing the action described above.
If this happens, the Senior Noteholders of the series will not be entitled
to the benefits of the Indenture except for registration of transfer and
exchange of Senior Notes and replacement of lost, stolen or mutilated Senior
Notes.
Covenant Defeasance
We will be discharged from our obligations under any restrictive covenant
applicable to the Senior 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 Senior
Notes of that series. In that instance, we would remain liable for such amounts.
Governing Law
The Indenture and Senior 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 in the normal course of business. The Trustee is also the Subordinated
Indenture Trustee under the Subordinated Indenture relating to the Junior
Subordinated Debentures.
22
DESCRIPTION OF COMMON STOCK
Our authorized capital stock currently consists of 600,000,000 shares of
common stock, par value $6.50 per share. 322,235,005 shares of our common stock
were issued and outstanding as of December 31, 2001. Our common stock,
including the common stock offered in this prospectus once issued, is listed on
the New York Stock Exchange. First Chicago Trust Company of New York, P.O. Box
2500, Jersey City, New Jersey 07303-2500, is the transfer agent and registrar
for our common stock.
Dividend Rights
The holders of our common stock are entitled to receive the dividends
declared by our board of directors provided funds are legally available for
such dividends. Our income derives from our common stock equity in the earnings
of our subsidiaries. Various financing arrangements, charter provisions and
regulating requirements may impose certain restrictions on the ability of our
subsidiaries to transfer funds to us in the form of cash dividends, loans or
advances.
Voting Rights
The holders of our common stock are entitled to one vote for each share of
common stock held. The holders of our common stock are entitled to cumulate
their votes when voting for the election of directors.
Pre-emptive Rights
The holders of our common stock generally do not have the right to subscribe
for or purchase any part of any new or additional issue of our common stock.
If, however, our board of directors determines to issue and sell any common
stock solely for money and not by (1) a public offering, (2) an offering to or
through underwriters or dealers who have agreed to promptly make a public
offering, or (3) any other offering which the holders of a majority of our
outstanding common stock have authorized; then such common stock must first be
offered pro rata to our existing shareholders on terms no less favorable than
those offered to persons other than our existing shareholders.
Rights Upon Liquidation
If we are liquidated, holders of our common stock will be entitled to
receive pro rata all assets available for distribution to our shareholders
after payment of our liabilities, including liquidation expenses.
Restrictions on Dealing with Existing Shareholders
We are subject to Section 513 of New York's Business Corporation Law, which
provides that no domestic corporation may purchase or agree to purchase more
than 10% of its stock from a shareholder who has held the shares for less than
two years at any price that is higher than the market price unless the
transaction is approved by both the corporation's board of directors and a
majority of the votes of all outstanding shares entitled to vote thereon at a
meeting of shareholders, unless the certificate of incorporation requires a
greater percentage or the corporation offers to purchase shares from all the
holders on the same terms. Our certificate of incorporation does not currently
provide for a higher percentage.
23
DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
General
We will issue the Junior Subordinated Debentures directly to the public, to
a trust or as part of a Stock Purchase Unit under the Subordinated Indenture to
be entered into by us and the Subordinated Indenture Trustee, The Bank of New
York. This prospectus briefly outlines some provisions of the Subordinated
Indenture. If you would like more information on these provisions, you should
review the Subordinated Indenture and any supplemental indentures or company
orders that we will file with the SEC. See Where You Can Find More Information
on how to locate these documents.
The Junior Subordinated Debentures are unsecured obligations and are junior
in right of payment to "Senior Indebtedness". You may find a description of the
subordination provisions of the Junior Subordinated Debentures, including a
description of Senior Indebtedness under Subordination.
Because we are a holding company, the claims of creditors of our
subsidiaries will have a priority over our equity rights and the rights of our
creditors (including the holders of the Junior Subordinated Debentures) to
participate in the assets of the subsidiary upon the subsidiary's liquidation.
The Subordinated Indenture does not limit the amount of Junior Subordinated
Debentures that we may issue under it. We may issue Junior Subordinated
Debentures from time to time under the Subordinated Indenture in one or more
series by entering into supplemental indentures or by our Board of Directors or
a duly authorized committee authorizing the issuance. The Subordinated
Indenture also gives us the ability to reopen a previous issue of a series of
Junior Subordinated Debentures and issue additional Junior Subordinated
Debentures of such series.
A prospectus supplement or pricing supplement will include the final terms
for each Junior Subordinated Debenture. If we decide to list upon issuance any
Junior Subordinated Debenture or Junior Subordinated Debentures 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 of
the Junior Subordinated Debentures that we may sell at one or more times will
be established in a prospectus supplement:
. Maturity
. Fixed or floating interest rate
. Remarketing features
. Certificate or book-entry form
. Redemption
. Not convertible, amortized or subject to a sinking fund
. Interest paid on fixed rate Junior Subordinated Debentures quarterly or
semi-annually
. Interest paid on floating rate Junior Subordinated Debentures monthly,
quarterly, semi-annually, or annually
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. Issued in multiples of a minimum denomination
. Ability to defer interest payments
. Any other terms not inconsistent with the Subordinated Indenture
. Issued with Original Issue Discount
The interest rate and interest and other payment dates of each series of
Junior Subordinated Debentures issued to a trust will correspond to the rate at
which distributions will be paid and the distribution and other payment dates
of the Trust Preferred Securities.
The Subordinated Indenture does not protect the holders of Junior
Subordinated Debentures if we engage in a highly leveraged transaction.
Redemption
Provisions relating to the redemption of Junior Subordinated Debentures will
be set forth in the applicable prospectus supplement. Unless we state otherwise
in the applicable prospectus supplement, we may redeem Junior Subordinated
Debentures only upon notice mailed at least 30 but not more than 60 days before
the date fixed for redemption. If we do not redeem all the Junior Subordinated
Debentures of a series at one time, the Subordinated Indenture Trustee selects
those to be redeemed in a manner it determines to be fair.
Junior Subordinated Debenture Certificates--Registration, Transfer, and Payment
of Interest and Principal
Unless otherwise indicated in the applicable prospectus supplement, each
series of Junior Subordinated Debentures issued to the public initially will be
in the form of one or more global Junior Subordinated Debentures, in registered
form, without coupons, as described under Book-Entry System. However, if we
issue Junior Subordinated Debenture certificates, they will be registered in
the name of the Junior Subordinated Debentureholder. The Junior Subordinated
Debentures may be transferred or exchanged, pursuant to administrative
procedures in the Subordinated Indenture, without the payment of any service
charge (other than any tax or other governmental charge) by contacting the
paying agent. Payments to public holders of Junior Subordinated Debenture
certificates will be made by check.
Original Issue Discount
We may issue the Junior Subordinated Debentures 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 Junior Subordinated
Debentures 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 Junior Subordinated Debentures.
Interest Rate
The interest rate on the Junior Subordinated Debentures will either be fixed
or floating. The interest paid will include interest accrued to, but excluding,
the date of maturity or redemption. Interest
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is generally payable to the person in whose name the Junior Subordinated
Debenture 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 Junior Subordinated Debenture 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.
For a discussion of our ability to defer interest payments on the Junior
Subordinated Debentures, see Description of Trust Preferred Securities--Option
to Extend Interest Payment Period.
Fixed Rate Junior Subordinated Debentures
A pricing or prospectus supplement will designate the record dates, payment
dates, our ability to defer interest payments and the fixed rate of interest
payable on a Junior Subordinated Debenture. 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 Junior Subordinated Debentures
Each floating rate Junior Subordinated Debenture will have an interest rate
formula. The applicable prospectus supplement or pricing supplement will state
the initial interest rate or interest rate formula on each Junior Subordinated
Debenture 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
The following are events of default under the Subordinated Indenture with
respect to any series of Junior Subordinated Debentures, unless we state
otherwise in the applicable prospectus supplement:
. failure to pay for three business days the principal of (or premium, if
any, on) any Junior Subordinated Debenture of a series when due and
payable;
. failure to pay for 30 days any interest on any Junior Subordinated
Debenture of any series when due and payable;
. failure to perform any other requirements in such Junior Subordinated
Debentures, or in the Subordinated Indenture, for 90 days after notice;
. certain events of our bankruptcy or insolvency; or
. any other event of default specified in a series of Junior Subordinated
Debentures.
An event of default for a particular series of Junior Subordinated
Debentures does not necessarily mean that an event of default has occurred for
any other series of Junior Subordinated Debentures issued under the
Subordinated Indenture. If an event of default occurs and continues, the
Subordinated Indenture Trustee or the holders of at least 33% of the principal
amount of the Junior Subordinated
26
Debentures of the series affected may require us to repay the entire principal
of the Junior Subordinated Debentures of such series immediately ("Repayment
Acceleration"). In most instances, the holders of at least a majority in
aggregate principal amount of the Junior Subordinated Debentures 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
Subordinated Indenture Trustee enough money to pay all (unaccelerated) past due
amounts and penalties, if any. For a discussion of remedies in the event Junior
Subordinated Debentures are issued to a trust, see Description of Trust
Preferred Securities--Enforcement of Certain Rights by Holders of Trust
Preferred Securities.
The Subordinated Indenture Trustee must within 90 days after a default
occurs, notify the holders of the Junior Subordinated Debentures of the series
of default unless such default has been cured or waived. We are required to
file an annual certificate with the Subordinated Indenture Trustee, signed by
an officer, concerning any default by us under any provisions of the
Subordinated Indenture.
In the case of Junior Subordinated Debentures issued to a trust, a holder of
Trust Preferred Securities may institute a legal proceeding directly against us
without first instituting a legal proceeding against the Property Trustee of
the trust by which those Trust Preferred Securities were issued or any other
person or entity, for enforcement of payment to that holder of principal or
interest on an equivalent amount of Junior Subordinated Debentures of the
related series on or after the due dates specified in those Junior Subordinated
Debentures.
Subject to the provisions of the Subordinated Indenture relating to its
duties in case of default, the Subordinated Indenture Trustee shall be under no
obligation to exercise any of its rights or powers under the Subordinated
Indenture at the request, order or direction of any holders unless such holders
offer the Subordinated Indenture Trustee reasonable indemnity. Subject to the
provisions for indemnification, the holders of a majority in principal amount
of the Junior Subordinated Debentures 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 Subordinated Indenture Trustee
with respect to such Junior Subordinated Debentures.
Modification of Subordinated Indenture
Under the Subordinated Indenture, our rights and obligations and the rights
of the holders of any Junior Subordinated Debentures may be changed. Any change
affecting the rights of the holders of any series of Junior Subordinated
Debentures requires the consent of the holders of not less than a majority in
aggregate principal amount of the outstanding Junior Subordinated Debentures 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 Junior Subordinated Debentures and
take other action that does not affect the rights of holders of any series by
executing supplemental indentures without the consent of any debentureholders.
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 (i) is organized
and existing under the laws of the United States, any
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state thereof or the District of Columbia and (ii) expressly assumes the
payment of principal, premium, if any, and interest on the Junior Subordinated
Debentures.
Legal Defeasance
We will be discharged from our obligations on the Junior Subordinated
Debentures of any series at any time if:
. 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 Junior Subordinated
Debenture of the series, and
. we deliver to the Trustee an opinion of counsel stating that the federal
income tax obligations of debentureholders of that series will not change
as a result of our performing the action described above.
If this happens, the debentureholders of the series will not be entitled to
the benefits of the Subordinated Indenture except for registration of transfer
and exchange of Junior Subordinated Debentures and replacement of lost, stolen
or mutilated Junior Subordinated Debentures.
Covenant Defeasance
We will be discharged from our obligations under any restrictive covenant
applicable to the Junior Subordinated Debentures 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 Subordinated Indenture Trustee to pay all
amounts due on the Junior Subordinated Debentures of that series. In that
instance, we would remain liable for such amounts.
Junior Subordinated Debentures issued to a trust will not be subject to
covenant defeasance.
Subordination
Each series of Junior Subordinated Debentures will be subordinate and junior
in right of payment, to the extent set forth in the Subordinated Indenture, to
all Senior Indebtedness as defined below. If:
. we make a payment or distribution of any of our assets to creditors upon
our dissolution, winding-up, liquidation or reorganization, whether in
bankruptcy, insolvency or otherwise;
. a default beyond any grace period has occurred and is continuing with
respect to the payment of principal, interest or any other monetary
amounts due and payable on any Senior Indebtedness; or
. the maturity of any Senior Indebtedness has been accelerated because of a
default on that Senior Indebtedness,
then the holders of Senior Indebtedness generally will have the right to
receive payment, in the case of the first instance, of all amounts due or to
become due upon that Senior Indebtedness, and, in the case of the second and
third instances, of all amounts due on that Senior Indebtedness, or we will
make provision for those payments, before the holders of any Junior
Subordinated Debentures have the right to receive any payments of principal or
interest on their Junior Subordinated Debentures.
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"Senior Indebtedness" means, with respect to any series of Junior
Subordinated Debentures, the principal, premium, interest and any other payment
in respect of any of the following:
. all of our indebtedness that is evidenced by notes, debentures, bonds or
other securities we sell for money or other obligations for money
borrowed;
. all indebtedness of others of the kinds described in the preceding
category which we have assumed or guaranteed or which we have in effect
guaranteed through an agreement to purchase, contingent or otherwise; and
. all renewals, extensions or refundings of indebtedness of the kinds
described in either of the preceding two categories.
Any such indebtedness, renewal, extension or refunding, however, will not be
Senior Indebtedness if the instrument creating or evidencing it or the
assumption or Guarantee of it provides that it is not superior in right of
payment to or is equal in right of payment with those Junior Subordinated
Debentures. Senior Indebtedness will be entitled to the benefits of the
subordination provisions in the Subordinated Indenture irrespective of the
amendment, modification or waiver of any term of the Senior Indebtedness.
The Subordinated Indenture does not limit the amount of Senior Indebtedness
that we may issue. As of December 31, 2001, our Senior Indebtedness totaled
approximately $6,252,621,000.
Governing Law
The Subordinated Indenture and Junior Subordinated Debentures 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
Subordinated Indenture Trustee in the normal course of business. The
Subordinated Trustee is also the Trustee under the Indenture relating to the
Senior Notes.
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DESCRIPTION OF TRUST PREFERRED SECURITIES
Each trust may issue Trust Preferred Securities and Trust Common Securities
under the trust agreement, which we refer to in this prospectus as the Trust
Securities. These Trust Securities will represent undivided beneficial
interests in the assets of the trust. Selected provisions of the trust
agreement are summarized below. This summary is not complete. The form of trust
agreement is filed with the SEC herewith and you should read the trust
agreement for provisions that may be important to you. The trust agreement will
be qualified as an indenture under the Trust Indenture Act. You should also
refer to the Trust Indenture Act for provisions that apply to the Trust
Preferred Securities.
General
Each trust will exist for the exclusive purposes of:
. issuing and selling its Trust Preferred Securities and Trust Common
Securities;
. investing the gross proceeds of the Trust Securities in our Debt
Securities;
. maintaining its status as a grantor trust for federal income tax purposes;
. making distributions; and
. engaging in only those other activities necessary, advisable or
incidental to the purposes listed above.
Our Debt Securities will be the sole assets of each trust, and our payments
under the Debt Securities will be the sole income of each trust. No separate
financial statements of any trust will be included in this prospectus. We
consider that these financial statements would not be material to holders of
the Trust Preferred Securities because no trust would have any independent
operations and the only purposes of each trust are those described above. We do
not expect that any trust will be filing annual, quarterly or special reports
with the SEC. The principal place of business of each trust will be c/o
American Electric Power Company, Inc., 1 Riverside Plaza, Columbus, OH 43215.
Each trust will exist until terminated as provided in its trust agreement.
The trustees of each trust will be:
. two of our employees or officers or two employees or officers of our
affiliates as administrators (the "Administrative Trustees"); and
. Wilmington Trust Company, which will act as Property Trustee and as
indenture trustee for purposes of the Trust Indenture Act (the "Property
Trustee") and for the purpose of complying with the provisions of the
Delaware Business Trust Act, the Delaware Trustee (the "Delaware
Trustee").
The trust agreement will authorize the Administrative Trustees to issue two
classes of Trust Securities: Trust Preferred Securities and Trust Common
Securities. We will own all of the Trust Common Securities issued by each
trust, which will rank equally in right of payment with the Trust Preferred
Securities issued by the respective trust. However, if an event of default
occurs and is continuing under the trust agreement, rights of the holders of
the Trust Common Securities to payment for distributions and otherwise will be
subordinated to the rights of the holders of the Trust Preferred
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Securities. We will acquire Trust Common Securities of each trust in a total
liquidation amount of at least three percent of the total capital of the trust.
Proceeds from the sale of both the Trust Preferred Securities and the Trust
Common Securities issued by each trust will be used to purchase our Debt
Securities, which will be held in trust by the Property Trustee for the benefit
of the holders of the Trust Securities issued by the respective trust. We will
guarantee the payments of distributions and payments of redemption or
liquidation with respect to the Trust Preferred Securities issued by each
trust, but only to the extent the respective trust has funds legally available
for and cash sufficient to make those payments and has not made the payments.
See Description of Guarantees below.
Each Guarantee, when taken together with our obligations under the related
Debt Securities, the related indenture and the related trust agreement, will
provide a full and unconditional guarantee of amounts due on the Trust
Preferred Securities issued by the respective trust. The Trust Preferred
Securities will have the terms, including distributions, redemption, voting,
liquidation rights and other rights or restrictions that will be described in
the related trust agreement or made part of it by the Trust Indenture Act or
the Delaware Business Trust Act.
Provisions of a Particular Series
Each Trust may issue only one series of Trust Preferred Securities. The
applicable prospectus supplement will set forth the principal terms of the
Trust Preferred Securities that will be offered, including:
. the name of the Trust Preferred Securities;
. the liquidation amount and number of Trust Preferred Securities issued;
. the annual distribution rate or rates or method of determining such rate
or rates, the payment date or dates and the record dates used to
determine the holders who are to receive distributions;
. whether distributions will be cumulative and, in the case of Trust
Preferred Securities, having cumulative distribution rights, the date
from which distributions will be cumulative;
. the optional redemption provisions, if any, including the prices, time
periods and other terms and conditions on which the Trust Preferred
Securities will be purchased or redeemed, in whole or in part;
. the terms and conditions, if any, upon which the Debt Securities and the
related Guarantee may be distributed to holders of the Trust Preferred
Securities;
. any securities exchange on which the Trust Preferred Securities will be
listed;
. the terms and conditions, if any, upon which the Trust Preferred
Securities may be converted into our securities; and
. any other relevant rights, covenants, preferences, privileges,
limitations or restrictions of the Trust Preferred Securities.
Terms of the Trust Preferred Securities issued by each trust will mirror the
terms of the Debt Securities held by the respective trust. In other words, the
interest rate and interest and other payment dates of each series of Debt
Securities issued to a trust will correspond to the rate at which distributions
31
will be paid and the distribution and other payment dates of the Trust
Preferred Securities of that trust. The prospectus supplement will also set
forth whether the Debt Securities to be issued to a trust will be Senior Notes
or Junior Subordinated Debentures.
Distributions
The Trust Preferred Securities represent preferred, undivided, beneficial
interests in the assets of the respective trust. The applicable prospectus
supplement will state the annual rate, as a percentage of the liquidation
amount, at which distributions on each Trust Preferred Security will be
payable, the liquidation amount and the dates on which distributions will be
payable.
Each trust will use the proceeds from the issuance and sale of the Trust
Preferred Securities to purchase our Debt Securities. The income of a trust
available for distribution to holders of the Trust Preferred Securities issued
by that trust will be limited to payments under those Debt Securities. If we do
not make payments on the Debt Securities, a trust will not have funds available
to pay distributions or other amounts payable on the Trust Preferred Securities
issued by that trust. The payment of distributions and other amounts payable on
the Trust Preferred Securities issued by a trust, if and to the extent the
trust has funds legally available for and cash sufficient to make such
payments, is guaranteed by us as described herein under Description of
Guarantees.
Option to Accelerate Maturity Date
If, at any time the Debt Securities are held by a trust, we are not able to
deduct the interest payable on the Debt Securities as a result of a Tax Event,
then we have the right to accelerate the stated maturity of the Debt Securities
to the minimum extent required so that interest on the Debt Securities will be
deductible for United States federal income tax purposes. However, the
resulting maturity may not be less than 15 years from the date of the original
issuance. Moreover, we may not accelerate the stated maturity unless we have
received an opinion of counsel to the effect that (1) following acceleration,
interest paid on the Debt Securities will be deductible for United States
federal income tax purposes and (2) the holders of Trust Preferred Securities
will not recognize income, gain or loss for United States federal income tax
purposes as a result of this acceleration and will be subject to United States
federal tax in the same amount, in the same manner and at the same times as
would have been the case if acceleration had not occurred.
Option to Extend Interest Payment Period
If the applicable prospectus supplement so states, we will have the right to
defer the payment of interest on the Debt Securities at any time or from time
to time for a period, which we refer to in this prospectus as an "extension
period," not exceeding 20 consecutive quarterly periods with respect to each
extension period. During each extension period we shall have the right to make
partial payments of interest on the Debt Security on any interest payment date.
At the end of each extension period we shall pay all interest then accrued and
unpaid. No extension period may extend beyond the stated maturity of the Debt
Securities or end on a date other than an interest payment date. As a
consequence of any such deferral, distributions on the Trust Preferred
Securities by a trust will be deferred during any such extension period.
Distributions to which holders of the Trust Preferred Securities are entitled
will accumulate additional distributions at the rate stated in the applicable
prospectus supplement. During an extension period, interest will continue to
accrue and holders of Debt Securities, or holders of Trust Preferred Securities
while outstanding, will be required to accrue original issue discount
32
income for United States federal income tax purposes. We will provide further
discussion of the accrual of original issue discount in the applicable
prospectus supplement.
Prior to the termination of any extension period, we may further defer the
payment of interest, provided that, unless the applicable prospectus supplement
states otherwise, no extension period may exceed 20 consecutive quarterly
periods or extend beyond the stated maturity of the Debt Securities. Upon the
termination of any extension period and the payment of all amounts then due, we
may elect to begin a new extension period subject to the above conditions. No
interest shall be due and payable during an extension period, except at its
end. We must give the applicable trustee and the Property Trustee notice of our
election of an extension period at least one business day prior to the earlier
of the date the distributions on the Trust Preferred Securities would have been
payable but for the election to begin such extension period and the date the
Property Trustee is required to give notice to holders of the Trust Preferred
Securities of the record date or the date such distributions are payable, but
in any event not less than one business day prior to such record date. The
applicable trustee will give notice of our election to begin a new extension
period to the holders of the Trust Preferred Securities.
Unless the applicable prospectus supplement states otherwise, during any
extended interest period, or for so long as an event of default under the
applicable indenture or any payment default under the Guarantee has occurred
and is continuing, we will not, except in limited circumstances, (1) declare or
pay any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of our capital stock, (2) make any
payment of principal of or interest or premium, if any, on or repay, repurchase
or redeem any Debt Securities of ours that rank equally with, or junior to, the
Debt Securities, or (3) make any guarantee payments with respect to any
guarantee issued by us if such guarantee ranks equally with, or junior to, the
applicable Debt Securities.
Registration, Transfer and Exchange
Unless otherwise indicated in the applicable prospectus supplement, each
series of Trust Preferred Securities will be issued initially in the form of
one or more global securities, in registered form, without coupons, as
described under Book-Entry System. However, if we issue certificates, they will
be issued in the name of the security holder.
Trust Preferred Securities of any series will be exchangeable for other
Trust Preferred Securities of the same series of any authorized denominations
of a like aggregate liquidation amount and tenor. Subject to the terms of the
trust agreement and the limitations applicable to global securities, Trust
Preferred Securities may be presented for exchange or registration of
transfer--duly endorsed or accompanied by a duly executed instrument of
transfer--at the office of the Property Trustee, without service charges but
upon payment of any taxes and other governmental charges as described in the
trust agreement. Such transfer or exchange will be effected upon the Property
Trustee being satisfied with the documents of title and identity of the person
making the request.
The Property Trustee will not be required to issue, register the transfer
of, or exchange any Trust Preferred Securities during a period beginning at the
opening of business 15 days before the day of mailing of a notice of redemption
of any Trust Preferred Securities called for redemption and ending at the close
of business on the day of mailing or register the transfer of, or exchange, any
Trust Preferred Securities selected for redemption except, in the case of any
Trust Preferred Security to be redeemed in part, the portion thereof not to be
so redeemed.
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Payment and Paying Agents
Distributions and other payments on Trust Preferred Securities issued in the
form of global securities will be paid in the manner described under Book-Entry
System.
The paying agent initially will be the Property Trustee and any co-paying
agent chosen by the Property Trustee and acceptable to the Administrative
Trustees. If the Property Trustee is no longer the paying agent, the Property
Trustee will appoint a successor, which must be a bank or trust company
reasonably acceptable to the Administrative Trustees, to act as paying agent.
Such paying agent will be permitted to resign as paying agent upon 30 days'
written notice to the Property Trustee and the Administrative Trustees at which
time the paying agent will return all unclaimed funds and all other funds in
its possession to the Property Trustee.
Redemption
Upon the repayment or redemption, in whole or in part, of the Debt
Securities held by a trust, the proceeds shall be applied by the Property
Trustee to redeem a Like Amount, as defined below, of the Trust Securities
issued by that trust, upon not less than 30 nor more than 60 days' notice,
unless otherwise indicated in a prospectus supplement, at a redemption price
equal to the aggregate liquidation amount of the Trust Preferred Securities
plus accumulated but unpaid distributions to but excluding the redemption date
and the related amount of the premium, if any, paid by us upon the concurrent
redemption of the Debt Securities. If less than all the Debt Securities held by
a trust are to be repaid or redeemed on a redemption date, then the proceeds
from the repayment or redemption shall be allocated to the redemption
proportionately of the Trust Preferred Securities and the Trust Common
Securities issued by that trust based on the relative liquidation amounts of
the classes. The amount of premium, if any, paid by us upon the redemption of
all or any part of the Debt Securities held by a trust to be repaid or redeemed
on a redemption date shall be allocated to the redemption proportionately of
the Trust Preferred Securities and the Trust Common Securities issued by that
trust.
Unless the applicable prospectus supplement states otherwise, we will have
the right to redeem the Debt Securities held by a trust:
. on or after the date fixed for redemption as stated in the applicable
prospectus supplement, in whole at any time or in part from time to time;
or
. prior to the date fixed for redemption as stated in the applicable
prospectus supplement, in whole, but not in part, at any time within 90
days following the occurrence and during the continuation of a Tax Event
or an Investment Company Event, each as defined below.
"Like Amount" means:
. with respect to a redemption of Trust Securities, Trust Securities having
a liquidation amount equal to that portion of the principal amount of
Debt Securities to be contemporaneously redeemed in accordance with the
applicable indenture, allocated to the Trust Common Securities and to the
Trust Preferred Securities based upon the relative liquidation amounts of
the classes; and
. with respect to a distribution of Debt Securities to holders of Trust
Securities in connection with a dissolution or liquidation of a trust,
Debt Securities having a principal amount equal to the liquidation amount
of the Trust Securities of the holder to whom the Debt Securities are
distributed.
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"Tax Event" means the receipt by a trust of an opinion of counsel to us
experienced in relevant matters to the effect that, as a result of any
amendment to, or change--including any announced prospective change--in, the
laws or any regulations thereunder of the United States or any political
subdivision or taxing authority of or in the United States, or as a result of
any official administrative pronouncement or action or judicial decision
interpreting or applying these laws or regulations, which amendment or change
is effective or which pronouncement or decision is announced on or after the
date of issuance by a trust of Trust Preferred Securities, including, without
limitation, any of the foregoing arising with respect to, or resulting from,
any proposal, proceeding or other action commencing on or before the date of
issuance, there is more than an insubstantial risk that:
. the trust is, or will be within 90 days of the delivery of the opinion,
subject to United States federal income tax with respect to income
received or accrued on the Debt Securities we have issued to that trust;
. interest payable by us on the Debt Securities is not, or within 90 days
of the delivery of the opinion, will not be, deductible by us, in whole
or in part, for United States federal income tax purposes; or
. the trust is, or will be within 90 days of the delivery of the opinion,
subject to more than an insubstantial amount of other taxes, duties or
other governmental charges.
"Investment Company Event" means the receipt by a trust of an opinion of
counsel to us experienced in these matters to the effect that, as a result of
the occurrence of a change in law or regulation or a written change--including
any announced prospective change--in interpretation or application of law or
regulation by any legislative body, court, governmental agency or regulatory
authority, there is more than an insubstantial risk that the trust is or will
be considered an "investment company" that is required to be registered under
the Investment Company Act, which change or prospective change becomes
effective or would become effective, as the case may be, on or after the date
of the issuance by that trust of Trust Preferred Securities.
If and for so long as a trust is the holder of all the Debt Securities
issued by us to that trust, we will pay, with respect to the Debt Securities,
such additional amounts as may be necessary in order that the amount of
distributions then due and payable by a trust on the outstanding Trust
Preferred Securities and Trust Common Securities of a trust will not be reduced
as a result of any additional taxes, duties and other governmental charges to
which that trust has become subject, including as a result of a Tax Event.
Redemption Procedures
Trust Preferred Securities of a trust redeemed on each redemption date shall
be redeemed at the redemption price with the applicable proceeds from the
contemporaneous redemption of the Debt Securities held by that trust.
Redemptions of Trust Preferred Securities shall be made and the redemption
price shall be payable on each redemption date only to the extent that a trust
has funds on hand available for the payment of the redemption price. See also
Subordination of Trust Common Securities.
If a trust gives a notice of redemption in respect of any Trust Preferred
Securities, then, by 12:00 noon, New York City time, on the redemption date, to
the extent funds are available, in the case of Trust Preferred Securities held
in book-entry form, the Property Trustee will deposit irrevocably with the
depository funds sufficient to pay the applicable redemption price and will
give the depository
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irrevocable instructions and authority to pay the redemption price to the
holders of the Trust Preferred Securities. With respect to Trust Preferred
Securities not held in book-entry form, the Property Trustee, to the extent
funds are available, will irrevocably deposit with the paying agent for the
Trust Preferred Securities funds sufficient to pay the applicable redemption
price and will give the paying agent irrevocable instructions and authority to
pay the redemption price to the holders upon surrender of their certificates
evidencing the Trust Preferred Securities. Notwithstanding the foregoing,
distributions payable on or prior to the redemption date for any Trust
Preferred Securities called for redemption shall be payable to the holders of
the Trust Preferred Securities on the relevant record dates for the related
distribution dates. If notice of redemption shall have been given and funds
deposited as required, then upon the date of the deposit all rights of the
holders of the Trust Preferred Securities so called for redemption will cease,
except the right of the holders of the Trust Preferred Securities to receive
the redemption price, and any distribution payable in respect of the Trust
Preferred Securities, but without interest on the redemption price, and the
Trust Preferred Securities will cease to be outstanding. In the event that
payment of the redemption price in respect of Trust Preferred Securities called
for redemption is improperly withheld or refused and not paid either by a trust
or by us pursuant to the Guarantee as described under Description of
Guarantees, distributions on the Trust Preferred Securities will continue to
accumulate at the then applicable rate, from the redemption date originally
established by a trust for the Trust Preferred Securities it issues to the date
the redemption price is actually paid, in which case the actual payment date
will be the date fixed for redemption for purposes of calculating the
redemption price.
If less than all the Trust Preferred Securities and Trust Common Securities
are to be redeemed on a redemption date, then the aggregate liquidation amount
of the Trust Preferred Securities and Trust Common Securities to be redeemed
shall be allocated proportionately to the Trust Preferred Securities and the
Trust Common Securities based upon the relative liquidation amounts of the
classes. The particular Trust Preferred Securities to be redeemed shall be
selected on a proportionate basis not more than 60 days prior to the redemption
date by the Property Trustee from the outstanding Trust Preferred Securities
not previously called for redemption, or if the Trust Preferred Securities are
then held in the form of a global Trust Preferred Security, in accordance with
the depository's customary procedures. The Property Trustee shall promptly
notify the securities registrar for the Trust Securities in writing of the
Trust Preferred Securities selected for redemption and, in the case of any
Trust Preferred Securities selected for partial redemption, the liquidation
amount to be redeemed. For all purposes of the trust agreements, unless the
context otherwise requires, all provisions relating to the redemption of Trust
Preferred Securities shall relate, in the case of any Trust Preferred
Securities redeemed or to be redeemed only in part, to the portion of the
aggregate liquidation amount of Trust Preferred Securities which has been or is
to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each registered holder of Trust Preferred
Securities to be redeemed at its address appearing on the securities register
for the Trust Securities. Unless we default in payment of the redemption price
on the related Debt Securities, on and after the redemption date interest will
cease to accrue on the Debt Securities or portions of them called for
redemption.
Subordination of Trust Common Securities
If on any distribution date or redemption date a payment event of default
with respect to the underlying Debt Securities has occurred and is continuing,
no payment on or in respect of the related Trust Common Securities shall be
made unless all amounts due in respect of the related Trust Preferred
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Securities (including the liquidation amount or redemption price, if
applicable) shall have been paid or payment provided for. All funds immediately
available to the respective Property Trustee shall first be applied to the
payment in full in cash of all distributions on, or redemption price of, the
Trust Preferred Securities then due and payable.
In the case of any event of default under the trust agreement, as defined
below, resulting from an event of default with respect to the underlying Debt
Securities, the holders of Trust Common Securities will be deemed to have
waived any right to act with respect to any event of default under the related
trust agreement until the effects of all events of default with respect to the
related Trust Preferred Securities have been cured, waived or otherwise
eliminated. Until all events of default under the related trust agreement with
respect to the Trust Preferred Securities have been so cured, waived or
otherwise eliminated, the Property Trustee will act solely on behalf of the
holders of the Trust Preferred Securities and not on behalf of the holders of
the Trust Common Securities, and only the holders of the Trust Preferred
Securities will have the right to direct the Property Trustee to act on their
behalf.
Liquidation Distribution Upon Dissolution
In the event of any liquidation of a trust, the applicable prospectus
supplement will state the amount payable on the Trust Preferred Securities
issued by that trust as a dollar amount per Trust Preferred Security plus
accumulated and unpaid distributions to the date of payment, subject to certain
exceptions, which may be in the form of a distribution of the amount in Debt
Securities held by that trust.
The holders of all the outstanding Trust Common Securities of a trust have
the right at any time to dissolve the trust and, after satisfaction of
liabilities to creditors of the trust as provided by applicable law, cause the
Debt Securities held by that trust to be distributed in liquidation of the
trust to the holders of the Trust Preferred Securities and Trust Common
Securities issued by the trust.
Pursuant to the related trust agreement, unless the applicable prospectus
supplement states otherwise, a trust will automatically dissolve upon
expiration of its term or, if earlier, will dissolve on the first to occur of:
. events of bankruptcy, dissolution or liquidation involving us or the
holder of the Trust Common Securities, as specified in the trust
agreement;
. the giving by the holder of the Trust Common Securities issued by the
trust of written direction to the Property Trustee to dissolve the trust,
which direction, subject to the foregoing restrictions, is optional and
wholly within the discretion of the holder of the Trust Common Securities;
. the redemption of all the Trust Preferred Securities issued by the trust
in connection with the repayment or redemption of all the Debt Securities
as described under "Redemption"; and
. the entry of an order for the dissolution of the trust by a court of
competent jurisdiction.
If dissolution of a trust occurs as described in the first, second or fourth
bullet point above, the trust will be liquidated by the Property Trustee as
expeditiously as the Property Trustee determines to be possible by
distributing, after satisfaction of liabilities to creditors of the trust as
provided by applicable law, to the holders of the Trust Securities issued by
the trust a Like Amount of the related Debt Securities. If such distribution is
not practical, or, if a dissolution of a trust occurs as described in
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the third bullet point above, the holders will be entitled to receive out of
the assets of the trust available for distribution to holders, after
satisfaction of liabilities to creditors of the trust as provided by applicable
law, an amount equal to, in the case of holders of the Trust Preferred
Securities, the aggregate of the liquidation amount plus accumulated and unpaid
distributions to the date of payment. In this prospectus we refer to this
amount as the "liquidation distribution." If the liquidation distribution can
be paid only in part because the trust has insufficient assets available to pay
in full the aggregate liquidation distribution, then the amounts payable
directly by the trust on its Trust Preferred Securities shall be paid on a
proportionate basis. The holders of the Trust Common Securities issued by the
trust will be entitled to receive distributions upon any liquidation
proportionately with the holders of the Trust Preferred Securities, except that
if a payment event of default has occurred and is continuing on the related
Debt Securities, the Trust Preferred Securities shall have a priority over the
Trust Common Securities. See Subordination of Trust Common Securities.
After the liquidation date is fixed for any distribution of Debt Securities
we have issued to a trust,
. the Trust Preferred Securities issued by that trust will no longer be
deemed to be outstanding,
. the depository or its nominee, as the registered holder of the Trust
Preferred Securities, will receive a registered global certificate or
certificates representing the Debt Securities to be delivered upon the
distribution with respect to the Trust Preferred Securities held by the
depository or its nominee, and
. any certificates representing the Trust Preferred Securities not held by
the depository or its nominee will be deemed to represent the Debt
Securities having a principal amount equal to the stated liquidation
amount of the Trust Preferred Securities and bearing accrued and unpaid
interest in an amount equal to the accumulated and unpaid distributions
on the Trust Preferred Securities until the certificates are presented to
the security registrar for the Trust Securities for transfer or
reissuance.
If we do not redeem the Debt Securities we have issued to a trust prior to
the stated maturity and the trust is not liquidated and the Debt Securities are
not distributed to holders of the Trust Preferred Securities issued by that
trust, the Trust Preferred Securities will remain outstanding until the
repayment of the Debt Securities and the distribution of the liquidation
distribution to the holders of the Trust Preferred Securities.
There can be no assurance as to the market prices for Trust Preferred
Securities or the related Debt Securities that may be distributed in exchange
for Trust Preferred Securities if a dissolution and liquidation of a trust were
to occur. Accordingly, the Trust Preferred Securities that an investor may
purchase, or the related Debt Securities that the investor may receive on
dissolution and liquidation of a trust, may trade at a discount to the price
that the investor paid to purchase the Trust Preferred Securities offered
hereby.
Certain Covenants
In connection with the issuance of Trust Preferred Securities by a trust, we
will agree:
. to continue to hold, directly or indirectly, 100% of the Trust Common
Securities of any trust to which Debt Securities have been issued while
such Debt Securities are outstanding, provided that certain successors
that are permitted pursuant to the applicable indenture may succeed to
our ownership of the Trust Common Securities;
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. not to voluntarily dissolve, wind up or liquidate a trust to which Debt
Securities have been issued, other than in connection with a distribution
of Debt Securities to the holders of the Trust Preferred Securities in
liquidation of a trust or in connection with certain mergers,
consolidations or amalgamations permitted by the trust agreements; and
. to use our reasonable efforts, consistent with the terms and provisions
of the trust agreements, to cause each trust to which Debt Securities
have been issued to continue not to be taxable other than as a grantor
trust for United States federal income tax purposes.
Unless the applicable prospectus supplement states otherwise, during any
extended interest period, or for so long as an event of default under the
applicable indenture or any payment default under the preferred security
Guarantee has occurred and is continuing, we will also agree that we will not,
except in limited circumstances, (1) declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of our capital stock, (2) make any payment of principal of
or interest or premium, if any, on or repay, repurchase or redeem any Debt
Securities of ours that rank equally with, or junior to, the Debt Securities,
or (3) make any guarantee payments with respect to any guarantee issued by us
if such guarantee ranks equally with, or junior to, the applicable Debt
Securities, other than, in each case, repurchases, redemptions or other
acquisitions of shares of our:
. capital stock in connection with any employment contract, benefit plan or
other similar arrangement with or for the benefit of any one or more
employees, officers, directors or consultants or in connection with a
dividend reinvestment or shareholder stock purchase plan;
. as a result of an exchange or conversion of any class or series of our
capital stock, or any capital stock of a subsidiary of ours, for any
class or series of our capital stock or of any class or series of our
then outstanding indebtedness for any class or series of our capital
stock;
. the purchase of fractional interests in shares of our capital stock
pursuant to the conversion or exchange provisions of the capital stock or
the security being converted or exchanged;
. payments under any Guarantee executed and delivered by us concurrently
with the issuance of any Trust Preferred Securities;
. any declaration of a dividend in the form of capital stock in connection
with any shareholders' rights plan, or the issuance of rights to capital
stock under any shareholders' rights plan, or the redemption or
repurchase of rights pursuant to any such plan; or
. any dividend in the form of stock, warrants, options or other rights
where the dividend stock or the stock issuable upon exercise of the
warrants, options or other rights is the same stock as that on which the
dividend is being paid or ranks on a parity with or junior to the stock,
if at such time
. we have actual knowledge of any event that (a) with the giving of notice
or the lapse of time, or both, would constitute an event of default under
the applicable indenture, and (b) we have not taken reasonable steps to
cure the same;
. we are in default with respect to our payment of any obligations under
any Guarantee executed and delivered by us concurrently with the issuance
of any Trust Preferred Securities; or
. an extension period is continuing.
We will also agree that, if and for so long as a trust is the holder of all
Debt Securities issued by us in connection with the issuance of Trust Preferred
Securities by that trust and that trust is required to
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pay any additional taxes, duties or other governmental charges, including in
connection with a Tax Event, we will pay as additional sums on the Debt
Securities the amounts that may be required so that the distributions payable
by that trust will not be reduced as a result of any additional taxes, duties
or other governmental charges.
Events of Default
Any one of the following events constitutes an event of default with respect
to the Trust Preferred Securities issued by a trust under the related trust
agreement:
. default by the trust in the payment of any distribution when it becomes
due and payable, and continuation of the default for a period of 30 days;
. default by the trust in the payment of any redemption price of any trust
security issued by that trust when it becomes due and payable;
. default in the performance, or breach, in any material respect, of any
covenant or warranty of the Property Trustee and the Delaware Trustee in
the trust agreement, other than as described above, and continuation of
the default or breach for a period of 60 days after there has been given,
by registered or certified mail, to the appropriate trustees and to us by
the holders of at least 33% in aggregate liquidation amount of the
outstanding Trust Preferred Securities, a written notice specifying the
default or breach and requiring it to be remedied and stating that the
notice is a "Notice of Default" under the trust agreement;
. the occurrence of an event of default under the applicable indenture
relating to the Debt Securities held by a trust (see Description of the
Senior Notes--Events of Default and Description of the Junior
Subordinated Debentures--Events of Default);
. the occurrence of certain events of bankruptcy or insolvency with respect
to the Property Trustee or all or substantially all of its property if a
successor Property Trustee has not been appointed within 90 days of the
occurrence; or
. the occurrence of certain events of bankruptcy or insolvency with respect
to the trust.
Within five business days after the occurrence of certain events of default
actually known to the respective Property Trustee, the Property Trustee will
transmit notice of the event of default to the respective holders of Trust
Securities and the respective Administrative Trustees, unless the event of
default has been cured or waived. Within five business days after the receipt
of notice that we intend to exercise our right under the applicable indenture
to defer the payment of interest on the related Debt Securities, the Property
Trustee must notify the holders and the Administrative Trustees that we intend
to defer these interest payments, unless we have revoked our determination to
do so.
The applicable trust agreement includes provisions as to the duties of the
Property Trustee in case an event of default occurs and is continuing.
Consistent with these provisions, the Property Trustee will be under no
obligation to exercise any of its rights or powers at the request or direction
of any of the holders unless those holders have offered to the Property Trustee
reasonable indemnity. Subject to these provisions for indemnification, the
holders of a majority in liquidation amount of the related outstanding Trust
Preferred Securities may direct the time, method and place of conducting any
proceeding for any remedy available to the Property Trustee, or exercising any
trust or power conferred on the Property Trustee, with respect to the related
Trust Preferred Securities.
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The holders of at least a majority in aggregate liquidation amount of the
outstanding Trust Preferred Securities issued by a trust may waive any past
default under the applicable trust agreement except:
. a default in the payment of any distribution when it becomes due and
payable or any redemption price;
. a default with respect to certain covenants and provisions of the
applicable trust agreement that cannot be modified or amended without
consent of the holder of each outstanding Trust Preferred Security; and
. a default under the applicable indenture that the holders of a majority
in liquidation amount of the Trust Preferred Securities would not be
entitled to waive under the applicable trust agreement.
If an event of default under the applicable indenture has occurred and is
continuing as a result of any failure by us to pay any amounts when due in
respect of the related Debt Securities issued by us to a trust, the related
Trust Preferred Securities will have a preference over the related Trust Common
Securities with respect to payments of any amounts in respect of the Trust
Preferred Securities as described above. See Subordination of Trust Common
Securities, Liquidation Distribution Upon Dissolution, Description of the
Senior Notes--Events of Default and Description of Junior Subordinated
Debentures--Events of Default.
We must furnish annually to each Property Trustee a statement by an
appropriate officer as to that officer's knowledge of our compliance with all
conditions and covenants under the respective trust agreement. Also, the
Administrative Trustees for each trust must file, on behalf of the respective
trust, a statement as to our compliance with all conditions and covenants under
the respective trust agreement.
Voting Rights; Amendment of Trust Agreement
Except as provided below and under Resignation, Removal of Property Trustee
and Delaware Trustee; Appointment of Successors and Description of
Guarantees--Amendments and Assignment and as otherwise required by law and the
applicable trust agreement, the holders of the Trust Preferred Securities
issued by a trust will have no voting rights.
The trust agreement applicable to a trust may be amended from time to time
by the holders of a majority in liquidation amount of its Trust Common
Securities and the respective Property Trustee, without the consent of the
holders of the Trust Preferred Securities issued by the trust:
. to cure any ambiguity, correct or supplement any provisions in the trust
agreements that may be inconsistent with any other provision, or to make
any other provisions with respect to matters or questions arising under
the trust agreements, provided that any such amendment does not adversely
affect in any material respect the interests of any holder of Trust
Securities;
. to facilitate the tendering, remarketing and settlement of the Trust
Preferred Securities, as contemplated in the trust agreement;
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. to modify, eliminate or add to any provisions of the trust agreements to
the extent as may be necessary to ensure that a trust will not be taxable
other than as a grantor trust for United States federal income tax
purposes at any time that any Trust Securities are outstanding or to
ensure that a trust will not be required to register as an "investment
company" under the Investment Company Act; or
. to reflect the appointment of a successor trustee.
The trust agreement may be amended by the holders of a majority in aggregate
liquidation amount of the Trust Common Securities and the Property Trustee with
the consent of holders representing not less than a majority in aggregate
liquidation amount of the outstanding Trust Preferred Securities and receipt by
the Property Trustee and the Delaware Trustee of an opinion of counsel to the
effect that the amendment or the exercise of any power granted to the trustees
in accordance with the amendment will not affect the trust's not being taxable
other than as a grantor trust for United States federal income tax purposes or
the trust's exemption from status as an "investment company" under the
Investment Company Act.
Without the consent of each holder of Trust Preferred Securities affected by
the amendment or related exercise of power, the trust agreement applicable to a
trust may not be amended to change the amount or timing of any distribution on
the Trust Securities or otherwise adversely affect the amount of any
distribution required to be made in respect of the Trust Securities as of a
specified date or restrict the right of a holder of Trust Securities to
institute suit for the enforcement of any payment due.
So long as any Debt Securities are held by a trust, the respective Property
Trustee will not:
. direct the time, method and place of conducting any proceeding for any
remedy available to the trustee for the Debt Securities under the related
indenture, or execute any trust or power conferred on the Property
Trustee with respect to the related Debt Securities;
. waive any past default that is waivable under the applicable indenture;
. exercise any right to rescind or annul a declaration that the Debt
Securities shall be due and payable; or
. consent to any amendment, modification or termination of the applicable
indenture or the related Debt Securities, where consent shall be required;
without, in each case, obtaining the prior approval of the holders of at least
a majority in aggregate liquidation amount of the Trust Preferred Securities,
except that, if a consent under the applicable indenture would require the
consent of each holder of Debt Securities affected by the consent, no consent
will be given by the Property Trustee without the prior written consent of each
holder of the Trust Preferred Securities.
A Property Trustee may not revoke any action previously authorized or
approved by a vote of the holders of the Trust Preferred Securities issued by
its respective trust except by subsequent vote of the holders of the Trust
Preferred Securities. The Property Trustee will notify each holder of Trust
Preferred Securities of any notice of default with respect to the Debt
Securities. In addition, before taking any of the foregoing actions, the
Property Trustee will obtain an opinion of counsel experienced in relevant
matters to the effect that the trust will not be taxable other than as a
grantor trust for United States federal income tax purposes on account of the
action.
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Any required approval of holders of Trust Preferred Securities issued by a
trust may be given at a meeting of holders of those Trust Preferred Securities
convened for the purpose or pursuant to written consent. The Property Trustee
will cause a notice of any meeting at which holders of Trust Preferred
Securities are entitled to vote, or of any matter upon which action by written
consent of the holders is to be taken, to be given to each registered holder of
Trust Preferred Securities in the manner set forth in the applicable trust
agreement.
No vote or consent of the holders of Trust Preferred Securities issued by a
trust will be required to redeem and cancel those Trust Preferred Securities in
accordance with the applicable trust agreement. See above under Redemption.
Notwithstanding that holders of Trust Preferred Securities issued by a trust
are entitled to vote or consent under any of the circumstances described above,
any of those Trust Preferred Securities that are owned by us, the respective
Property Trustee or Delaware Trustee, or any affiliate of us or either trustee,
will, for purposes of the vote or consent, be treated as if they were not
outstanding.
Enforcement of Certain Rights by Holders of Trust Preferred Securities
If an event of default has occurred and is continuing under the applicable
indenture, and the trustee for the related Debt Securities and the holders of
those Debt Securities have failed to declare the principal due and payable, the
holders of at least 33% in aggregate liquidation amount of the related
outstanding Trust Preferred Securities shall have this right.
If an event of default has occurred and is continuing under a trust
agreement and the event is attributable to our failure to pay any amounts
payable in respect of Debt Securities on the date the amounts are otherwise
payable, a registered holder of Trust Preferred Securities may institute a
direct action against us for enforcement of payment to the holder of an amount
equal to the amount payable in respect of Debt Securities having a principal
amount equal to the aggregate liquidation amount of the Trust Preferred
Securities held by the holder, which we refer to in this discussion as a
"Direct Action". We will have the right under the applicable indenture to
set-off any payment made to the holders of Trust Preferred Securities by us in
connection with a Direct Action.
We may not amend the applicable indenture to remove the foregoing right to
bring a Direct Action without the prior written consent of the holders of all
the Trust Preferred Securities. Furthermore, so long as any of the Trust
Preferred Securities are outstanding:
. no modification of the applicable indenture may be made that adversely
affects the holders of the Trust Preferred Securities in any material
respect,
. no termination of the applicable indenture may occur and
. no waiver of any event of default or compliance with any covenant under
the applicable indenture may be effective,
without the prior consent of the holders of at least a majority of the
aggregate liquidation amount of the outstanding Trust Preferred Securities
unless and until the principal of, accrued and unpaid interest on and premium,
if any, on the related Debt Securities have been paid in full and certain other
conditions are satisfied.
With certain exceptions, the holders of the Trust Preferred Securities would
not be able to exercise directly any remedies available to the holders of the
Debt Securities except under the circumstances described in this section.
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Resignation, Removal of Property Trustee and Delaware Trustee; Appointment of
Successors
The Property Trustee or the Delaware Trustee of a trust may resign at any
time by giving written notice to us or may be removed at any time by an action
of the holders of a majority in liquidation amount of that trust's outstanding
Trust Preferred Securities delivered to the trustee to be removed and to us. No
resignation or removal of either of the trustees and no appointment of a
successor trustee will become effective until a successor trustee accepts
appointment in accordance with the requirements of the trust agreement. So long
as no event of default or event that would become an event of default has
occurred and is continuing, and except with respect to a trustee appointed by
an action of the holders, if we have delivered to either the Property Trustee
or the Delaware Trustee a resolution of our board of directors appointing a
successor trustee and the successor trustee has accepted the appointment in
accordance with the terms of the trust agreement, the Property Trustee or the
Delaware Trustee, as the case may be, will be deemed to have resigned and the
successor trustee will be deemed to have been appointed as trustee in
accordance with the trust agreement.
Mergers, Consolidations, Amalgamations or Replacements of a Trust
A trust may not merge with or into, consolidate, amalgamate, or be replaced
by, or convey, transfer or lease its properties and assets substantially as an
entirety to any entity, except as described below or as otherwise set forth in
the applicable trust agreement. A trust may, at the request of the holders of
its Trust Common Securities and with the consent of the holders of at least a
majority in aggregate liquidation amount of its outstanding Trust Preferred
Securities, merge with or into, consolidate, amalgamate, or be replaced by or
convey, transfer or lease its properties and assets substantially as an
entirety to a trust organized as such under the laws of any state, so long as:
. the successor entity either expressly assumes all the obligations of the
trust with respect to its Trust Preferred Securities or substitutes for
the Trust Preferred Securities other securities having substantially the
same terms as the Trust Preferred Securities, which we refer to in this
prospectus as the successor securities, so long as the successor
securities have the same priority as the Trust Preferred Securities with
respect to distributions and payments upon liquidation, redemption and
otherwise;
. a trustee of the successor entity, possessing the same powers and duties
as the Property Trustee, is appointed to hold the related Debt Securities;
. the merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not cause the Trust Preferred Securities,
including any successor securities, to be downgraded by any nationally
recognized statistical rating organization;
. the Trust Preferred Securities or any successor securities are listed or
quoted, or any successor securities will be listed or quoted upon
notification of issuance, on any national securities exchange or with
another organization on which the Trust Preferred Securities are then
listed or quoted;
. the merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not adversely affect the rights, preferences and
privileges of the holders of the Trust Preferred Securities, including
any successor securities, in any material respect;
. the successor entity has a purpose substantially identical to that of the
trust;
44
. prior to the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, the Property Trustee has received an
opinion from independent counsel experienced in relevant matters to the
effect that such transaction does not adversely affect the rights,
preferences and privileges of the holders of the Trust Preferred
Securities, including any successor securities, in any material respect
and following such transaction, neither the trust nor the successor
entity will be required to register as an investment company under the
Investment Company Act; and
. we or any permitted successor or assignee owns all the Trust Common
Securities of the successor entity and guarantees the obligations of the
successor entity under the successor securities at least to the extent
provided by the applicable Guarantee.
Notwithstanding the foregoing, a trust may not, except with the consent of
holders of 100% in aggregate liquidation amount of the Trust Preferred
Securities, consolidate, amalgamate, merge with or into, or be replaced by or
convey, transfer or lease its properties and assets substantially as an
entirety to, any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it if the consolidation,
amalgamation, merger, replacement, conveyance, transfer or lease would cause
the trust or the successor entity to be taxable other than as a grantor trust
for United States federal income tax purposes.
Information Concerning the Property Trustees
Each Property Trustee, other than during the occurrence and continuance of
an event of default, undertakes to perform only the duties as are specifically
set forth in the applicable trust agreement and, after an event of default,
must exercise the same degree of care and skill as a prudent person would
exercise or use in the conduct of his or her own affairs. Subject to this
provision, each Property Trustee is under no obligation to exercise any of the
powers vested in it by the trust agreements at the request of any holder of
Trust Preferred Securities issued by the respective trust unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might be
incurred by exercising these powers.
Concerning the Property Trustee
We and our affiliates use or will use some of the services of the Property
Trustee in the normal course of business.
Miscellaneous
The Administrative Trustees and the Property Trustee relating to each trust
are authorized and directed to conduct the affairs of and to operate the trust
in such a way that the trust will not be deemed to be an "investment company"
required to be registered under the Investment Company Act or taxable other
than as a grantor trust for United States federal income tax purposes and so
that the Debt Securities held by that trust will be treated as indebtedness of
ours for United States federal income tax purposes. In this regard, each
Property Trustee and the holders of Trust Common Securities issued by the
respective trust are authorized to take any action, not inconsistent with
applicable law, the certificate of trust of the trust or the applicable trust
agreement, that the Property Trustee and the holders of Trust Common Securities
determine in their discretion to be necessary or desirable for these purposes,
as long as this action does not materially adversely affect the interests of
the holders of the Trust Preferred Securities.
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Holders of the Trust Preferred Securities have no preemptive or similar
rights.
A trust may not borrow money or issue debt or mortgage or pledge any of its
assets.
Governing Law
The trust agreement and the Trust Preferred Securities will be governed by
Delaware law.
DESCRIPTION OF GUARANTEES
Each Guarantee will be executed and delivered by us concurrently with the
issuance of Trust Preferred Securities by a trust for the benefit of the
holders from time to time of the Trust Preferred Securities. We will appoint
The Bank of New York as Guarantee Trustee under each Guarantee. Each Guarantee
Trustee will hold the respective Guarantee for the benefit of the holders of
the Trust Preferred Securities issued by the related trust. Each Guarantee will
be qualified as an indenture under the Trust Indenture Act of 1939. We have
summarized below certain provisions of the Guarantees. This summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, all the provisions of the Guarantee, including the definitions in
the Guarantee of certain terms. The form of guarantee agreement will be filed
as an exhibit to the registration statement of which this prospectus is a part.
General
Unless otherwise provided in a prospectus supplement, we will fully and
unconditionally agree, to the extent described herein, to pay the Guarantee
payments, as defined below, to the holders of the Trust Preferred Securities
issued by each trust, as and when due, regardless of any defense, right of
set-off or counterclaim that a trust may have or assert other than the defense
of payment. The following payments with respect to the Trust Preferred
Securities, to the extent not paid or made by or on behalf of the respective
trust, which payments we refer to in this discussion as the "Guarantee
payments," will be subject to the respective Guarantee:
. any accumulated and unpaid distributions required to be paid on the Trust
Preferred Securities, to the extent that the trust has funds on hand
available therefor;
. the redemption price with respect to any Trust Preferred Securities
called for redemption, to the extent that the trust has funds on hand
available therefor; and
. upon a voluntary or involuntary dissolution, winding up or liquidation of
the trust, unless the related Debt Securities are distributed to holders
of the Trust Preferred Securities, the lesser of:
(1) the aggregate of the liquidation amount and all accumulated and unpaid
distributions to the date of payment, to the extent that the trust has funds on
hand available therefor; and
(2) the amount of assets of the trust remaining available for distribution
to holders of the Trust Preferred Securities on liquidation of the trust.
Our obligation to make a Guarantee payment may be satisfied by direct
payment of the required amounts by us to the holders of the Trust Preferred
Securities or by causing the trust to pay these amounts to the holders.
46
Each Guarantee will be an irrevocable guarantee of the obligations of the
respective trust under its Trust Preferred Securities, but will apply only to
the extent that the trust has funds sufficient to make these payments.
If we do not make payments on the Debt Securities held by a trust, the trust
will not be able to pay any amounts payable in respect of its Trust Preferred
Securities and will not have funds legally available for these payments. The
applicable prospectus supplement will describe the ranking of the Guarantee.
See Status of the Guarantees. The Guarantees do not limit our incurrence or
issuance of other secured or unsecured debt, including Senior Indebtedness,
whether under the applicable indenture, any other indenture that we may enter
into in the future or otherwise.
We will enter into an agreement as to expenses and liabilities with each
trust to provide funds to such trust as needed to pay obligations of the trust
to parties other than the holders of the Trust Preferred Securities. We have,
through the Guarantees, the trust agreements, the agreements as to expenses and
liabilities, the applicable Debt Securities and the related indenture, taken
together, fully, irrevocably and unconditionally guaranteed all of each trust's
obligations under its Trust Preferred Securities. No single document standing
alone or operating in conjunction with fewer than all the other documents
constitutes the Guarantee. It is only the combined operation of these documents
that has the effect of providing a full, irrevocable and unconditional
guarantee of each trust's obligations in respect of its Trust Preferred
Securities. See Relationship Among Trust Preferred Securities, Debt Securities
and Guarantees.
Status of the Guarantees
Each Guarantee will constitute an unsecured obligation of ours. The
applicable prospectus supplement will describe the ranking of each Guarantee.
Each Guarantee will constitute a guarantee of payment and not of collection;
specifically, the Guaranteed party may institute a legal proceeding directly
against the guarantor to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity. Each
Guarantee will be held by the respective Guarantee Trustee for the benefit of
the holders of the related Trust Preferred Securities. A Guarantee will not be
discharged except by payment of the applicable Guarantee payments in full to
the extent not paid or distributed by the respective trust.
Amendments and Assignment
Except with respect to any changes that do not materially adversely affect
the rights of holders of the related Trust Preferred Securities, in which case
no vote will be required, a Guarantee may not be amended without the prior
approval of the holders of not less than a majority of the aggregate
liquidation amount of the related Trust Preferred Securities. The manner of
obtaining this type of approval will be as set forth under Description of Trust
Preferred Securities--Voting Rights; Amendment of Trust Agreement. All
Guarantees and agreements contained in each Guarantee shall bind the
successors, assigns, receivers, trustees and representatives of ours and shall
inure to the benefit of the holders of the related Trust Preferred Securities
then outstanding.
Events of Default
An event of default under a Guarantee will occur upon our failure to perform
any of our payment obligations under the Guarantee, or to perform any other
obligation if such default remains unremedied for 30 days.
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The holders of not less than a majority in aggregate liquidation amount of
the related Trust Preferred Securities have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Guarantee Trustee in respect of the Guarantee or to direct the exercise of any
trust or power conferred upon the Guarantee Trustee under the Guarantee. Any
registered holder of Trust Preferred Securities may institute a legal
proceeding directly against us to enforce its rights under the related
Guarantee without first instituting a legal proceeding against the related
trust, the Guarantee Trustee or any other person or entity.
We, as guarantor, are required to file annually with each Guarantee Trustee
a certificate as to whether or not we are in compliance with all the conditions
and covenants applicable to us under each Guarantee.
Consolidation, Merger, Sale of Assets and Other Transactions
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 (i) is organized
and existing under the laws of the United States, any state thereof or the
District of Columbia, (ii) expressly assumes our obligations under the
Guarantee and (iii) immediately after giving effect thereto no event of default
under the Guarantee and no event which after notice or lapse of time or both,
would become an event of default under the Guarantee has happened and is
continuing.
Information Concerning the Guarantee Trustee
The Guarantee Trustee, other than during the occurrence and continuance of a
default by us in performance of the Guarantee, undertakes to perform only such
duties as are specifically set forth in the guarantee agreement. After a
default with respect to the Guarantee, the Guarantee Trustee must exercise the
same degree of care and skill as a prudent person would exercise or use in the
conduct of his or her own affairs. Subject to this provision, the Guarantee
Trustee is under no obligation to exercise any of the powers vested in it by
the guarantee agreement at the request of any holder of the Trust Preferred
Securities unless it is offered reasonable indemnity against the costs,
expenses and liabilities that it might thereby incur.
Termination of the Guarantees
Each Guarantee will terminate and be of no further force and effect upon
full payment of the redemption price of the related Trust Preferred Securities,
upon full payment of the amounts payable with respect to the Trust Preferred
Securities upon liquidation of the respective trust and upon distribution of
the related Debt Securities to the holders of the Trust Preferred Securities.
Each Guarantee will continue to be effective or will be reinstated, as the case
may be, if at any time any holder of the related Trust Preferred Securities
must restore payment of any sums paid under the Trust Preferred Securities or
the Guarantee.
Governing Law
Each Guarantee will be governed by New York law.
48
Concerning the Trustee
We and our affiliates use or will use some of the banking services of the
Guarantee Trustee in the normal course of business.
We must furnish annually to each Property Trustee a statement by an
appropriate officer as to that officer's knowledge of our compliance with all
conditions and covenants under the respective trust agreement. Also, the
Administrative Trustees for each trust must file, on behalf of the respective
trust, a statement as to our compliance with all conditions and covenants under
the respective trust agreement.
49
DESCRIPTION OF THE STOCK PURCHASE CONTRACTS AND
THE STOCK PURCHASE UNITS
We may issue Stock Purchase Contracts representing contracts obligating
holders to purchase from us and we may sell to the holders, a specified number
of shares of common stock (or a range of numbers of shares pursuant to a
predetermined formula) at a future date or dates. The price per share of common
stock may be fixed at the time the Stock Purchase Contracts are issued or may
be determined by reference to a specific formula set forth in the Stock
Purchase Contracts.
The Stock Purchase Contracts may be issued separately or as a part of units,
often known as Stock Purchase Units, consisting of a Stock Purchase Contract
and either Debt Securities or debt obligations of third parties, including U.S.
Treasury securities or Trust Preferred Securities securing the holder's
obligations to purchase the common stock under the Stock Purchase Contracts.
The Stock Purchase Contracts may require us to make periodic payments to the
holders of the Stock Purchase Units or vice versa, and such payments may be
unsecured or prefunded on some basis. The Stock Purchase Contracts may require
holders to secure their obligations in a specified manner and in certain
circumstances we may deliver newly issued prepaid Stock Purchase Contracts,
often known as prepaid securities, upon release to a holder of any collateral
securing such holder's obligations under the original Stock Purchase Contract.
The applicable prospectus supplement will describe the terms of any Stock
Purchase Contracts or Stock Purchase Units and, if applicable, prepaid
securities. The description in the applicable prospectus supplement will not
necessarily contain all of information that you may find useful. For more
information, you should review the Stock Purchase Contracts, the collateral
arrangements and depositary arrangements, if applicable, relating to such Stock
Purchase Contracts or Stock Purchase Units and, if applicable, the prepaid
securities and the document pursuant to which the prepaid securities will be
issued. These documents will be filed with the SEC promptly after the offering
of such Stock Purchase Contracts or Stock Purchase Units and, if applicable,
prepaid securities.
RELATIONSHIP AMONG TRUST PREFERRED SECURITIES, DEBT SECURITIES AND GUARANTEES
Full and Unconditional Guarantee
Payments of distributions and other amounts due on the Trust Preferred
Securities issued by a trust, to the extent the trust has funds available for
the payment, are irrevocably Guaranteed by us as and to the extent set forth
under Description of Guarantees. Taken together, our obligations under the
related Debt Securities, the applicable indenture, an agreement as to expenses
and liabilities, the related trust agreement and the related Guarantee provide,
in the aggregate, a full, irrevocable and unconditional Guarantee of payments
of distributions and other amounts due on the Trust Preferred Securities issued
by a trust. No single document standing alone or operating in conjunction with
fewer than all the other documents constitutes the Guarantee. It is only the
combined operation of these documents that has the effect of providing a full,
irrevocable and unconditional Guarantee of each trust's obligations in respect
of the related Trust Preferred Securities. If and to the extent that we do not
make payments on the Debt Securities issued to a trust, the trust will not have
sufficient funds to pay distributions or other amounts due on its Trust
Preferred Securities. A Guarantee does not cover payment of amounts payable
with respect to the Trust Preferred Securities issued by a trust when the trust
does not have sufficient funds to pay these amounts. In this event, the remedy
of a holder of the Trust Preferred Securities is to institute a legal
proceeding directly against us for enforcement of payment of our obligations
under Debt Securities having a principal amount equal to the liquidation amount
of the Trust Preferred Securities held by the holder.
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Sufficiency of Payments
As long as payments are made when due on the Debt Securities issued to a
trust, these payments will be sufficient to cover distributions and other
payments distributable on the Trust Preferred Securities issued by that trust,
primarily because:
. the aggregate principal amount of the Debt Securities will be equal to
the sum of the aggregate stated liquidation amount of the Trust Preferred
Securities and Trust Common Securities;
. the interest rate and interest and other payment dates on the Debt
Securities will match the distribution rate, distribution dates and other
payment dates for the Trust Preferred Securities;
. we will pay for any and all costs, expenses and liabilities of the trust
except the trust's obligations to holders of the related Trust
Securities; and
. the applicable trust agreement further provides that the trust will not
engage in any activity that is not consistent with the limited purposes
of the trust.
Notwithstanding anything to the contrary in the applicable indenture, we
have the right to set-off any payment we are otherwise required to make under
that indenture against and to the extent we have previously made, or are
concurrently on the date of the payment making, a payment under a Guarantee.
Enforcement Rights of Holders of Trust Preferred Securities
Under the circumstances set forth under Description of Trust Preferred
Securities--Enforcement of Certain Rights by Holders of Trust Preferred
Securities, holders of Trust Preferred Securities may bring a Direct Action
against us.
A holder of any Trust Preferred Security may institute a legal proceeding
directly against us to enforce its rights under the related Guarantee without
first instituting a legal
proceeding against the related Guarantee Trustee, the related trust or any
other person or entity. See Description of Guarantees.
Limited Purpose of Trust
The Trust Preferred Securities issued by a trust represent preferred
undivided beneficial interests in the assets of the trust, and the trust exists
for the sole purpose of issuing its Trust Preferred Securities and Trust Common
Securities and investing the proceeds of these Trust Securities in Debt
Securities. A principal difference between the rights of a holder of a Trust
Preferred Security and a holder of a debt security is that a holder of a debt
security is entitled to receive from us payments on Debt Securities held, while
a holder of Trust Preferred Securities is entitled to receive distributions or
other amounts distributable with respect to the Trust Preferred Securities from
a trust, or from us under a Guarantee, only if and to the extent the trust has
funds available for the payment of the distributions.
Rights Upon Dissolution
Upon any voluntary or involuntary dissolution of a trust, other than any
dissolution involving the distribution of the related Debt Securities, after
satisfaction of liabilities to creditors of the trust as required by applicable
law, the holders of the Trust Preferred Securities issued by the trust will be
entitled to receive, out of assets held by the trust, the liquidation
distribution in cash. See Description of Trust Preferred
Securities--Liquidation Distribution Upon Dissolution. Since we are the
guarantor under each of the Guarantees and have agreed to pay for all costs,
expenses and liabilities of each trust, other than each trust's obligations to
the holders of the respective Trust Securities, the positions of a holder of
Trust Preferred Securities and a holder of Debt Securities relative to other
creditors and to our shareholders in the event of our liquidation or bankruptcy
are expected to be substantially the same.
51
BOOK-ENTRY SYSTEM
Unless otherwise stated in a prospectus supplement, book-entry securities of
a series will be issued in the form of a global security that the Trustee will
deposit with The Depository Trust Company, New York, New York ("DTC"). This
means that we will not issue security certificates to each holder. One or more
global securities will be issued to DTC who will keep a computerized record of
its participants (for example, your broker) whose clients have purchased the
securities. The participant will then keep a record of its clients who
purchased the securities. Unless it is exchanged in whole or in part for a
certificate, a global security may not be transferred, except that DTC, its
nominees, and their successors may transfer a global security as a whole to one
another.
Beneficial interests in global securities will be shown on, and transfers of
global securities 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 Participant's accounts. This eliminates
the need to exchange security 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
applicable trustee will treat DTC's nominee as the owner of the global
securities 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 securities to owners of beneficial interests in the global securities.
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 securities
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 securities 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 securities and
voting by participants, as is the case with securities 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.
52
Securities represented by a global certificate will be exchangeable for
definitive securities 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 securities of a series to be
represented by a global security and notify the Trustee of our decision.
53
PLAN OF DISTRIBUTION
We may sell the securities (a) through agents; (b) through underwriters or
dealers; or (c) directly to one or more purchasers.
By Agents
Securities 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 applicable prospectus supplement will set forth the terms under which
the securities are offered, including the name or names of any underwriters,
the purchase price of the securities and the proceeds to us from the sale, any
underwriting discounts and other items constituting underwriters' compensation,
any initial offering price and any discounts, commissions or concessions
allowed or reallowed or paid to dealers.
Any initial offering price and any discounts, concessions or commissions
allowed or reallowed or paid to dealers may be changed from time to time.
The Agents will not be obligated to make a market in the securities. We
cannot predict the amount of trading or liquidity of the securities.
By Underwriters
If underwriters are used in the sale, the underwriters will acquire the
securities for their own account. The underwriters may resell the securities 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 securities will be subject to
certain conditions. The underwriters will be obligated to purchase all the
securities offered if any 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 securities directly. In this case, no underwriters or
agents would be involved.
General Information
Underwriters, dealers, and agents that participate in the distribution of
the securities 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 securities 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.
54
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 securities 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.
Certain matters of Delaware law relating to the validity of the Trust
Preferred Securities, the enforceability of the trust agreement and the
creation of the trusts will be passed upon by Richards Layton & Finger, P.A.,
Wilmington, Delaware.
EXPERTS
The financial statements of the Company and its subsidiaries (including
Central and South West Corporation and its subsidiaries, as of December 31,
2001 and 2000, and for the years then ended) and the related financial
statement schedule incorporated in this prospectus by reference from the
Company's Annual Report on Form 10-K for the year ended December 31, 2001 have
been audited by Deloitte & Touche LLP, as stated in their reports dated
February 22, 2002 (which report on the financial statements expresses an
unqualified opinion and includes an explanatory paragraph referring to the
restatement of the 1999 financial statements to give retroactive effect to the
conforming change in the method of accounting for vacation pay accruals), which
are incorporated herein by reference.
The financial statements of Central and South West Corporation and its
subsidiaries (excluding CSW UK Holdings), as of December 31, 1999, and for the
year then ended, have been audited by Arthur Andersen LLP, as stated in their
reports, which are incorporated herein by reference. The financial statements
of CSW UK Holdings, as of December 31, 1999, and for the year then ended, have
been audited by KPMG Audit Plc, as stated in their report, which is
incorporated herein by reference.
Such financial statements of the Company and its subsidiaries have been so
incorporated herein in reliance upon the respective reports of such firms given
upon their authority as experts in accounting and auditing. All of the
foregoing firms are independent auditors.
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6,000,000 Equity Units
American Electric Power Company, Inc.
9.25% Equity Units
[LOGO]
AEP
AMERICAN(R)
ELECTRIC
POWER
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PROSPECTUS SUPPLEMENT
June 5, 2002
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