<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
American Electric Power Company, Inc.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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<PAGE>
NOTICE OF 1997 ANNUAL MEETING - PROXY STATEMENT
AMERICAN ELECTRIC POWER
COMPANY, INC.
1 Riverside Plaza
Columbus, OH 43215
[LOGO]
March 10, 1997
Dear Shareholder:
This year's annual meeting of shareholders will be held in the
Grand Ballroom of the MeadowView Conference Resort &
Convention Center, 1901 Meadowview Parkway, Kingsport,
Tennessee, on Wednesday, April 23, 1997 at 9:30 a.m.
Your Board of Directors and I cordially invite you to attend.
During the course of the meeting there will be the usual time
for discussion of the items on the agenda and for questions
regarding the Company's affairs. Directors and officers will
be available to talk individually with shareholders before and
after the meeting.
The Company's audited financial statements and management's
discussion and analysis of results of operations and financial
condition are included in Appendix A to this proxy statement.
Including this financial information with the proxy statement
allows for the use of a summary annual report. The Company's
summary annual report contains my letter to shareholders, a
review of operations, the summary management discussion and
financial information and independent auditors' report.
E. LINN DRAPER, JR.
Chairman of the Board,
President and
Chief Executive Officer
If you plan to attend the meeting and are a shareholder of
record, please mark the "Annual Meeting" box on your proxy
card. An admission ticket is included with the proxy card for
each shareholder of record. However, if your shares are not
registered in your own name, please advise the shareholder of
record (your bank, broker, etc.) that you wish to attend. That
firm must provide you with evidence of your ownership which
will enable you to gain admittance to the meeting.
IN ORDER TO ENSURE MAXIMUM SHAREHOLDER REPRESENTATION AT THE
MEETING, I URGE EACH OF YOU, WHETHER OR NOT YOU EXPECT TO
ATTEND IN PERSON, TO FILL IN, DATE, SIGN AND RETURN YOUR PROXY
PROMPTLY IN THE ENCLOSED ENVELOPE.
Sincerely,
[SIGNATURE]
<PAGE>
NOTICE OF 1997 ANNUAL MEETING
March 10, 1997
Columbus, Ohio
THE ANNUAL MEETING of shareholders of AMERICAN ELECTRIC POWER COMPANY, INC.,
a New York corporation, will be held in the Grand Ballroom of the MeadowView
Conference Resort & Convention Center, 1901 Meadowview Parkway, Kingsport,
Tennessee on Wednesday, April 23, 1997 at 9:30 o'clock in the morning, for the
following purposes:
1. To elect 12 directors to hold office until the next annual meeting and
until their successors are duly elected;
2. To approve the firm of Deloitte & Touche LLP as independent auditors for
the year 1997;
3. To consider and act on a proposal to approve the American Electric Power
Company, Inc. Deferred Compensation and Stock Plan for Non-Employee
Directors;
4. To consider and act on a proposal to amend the Restated Certificate of
Incorporation and By-Laws of the Company to reduce the minimum required
number of directors from 12 to nine; and
5. To consider and act on such other matters as may properly come before
the meeting.
Only shareholders of record at the close of business on March 5, 1997 are
entitled to notice of and to vote at the meeting or any adjournment thereof.
G.P. Maloney
SECRETARY
<PAGE>
PROXY STATEMENT
March 10, 1997
THIS PROXY STATEMENT and the accompanying proxy card are to be mailed to
shareholders, commencing on or about March 19, 1997, in connection with the
solicitation of proxies by the Board of Directors of American Electric Power
Company, Inc., 1 Riverside Plaza, Columbus, Ohio 43215, for the annual meeting
of shareholders to be held on April 23, 1997 in Kingsport, Tennessee.
Only the holders of shares of Common Stock at the close of business on March
5, 1997 are entitled to vote at the meeting. Each such holder has one vote for
each share held on all matters to come before the meeting. On March 5, 1997,
there were 188,235,000 shares of Common Stock, $6.50 par value, outstanding.
When proxy cards are returned properly signed, the shares represented
thereby will be voted by the persons named on the proxy card or by their
substitutes in accordance with shareholders' directions. The proxy cards of
shareholders who are participants in the Dividend Reinvestment and Stock
Purchase Plan include both the shares registered in their names and the whole
shares held in their Plan accounts on March 5, 1997. Shareholders are urged to
grant or withhold authority to vote for the nominees for directors listed on the
proxy card and to specify their choice between approval or disapproval of, or
abstention with respect to, each other matter by marking the appropriate boxes
on the proxy card. If a proxy card is signed and returned without choices
marked, it will be voted for the nominees for directors listed on the card and
as recommended by the Board of Directors with respect to other matters. A
shareholder giving a proxy may revoke it at any time before it is exercised at
the meeting by giving notice of its revocation to the Company, by executing
another proxy dated after the proxy to be revoked, or by attending the meeting
and voting in person.
ANNUAL REPORT. Securities and Exchange Commission rules require that an
annual report precede or accompany proxy material. More than one annual report
need not be sent to the same address, if the recipient agrees. If more than one
annual report is being sent to your address, at your request, mailing of the
duplicate copy to the account you select will be discontinued. You may so
indicate in the space provided on the proxy card. Eliminating these duplicate
mailings will not affect receipt of future proxy statements and proxy cards.
<PAGE>
1. ELECTION OF DIRECTORS
TWELVE DIRECTORS are to be elected by a plurality of the votes cast at the
meeting to hold office until the next annual meeting and until their successors
have been elected. The Restated Certificate of Incorporation of the Company
provides that the number of directors of the Company shall be such number, not
less than 12 nor more than 17, as shall be determined from time to time, as
prescribed in the By-Laws, by resolution of the Board of Directors. Amendments
to the Restated Certificate of Incorporation and By-Laws of the Company are
being proposed for shareholder approval at the meeting which would reduce the
minimum required number of directors from 12 to nine.
On February 26, 1997, the Board of Directors adopted a resolution increasing
the number of directors constituting the entire Board from 12 to 13, and elected
Mr. Leonard J. Kujawa to fill the vacancy thus created. In addition, on that
same date, the Board of Directors adopted a resolution reducing the number of
directors from 13 to 12, effective on the date of the annual meeting. Ms. Ann
Haymond Zwinger, a director, will be retiring from the Board and not standing
for reelection.
The 12 nominees named on pages 3-5 were selected by the Board of Directors
on the recommendation of the Committee on Directors of the Board. The proxies
named on the proxy card or their substitutes will vote for the Board's nominees,
unless instructed otherwise. Shareholders may withhold authority to vote for any
or all of such nominees on the proxy card. Except for Mr. Leonard J. Kujawa, who
is standing for election for the first time, all of the Board's nominees were
elected by the shareholders at the 1996 annual meeting. It is not expected that
any of the nominees will be unable to stand for election or be unable to serve
if elected. In the event that a vacancy in the slate of nominees should occur
before the meeting, the proxies may be voted for another person nominated by the
Board of Directors.
Shareholders have the right to vote cumulatively for the election of
directors. This means that in the voting at the meeting each shareholder, or his
proxy, may multiply the number of his shares by 12 -- the number of directors to
be elected -- and then cast the resulting total number of votes for a single
nominee, or distribute such votes on the ballot among any two or more nominees
as desired. The proxies designated by the Board of Directors will not cumulate
the votes of the shares they represent.
The following brief biographies of the nominees include their principal
occupations, ages on the date of this statement, accounts of their business
experience and names of certain companies of which they are directors. Data with
respect to the number of shares of the Company's Common Stock and stock-based
units beneficially owned by each of them appears on pages 19 and 20.
2
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NOMINEES FOR DIRECTOR
<TABLE>
<C> <S> <C>
PETER J. DEMARIA Received his B.A. in 1955 from Queens
[PHOTO] CONTROLLER OF THE COMPANY; College and M.B.A. in 1963 from New York
EXECUTIVE VICE PRESIDENT -- University. Certified Public Accountant
ADMINISTRATION AND CHIEF (1965). Joined AEP Service Corporation in
ACCOUNTING OFFICER, AEP SERVICE 1959. In 1978 became senior vice
CORPORATION president and chief accounting officer of
Age 62 AEP Service Corporation and treasurer of
Director since 1993 the Company and in 1984 became executive
vice president -- administration of AEP
Service Corporation. Resigned as
treasurer and became controller in 1995.
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E. LINN DRAPER, JR. Received his B.A. and B.S. (chemical
[PHOTO] CHAIRMAN, PRESIDENT AND CHIEF engineering) degrees from Rice University
EXECUTIVE OFFICER OF THE COMPANY in 1964 and 1965, respectively, and Ph.D.
AND AEP SERVICE CORPORATION; (nuclear engineering) in 1970 from
CHAIRMAN AND CHIEF EXECUTIVE Cornell University. Joined Gulf States
OFFICER OF ALL OTHER MAJOR Utilities Company, an unaffiliated
COMPANY SUBSIDIARIES electric utility, in 1979. Chairman of
Age 55 the board, president and chief executive
Director since 1992 officer of Gulf States (1987-1992).
Elected president of the Company and
president and chief operating officer of
AEP Service Corporation in March 1992 and
chairman of the board and chief executive
officer of the Company and all of its
major subsidiaries in April 1993. A
director of VECTRA Technologies, Inc.
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ROBERT M. DUNCAN Received his B.S. and J.D. from The Ohio
[PHOTO] DIRECTOR AND TRUSTEE, State University in 1948 and 1952,
COLUMBUS, OHIO respectively. After two years in the
Age 69 private practice of law, held a series of
Director since 1985 governmental legal positions culminating
in service as a judge for the U.S.
District Court for the Southern District
of Ohio, a position held from 1974 to
1985. Private practice of law
(1985-1991). Vice president and general
counsel, The Ohio State University
(1992-1994). A trustee of Nationwide
Investing Foundation, Nationwide
Investing Foundation II, Nationwide
Separate Account Trust and Financial
Horizons Investment Trust. A director of
Nationwide Financial Services Inc.
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ROBERT W. FRI Holds a B.A. from Rice University and an
DIRECTOR, NATIONAL M.B.A. from Harvard Business School.
MUSEUM OF NATURAL HISTORY Associated with McKinsey & Company, Inc.,
(SMITHSONIAN INSTITUTION), management consulting firm, from 1963 to
WASHINGTON, D.C. 1971 and again from 1973 to 1975, being
Age 61 elected a principal in the firm in 1968.
Director since 1995 From 1971 to 1973, served as first Deputy
Administrator of the Environmental
Protection Agency, becoming Acting
Administrator in 1973. Was first Deputy
and then Acting Administrator of the
Energy Research and Development
Administration from 1975 to 1977. From
1978 to 1986 was President of Energy
Transition Corporation. President and
director of Resources for the Future
(non-profit research organization) from
1986 to 1995. Assumed his present
position with the National Museum of
Natural History in 1996.
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</TABLE>
3
<PAGE>
NOMINEES FOR DIRECTOR -- CONTINUED
<TABLE>
<C> <S> <C>
ARTHUR G. HANSEN Received his B.S.E.E. in 1946 and M.S. in
[PHOTO] EDUCATIONAL CONSULTANT, 1948 from Purdue University, his Ph.D.
ZIONSVILLE, INDIANA (mathematics) in 1958 from Case Western
Age 72 Reserve University, and honorary doctoral
Director since 1979 degrees in engineering and science from
Purdue and Indiana universities. Was dean
of the College of Engineering (1966-1969)
and president (1969-1971) of Georgia
Institute of Technology, president of
Purdue University (1971-1982) and
chancellor of The Texas A&M University
System (1982-1986). Director of Research,
Hudson Institute (1987-1988). Vice
chairman, Indiana Commission for Higher
Education (1995).
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LESTER A. HUDSON, JR. Received a B.A. from Furman University in
[PHOTO] CHAIRMAN, H&E ASSOCIATES, 1961 and an M.B.A. from the University of
GREENVILLE, SOUTH CAROLINA South Carolina in 1965. Joined Dan River
Age 57 Inc. (textile fabric manufacturer) in
Director since 1987 1970 and was elected president and chief
operating officer in 1981 and chief
executive officer in 1987. Resigned from
Dan River in 1990. Joined WundaWeve
Carpets, Inc. (carpet manufacturer) as
chairman, president and chief executive
officer in 1990. Chairman of WundaWeve in
1991. Vice chairman of WundaWeve
(1993-1995). Chairman, H&E Associates
(investment firm) in 1995. A director of
American National Bankshares Inc.
Visiting lecturer, Clemson University.
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LEONARD J. KUJAWA Received his B.B.A. in 1954 and M.B.A. in
INTERNATIONAL 1955 from the University of Michigan.
ENERGY CONSULTANT, Joined Arthur Andersen LLP (accounting
ATLANTA, GEORGIA and consulting firm) in 1957 and became a
Age 64 partner in 1968, specializing in the
Director since February 1997 electric and telecommunications
industries. Worldwide Director -- Energy
and Telecommunications (1985-1995).
Retired in 1995. International energy
consultant to his former firm and other
global companies. A director of
Schweitzer-Mauduit International, Inc.
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GERALD P. MALONEY Holds B.S. degrees in both electrical
[PHOTO] VICE PRESIDENT AND SECRETARY OF engineering and business administration
THE COMPANY; EXECUTIVE VICE from Massachusetts Institute of
PRESIDENT -- Technology (1955) and an M.B.A. from
CHIEF FINANCIAL OFFICER, Rutgers University (1962). Joined AEP
AEP SERVICE CORPORATION Service Corporation in 1955. In 1974
Age 64 became senior vice president -- finance
Director since 1994 of AEP Service Corporation and vice
president of the Company; in 1991 became
executive vice president -- chief
financial officer of AEP Service
Corporation; and in 1994 became secretary
of the Company.
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ANGUS E. PEYTON Graduated from Princeton University in
[PHOTO] PARTNER, BROWN & PEYTON, 1949 and received his LL.B. from the
ATTORNEYS, CHARLESTON, University of Virginia in 1952. Served as
WEST VIRGINIA an assistant attorney general of West
Age 70 Virginia (1956-1957), as chairman of the
Director since 1978 West Virginia Industrial Development
Authority, and as West Virginia Commerce
Commissioner (1965-1969). Formed his
present law firm in 1969. A director of
One Valley Bancorp of West Virginia, Inc.
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</TABLE>
4
<PAGE>
<TABLE>
<C> <S> <C>
DONALD G. SMITH Joined Roanoke Electric Steel Corporation
[PHOTO] CHAIRMAN OF THE BOARD, (steel manufacturer) in 1957. Held
PRESIDENT, CHIEF EXECUTIVE various positions with Roanoke Electric
OFFICER AND TREASURER OF ROANOKE Steel before being named president and
ELECTRIC STEEL CORPORATION, treasurer in 1985, chief executive
ROANOKE, VIRGINIA officer in 1986 and chairman of the board
Age 61 in 1989.
Director since 1994
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LINDA GILLESPIE STUNTZ Holds an A.B. from Wittenberg University
[PHOTO] PARTNER, STUNTZ & DAVIS, P.C., (1976) and J.D. from Harvard Law School
ATTORNEYS, WASHINGTON, D.C. (1979). Private practice of law
Age 42 (1979-1981). U.S. House of Repre-
Director since 1993 sentatives, Committee on Energy and
Commerce: Associate Minority Counsel,
Subcommittee on Fossil and Synthetic
Fuels (1981-1986) and Minority Counsel
and Staff Director (1986-1987). Private
practice of law (1987-1989). U.S.
Department of Energy (1989-1993): Acting
Deputy Secretary (January 1992-July 1992)
and Deputy Secretary (July 1992-January
1993). Returned to the private practice
of law in March 1993. A director of
Schlumberger Limited. Member, Advisory
Council, Electric Power Research
Institute.
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MORRIS TANENBAUM Graduated from The Johns Hopkins
[PHOTO] VICE PRESIDENT, NATIONAL ACADEMY University in 1949 with a B.A. in
OF ENGINEERING, chemistry and received a Ph.D. in
SHORT HILLS, NEW JERSEY physical chemistry in 1952 from Princeton
Age 68 University. Joined Bell Telephone
Director since 1989 Laboratories in 1952 and held various
positions with AT&T companies. Became
vice chairman of the board of AT&T in
1986 and chief financial officer in 1988.
Retired in 1991. A director of Cabot
Corporation. A trustee of Battelle
Memorial Institute and Massachusetts In-
stitute of Technology, Trustee Emeritus
of The Johns Hopkins University and
honorary trustee of The Brookings
Institution.
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</TABLE>
Dr. Draper and Messrs. DeMaria and Maloney are directors of Appalachian
Power Company, Columbus Southern Power Company, Indiana Michigan Power Company,
Kentucky Power Company and Ohio Power Company (all of which are subsidiaries of
the Company with one or more classes of publicly held preferred stock or debt
securities) and other subsidiaries of the Company. Dr. Draper and Messrs.
DeMaria and Maloney are also directors of AEP Generating Company, a subsidiary
of the Company.
FUNCTIONS OF THE BOARD OF DIRECTORS AND COMMITTEES
UNDER NEW YORK LAW, the Company is managed under the direction of the Board of
Directors. The Board establishes broad corporate policies and authorizes various
types of transactions, but it is not involved in day-to-day operational details.
During 1996, the Board held eight regular meetings. The Board has six standing
committees, the functions of which are described in the following paragraphs.
The AUDIT COMMITTEE consists of Messrs. Duncan, Fri, Hudson and Peyton and
Ms. Zwinger. The Audit Committee oversees, and reports to the Board concerning,
the general policies and practices of the Company and its subsidiaries with
respect to accounting, financial reporting, and internal auditing and financial
controls. It also maintains a direct exchange of information between the Board
and the Company's independent accountants and reviews possible conflict of
interest situations involving directors. During 1996 the Audit Committee held
five meetings.
The COMMITTEE ON DIRECTORS consists of Messrs. Duncan, Fri and Hudson, Dr.
Hansen and
5
<PAGE>
Mses. Stuntz and Zwinger. The Committee on Directors is responsible for: (i)
recommending the size of the Board within the boundaries imposed by the
corporate charter; (ii) recommending selection criteria for nominees for
election or appointment to the Board; (iii) conducting independent searches for
qualified nominees and screening the qualifications of candidates recommended by
others; and (iv) recommending to the Board for its consideration one or more
nominees for appointment to fill vacancies on the Board as they occur and the
slate of nominees for election at the annual meeting. During 1996 the Committee
on Directors held two meetings.
The Committee on Directors will consider shareholder recommendations of
candidates to be nominated as directors of the Company. All such recommendations
must be in writing and addressed to the Secretary of the Company. By accepting a
shareholder recommendation for consideration, the Committee on Directors does
not undertake to adopt or take any other action concerning the recommendation,
or to give the proponent its reasons for not doing so.
The CORPORATE PUBLIC POLICY COMMITTEE consists of Messrs. Duncan, Fri,
Hudson, Peyton and Smith and Drs. Hansen and Tanenbaum and Mses. Stuntz and
Zwinger. The Corporate Public Policy Committee is responsible for examining the
Company's policies on major public issues affecting the AEP System, as well as
established System policies which affect the relationship of the Company and its
subsidiaries to their service areas and the general public; for reporting
periodically and on request to the Board and providing recommendations to the
Board on such policy matters; and for counseling the management of the AEP
System on any such policy matters presented to the Committee for consideration
and study. During 1996 the Corporate Public Policy Committee held three
meetings.
The EXECUTIVE COMMITTEE consists of Drs. Draper and Tanenbaum and Mr.
Peyton. It is empowered to exercise all the authority of the Board of Directors,
subject to certain limitations prescribed in the By-Laws, during the intervals
between meetings of the Board. Meetings of the Executive Committee are convened
only in extraordinary circumstances. The Executive Committee did not meet during
1996.
The FINANCE COMMITTEE consists of Messrs. Peyton and Smith, Ms. Stuntz and
Dr. Tanenbaum. The Finance Committee monitors and reports to the Board with
respect to the capital requirements and financing plans and programs of the
Company and its subsidiaries including, among other things, reviewing and making
such recommendations as it considers appropriate concerning the short and
long-term financing plans and programs of the Company and its subsidiaries and
the implementation of the same. During 1996 the Finance Committee held four
meetings.
The HUMAN RESOURCES COMMITTEE consists of Drs. Hansen and Tanenbaum and
Messrs. Hudson and Smith. The Human Resources Committee is responsible for: (i)
reviewing the salaries and other compensation and benefits provided to members
of the Board who are officers of the Company or employees of any of its
subsidiaries, and recommending to the Board for approval the amount of salary,
compensation and benefits to be paid to such persons each year; (ii) reviewing
management proposals concerning salaries, compensation and benefits to be paid
to senior officers of AEP Service Corporation; (iii) reviewing and making
recommendations to the Board with respect to the compensation of directors; (iv)
evaluating the Company's hiring, development, promotional and succession
planning practices for those management positions described in (ii) above; and
(v) periodic review of the Company's overall affirmative action performance.
During 1996 the Human Resources Committee held five meetings.
During 1996, no incumbent director attended fewer than 75% of the aggregate
of the total number of meetings of the Board of Directors and the total number
of meetings held by all Committees on which he or she served.
COMPENSATION OF DIRECTORS
IN 1996, the Board of Directors authorized a complete study of the Company's
practices with respect to director compensation. After a full review, on
December 18, 1996, the Board of Directors approved certain compensation
initiatives in order to more closely align directors compensation with the
financial interests of shareholders. These initiatives are described below under
"Directors Compensation Initiatives."
ANNUAL RETAINERS AND MEETING FEES. Directors who are officers of the
Company or employees of any of its subsidiaries do not receive any compensation,
other than their regular salaries
6
<PAGE>
and the accident insurance coverage described below, for attending meetings of
the Board of Directors of the Company. The other members of the Board receive an
annual retainer of $23,000 for their services, an additional annual retainer of
$3,000 for each Committee that they chair, a fee of $1,000 for each meeting of
the Board and of any Committee that they attend (except a meeting of the
Executive Committee held on the same day as a Board meeting), and a fee of
$1,000 per day for any inspection trip or conference (except a trip or
conference on the same day as a Board or Committee meeting).
DEFERRED COMPENSATION POLICY. The Board has adopted a policy which permits
directors to elect annually to defer receipt of all or a portion of their
retainer and fees to be payable in a lump sum or monthly installments after they
cease to be a director. The deferred compensation accrues interest compounded
quarterly at the daily prime lending rate in effect from time to time at a
specified major financial institution. This policy is implemented by individual
deferred-compensation agreements which set forth the terms of the deferral.
RETIREMENT PLAN. The Retirement Plan for Directors (excluding officers of
the Company or employees of any of its subsidiaries) provides for annual
retirement payments for life to such directors commencing at the later of the
director's retirement or age 72 in an amount equal to the annual Board retainer
at the time of retirement with a 20% reduction for each year that service as a
director is less than five.
INSURANCE. The Company maintains a group 24-hour accident insurance policy
to provide a $1,000,000 accidental death benefit for each director (three-year
premium was $16,065). The current policy will expire on September 1, 1997, and
the Company expects to renew the coverage. In addition, the Company pays each
director (excluding officers of the Company or employees of any of its
subsidiaries) an amount to provide for the federal and state income taxes
incurred in connection with the maintenance of this coverage (approximately $400
annually).
DIRECTORS COMPENSATION INITIATIVES
COMPENSATION initiatives adopted by the Board are as follows.
First, the Board adopted the Deferred Compensation and Stock Plan for
Non-Employee Directors, subject to approval by the shareholders at this annual
meeting. This Plan allows non-employee directors to choose to receive up to 100
percent of their annual Board retainer in shares of Common Stock and/or units
that are equivalent in value to shares of Common Stock ("Stock Units"). This
Plan would replace the directors deferred compensation policy. A full
description of this Plan appears on pages 8 and 9 under "Approval of Deferred
Compensation and Stock Plan for Non-Employee Directors."
Second, the Board adopted the Stock Unit Accumulation Plan for Non-Employee
Directors, effective January 1, 1997. Under this Plan, an award of 300 Stock
Units to each non-employee director will be made as of the first day of the
month in which the non-employee director becomes a member of the Board, and
annually thereafter, up to a maximum of 3,000 Stock Units for each non-employee
director. Amounts equivalent to cash dividends on the Stock Units will accrue as
additional Stock Units. Stock Units credited to a non-employee director's
account as a result of the annual awards and dividend credits will be
forfeitable on a pro rata basis for each full month that service as a director
is less than 60 months. Stock Units are paid to the director upon termination of
service unless the director has elected to defer payment for a period that
results in payment commencing not later than five years thereafter.
Third, the Board amended the Retirement Plan for Directors to provide that
non-employee directors elected to the Board after December 31, 1996, shall not
participate in the Retirement Plan. Directors on the Board on that date were
permitted to waive any benefits payable under the Retirement Plan in exchange
for participation in the Stock Unit Accumulation Plan and, directors who elected
to participate in the Stock Unit Accumulation Plan received 300 nonforfeitable
Stock Units for each year of prior service up to the maximum of 3,000 specified
in the Stock Unit Accumulation Plan, effective January 1, 1997.
Finally, the Board of Directors of the Company considers stock ownership in
the Company by management to be of great importance. Such ownership enhances
management's commitment to the future of the Company and further aligns
management's interests with those of AEP's shareholders. In keeping with this
philosophy, the
7
<PAGE>
Board adopted minimum stock ownership guidelines for non-employee directors. The
target for each non-employee director is 2,000 shares of AEP Common Stock and/or
Stock Units, which is currently equivalent to approximately 2.2 times the annual
retainer and average meeting fees, with such ownership to be acquired by
December 31, 2000 for directors in office on January 1, 1997, and by the end of
the fifth year of service for directors joining the Board after this time. For
further information as to the guidelines which pertain to AEP's executive
officers, see the "Board Human Resources Committee Report on Executive
Compensation" below under the caption "Stock Ownership Guidelines."
OTHER MATTERS
THE DIRECTORS and officers of the Company and its subsidiaries are insured,
subject to certain exclusions, against losses resulting from any claim or claims
made against them while acting in their capacities as directors and officers.
The American Electric Power System companies are also insured, subject to
certain exclusions and deductibles, to the extent that they have indemnified
their directors and officers for any such losses. Such insurance is provided by
Associated Electric & Gas Insurance Services, CNA, Energy Insurance Mutual, The
Chubb Insurance Company and Great American Insurance Company, effective January
1, 1997 through December 31, 1997, and pays up to an aggregate amount of
$150,000,000 on any one claim and in any one policy year. The total annual
premium for the five policies is $1,259,724.
Fiduciary liability insurance provides coverage for System companies, their
directors and officers, and any employee deemed to be a fiduciary or trustee,
for breach of fiduciary responsibility, obligation, or duties as imposed under
the Employee Retirement Income Security Act of 1974. This coverage, provided by
Federal Insurance Company, was renewed, effective July 1, 1996 through June 30,
1997, for a premium of $71,910. It provides $25,000,000 of aggregate coverage
with a $5,000 deductible for each loss.
2. APPROVAL OF AUDITORS
ON THE RECOMMENDATION of the Audit Committee, the Board of Directors has
appointed the accounting firm of Deloitte & Touche LLP as independent auditors
of the Company for the year 1997, subject to approval by the shareholders at the
annual meeting. Deloitte & Touche LLP is considered to be the firm best
qualified to perform this important function because of its ability and the
familiarity of its personnel with the Company's affairs. It and predecessor
firms have been the Company's auditors since 1911. Approval of this proposal
requires the affirmative vote of holders of a majority of the shares present in
person or by proxy at the meeting.
Fees billed by Deloitte & Touche LLP for auditing and other professional
services rendered to the Company and its subsidiaries during 1996 were
$5,630,000.
Representatives of Deloitte & Touche LLP will be present at the meeting and
will have an opportunity to make a statement if they desire to do so. They also
will be available to answer appropriate questions.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF DELOITTE & TOUCHE
LLP AS INDEPENDENT AUDITORS FOR 1997.
3. APPROVAL OF DEFERRED COMPENSATION AND STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
THE BOARD OF DIRECTORS unanimously adopted the American Electric Power Company,
Inc. Deferred Compensation and Stock Plan for Non-Employee Directors (the
"Director Stock Plan") on December 18, 1996, effective January 1, 1997, subject
to approval by the shareholders at the annual meeting. The Director Stock Plan
will replace the existing directors deferred compensation policy.
PURPOSE. The Director Stock Plan is designed to attract and retain
qualified persons to serve as non-employee directors, to solidify the common
interests of its non-employee directors and shareholders by enhancing the equity
interest of non-employee directors in the Company, and to encourage the highest
level of non-employee director performance by providing such non-employee
directors with a proprietary interest in the Company's performance and progress.
GENERAL DESCRIPTION. The Director Stock Plan allows non-employee directors
to choose to receive up to 100 percent of their annual retainer fee in shares of
Common Stock of the Company and/or units that are equivalent in value to shares
8
<PAGE>
of Common Stock ("Stock Units"), deferring receipt by the director. Amounts
equivalent to cash dividends on the Stock Units will accrue as additional Stock
Units. The shares to be delivered under the Director Stock Plan will be
purchased in the open market.
SUMMARY OF THE DIRECTOR STOCK PLAN
THE FOLLOWING SUMMARY of the principal features of the Director Stock Plan is
qualified in its entirety by the complete text of the Director Stock Plan, which
is set forth as Exhibit A to this proxy statement.
ELIGIBILITY AND ADMINISTRATION. Each director of the Company who is a
director on January 1, 1997, and each individual who becomes a director
thereafter, and who is not an employee of the AEP System will be eligible to
participate ("Participant") in the Director Stock Plan. The Company currently
has nine directors who are eligible to participate. The Director Stock Plan is
administered by the Human Resources Committee of the Board.
ELECTION TO RECEIVE COMMON STOCK FOR RETAINER AND/OR TO DEFER RETAINER IN
STOCK UNITS. The Director Stock Plan permits Participants to elect to receive
all or a specified portion of the retainer in shares of AEP Common Stock and/or
to defer all or a specified portion of the retainer in Stock Units until
termination of service or for a period that results in payment commencing not
later than five years thereafter, provided that an appropriate and timely
written election to defer is made. Shares of Common Stock will be distributed
and/or Stock Units will be credited to the Participants, as the case may be,
when the retainer is payable, and will be based on the Market Value of the
Common Stock on the payment date. For purposes of the Director Stock Plan, the
"Market Value" of the Common Stock will be the closing price reported on the New
York Stock Exchange composite tape. Stock Units credited to a Participant's
account as a result of the Participant's deferral will at all times be
nonforfeitable.
PAYMENT OF STOCK UNITS. Payment of Stock Units to a Participant due to
deferrals of the retainer and dividend credits will be made in cash or Common
Stock, or a combination of both, as elected by the Participant. In the event of
death, all Stock Units in a Participant's account will be payable in cash to the
Participant's beneficiary unless deferral is otherwise requested by the
beneficiary and such request is approved by the Human Resources Committee.
CHANGE IN CONTROL. In the event of a Change in Control, as defined in the
Director Stock Plan, all Stock Units in a Participant's account will be payable
in cash or Common Stock, or a combination of both, to the Participant, as
elected by the Participant, not later than 15 days after the date of the Change
in Control.
AMENDMENT. The Board of Directors may terminate or amend the Director Stock
Plan, but no such amendment will adversely affect the rights of any Participant
with respect to any Stock Units held in such Participant's account without the
Participant's written consent.
VOTE REQUIRED. Approval of this proposal requires an affirmative vote by
the holders of a majority of the outstanding shares of Common Stock entitled to
vote at the meeting.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE DEFERRED
COMPENSATION AND STOCK PLAN FOR NON-EMPLOYEE DIRECTORS.
4. APPROVAL OF AMENDMENTS TO RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
TO REDUCE MINIMUM REQUIRED NUMBER OF DIRECTORS FROM 12 TO NINE
PARAGRAPH 5 of the Restated Certificate of Incorporation of the Company provides
that the number of directors shall be not less than 12 nor more than 17, with
the exact number within that range to be fixed in the manner prescribed by the
By-Laws of the Company. Section 7 of the By-Laws provides that the Board of
Directors may fix by resolution, within the range prescribed by the Restated
Certificate of Incorporation, the number of directors of the Company. The number
of directors is being reduced, effective on the date of the annual meeting, from
13 to 12 by resolution of the Board.
The Board of Directors unanimously recommends that the shareholders
authorize amendment of (i) the Restated Certificate of Incorporation to delete
the first sentence of Paragraph 5 and (ii) the first and fourth sentences of the
By-Laws to reduce the minimum required
9
<PAGE>
number of directors from 12 to nine. The maximum number of directors would
remain at 17 and the Board will fix the number of directors within that range by
resolution.
REASONS FOR THE AMENDMENTS. The Company proposes to make these changes to
the Restated Certificate of Incorporation and By-Laws to provide it with greater
flexibility in determining the size of its Board of Directors, particularly in
light of the trend towards somewhat smaller boards of directors and a greater
percentage of outside directors. The Company believes that such flexibility is
important at this time since outside directors are increasingly becoming more
likely to limit the number of boards of directors on which they are willing to
serve. There is a limited number of qualified persons who are willing to take on
the responsibilities and liabilities of serving as a director and the number of
qualified persons varies from time to time. If the proposed amendments to the
Restated Certificate of Incorporation and By-Laws are approved by the
shareholders and following such amendments the Board of Directors were to fix
the number of directors at a number less than the current minimum of 12, the
number of shares that would be required to elect one director if a shareholder
were to vote his or her shares cumulatively would increase somewhat. The
presently effective resolution reducing the number of directors from 13 to 12,
effective on the date of the annual meeting, is not being modified at this time.
PROPOSED AMENDMENTS. The first sentence of Paragraph 5 of the Restated
Certificate of Incorporation, which is set forth below, would be deleted:
The number of directors of the corporation shall be such number, not less
than twelve (12) nor more than seventeen (17), as shall be determined from time
to time in the manner prescribed by the by-laws.
The first and fourth sentences of Section 7 of the By-Laws, as proposed to
be amended, are set forth below (deletions are indicated by strike-out and
additions are boldface italic type):
The Board of Directors shall consist of such number of directors, [within
the limits prescribed in the Certificate of Consolidation forming the
Company, as amended,] NOT LESS THAN NINE (9) NOR MORE THAN SEVENTEEN (17),
as shall be determined from time to time as herein provided.
The Board of Directors shall have power from time to time and at any time
when the stockholders are not assembled as such in an annual or special
meeting, by resolution adopted by a majority of the directors then in
office, OR SUCH GREATER NUMBER REQUIRED BY LAW, to fix, within the limits
prescribed by [the Certificate of Consolidation forming the Company, as
amended,] THIS SECTION 7, the number of directors of the Company.
VOTE REQUIRED. Approval of this proposal requires an affirmative vote by
the holders of a majority of the outstanding shares of Common Stock entitled to
vote at the meeting.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENTS TO
THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS.
OTHER BUSINESS
THE BOARD OF DIRECTORS does not intend to present to the meeting any business
other than the election of directors, the approval of auditors and the two other
proposals described above.
If any other business not described herein should properly come before the
meeting for action by the shareholders, the persons named as proxies on the
enclosed card or their substitutes will vote the shares represented by them in
accordance with their best judgment. At the time this proxy statement was
printed, the Board of Directors was not aware of any other matters that might be
presented.
VOTING PROCEDURES
UNDER NEW YORK LAW, abstentions and broker non-votes do not count in the
determination of voting results and have no effect on the vote in connection
with the approval of auditors. The determination by the shareholders of approval
of the auditors is based on votes "for" and "against" -- with abstentions and
broker non-votes not counted as "against" votes but counted in the determination
of a quorum. However, with respect to the proposals regarding the Deferred
Compensation and Stock Plan for Non-Employee Directors and amendments to the
Restated Certificate of Incorporation and By-Laws of the Company, abstentions
and broker non-votes will have the same effect as votes against these proposals,
since the affirmative vote of holders of a majority of the
10
<PAGE>
outstanding shares is required for approval. Unvoted shares are termed
"non-votes" when a nominee holding shares for beneficial owners may not have
received instructions from the beneficial owner and may not have exercised
discretionary voting power on certain matters, but with respect to other matters
may have voted pursuant to discretionary authority or instructions from the
beneficial owner.
It is the policy of the Company that shareholders be provided privacy in
voting. All proxy
(voting instruction) cards and ballots, which identify shareholders, are held
confidential, except as may be necessary to meet any applicable legal
requirements. Proxy cards are returned in envelopes addressed to an independent
third-party tabulator, who receives, inspects, and tabulates the proxies. Voted
proxies and ballots are not seen by nor reported to the Company except (i) in
aggregate number or to determine if (rather than how) a shareholder has voted,
(ii) in cases where shareholders write comments on their proxy cards, or (iii)
in a contested proxy solicitation.
11
<PAGE>
EXECUTIVE COMPENSATION
THE FOLLOWING TABLE shows for 1996, 1995 and 1994 the compensation earned by the
chief executive officer and the four other most highly compensated executive
officers (as defined by regulations of the Securities and Exchange Commission)
of the Company at December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL -------------------
COMPENSATION
---------------- PAYOUTS ALL OTHER
SALARY BONUS ------------------- COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) LTIP PAYOUTS($)(1) ($)(2)
- ---------------------------------------- ---- ------- ------- ------------------- -------------
<S> <C> <C> <C> <C> <C>
E. LINN DRAPER, JR. -- Chairman of the 1996 720,000 281,664 675,903 31,990
board, president and chief executive 1995 685,000 236,325 334,851 30,790
officer of the Company and the Service 1994 620,000 209,436 137,362 29,385
Corporation; chairman and chief
executive officer of other subsidiaries
PETER J. DEMARIA -- Controller and 1996 360,000 140,832 290,825 21,190
director of the Company; executive vice 1995 330,000 113,850 143,829 20,050
president -- administration and chief 1994 305,000 103,029 59,032 18,750
accounting officer and director of the
Service Corporation; vice president,
controller and director of other
subsidiaries
G.P. MALONEY -- Vice president, 1996 360,000 140,832 286,288 21,190
secretary and director of the Company; 1995 330,000 113,850 141,582 20,060
executive vice president -- chief 1994 300,000 101,340 58,094 19,745
financial officer and director of the
Service Corporation; vice president and
director of other subsidiaries
WILLIAM J. LHOTA -- Executive vice 1996 320,000 125,184 263,114 19,690
president and director of the Service 1995 300,000 103,500 132,592 19,140
Corporation; president, chief operating 1994 280,000 94,584 54,409 19,185
officer and director of other
subsidiaries
JAMES J. MARKOWSKY -- Executive vice 1996 303,000 118,534 254,535 19,480
president -- power generation and 1995 285,000 98,325 126,599 17,515
director of the Service Corporation; 1994 267,000 90,193 51,930 14,755
vice president and director of other
subsidiaries
</TABLE>
- -------------
(1) Amounts in the "Bonus" column reflect payments under the Management
Incentive Compensation Plan for performance measured for each of the years
ended December 31, 1994, 1995 and 1996. Payments are made in March of the
subsequent year. Amounts for 1996 are estimates but should not change
significantly.
Amounts in the "Long-Term Compensation" column reflect performance share
unit targets earned under the Performance Share Incentive Plan (which became
effective January 1, 1994) for the one-, two- and three-year performance
periods ending December 31, 1994, 1995 and 1996, respectively. The one- and
two-year performance periods were transition performance periods.
See below under "Long-Term Incentive Plans -- Awards in 1996" and pages 16
and 17 for additional information.
(2) For 1996, includes (i) employer matching contributions under the AEP System
Employees Savings Plan: Dr. Draper, $3,600; Mr. DeMaria, $3,175; Mr.
Maloney, $4,500; Mr. Lhota, $4,500; and Dr. Markowsky, $3,235; (ii) employer
matching contributions under the AEP System Supplemental Savings Plan, a
non-qualified plan designed to supplement the AEP Savings Plan: Dr. Draper,
$18,000; Mr. DeMaria, $7,625; Mr. Maloney, $6,300; Mr. Lhota, $4,800; and
Dr. Markowsky, $5,855; and (iii) subsidiary companies director fees: $10,390
for each of the named executive officers.
12
<PAGE>
LONG-TERM INCENTIVE PLANS -- AWARDS IN 1996
Each of the awards set forth below establishes performance share unit
targets, which represent units equivalent to shares of Common Stock, pursuant to
the Company's Performance Share Incentive Plan. Since it is not possible to
predict future dividends and the price of AEP Common Stock, credits of
performance share units in amounts equal to the dividends that would have been
paid if the performance share unit targets were established in the form of
shares of Common Stock are not included in the table.
The ability to earn performance share unit targets is tied to achieving
specified levels of total shareholder return ("TSR") relative to the S&P
Electric Utility Index. Notwithstanding AEP's TSR ranking, no performance share
unit targets are earned unless AEP shareholders realize a positive TSR over the
relevant three-year performance period. The Human Resources Committee may, at
its discretion, reduce the number of performance share unit targets otherwise
earned. In accordance with the performance goals established for the periods set
forth below, the threshold, target and maximum awards are equal to 25%, 100% and
200%, respectively, of the performance share unit targets. No payment will be
made for performance below the threshold.
Payments of earned awards are deferred in the form of restricted stock units
(equivalent to shares of AEP Common Stock) until the officer has met the
equivalent stock ownership target discussed in the Human Resources Committee
Report. Once officers meet and maintain their respective targets, they may elect
either to continue to defer or to receive further earned awards in cash and/or
Common Stock.
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS OF
PERFORMANCE SHARE UNITS UNDER
PERFORMANCE NON-STOCK PRICE-BASED PLAN
NUMBER OF PERIOD UNTIL -------------------------------
PERFORMANCE MATURATION THRESHOLD TARGET MAXIMUM
NAME SHARE UNITS OR PAYOUT (#) (#) (#)
- --------------- ----------- ------------ ---------- ------- -------
<S> <C> <C> <C> <C> <C>
E. L. Draper,
Jr. 7,339 1996-1998 1,835 7,339 14,678
P. J. DeMaria 3,211 1996-1998 803 3,211 6,422
G. P. Maloney 3,211 1996-1998 803 3,211 6,422
W. J. Lhota 2,854 1996-1998 714 2,854 5,708
J. J. Markowsky 2,702 1996-1998 676 2,702 5,404
</TABLE>
RETIREMENT BENEFITS
The American Electric Power System Retirement Plan provides pensions for all
employees of AEP System companies (except for employees covered by certain
collective bargaining agreements), including the executive officers of the
Company. The Retirement Plan is a noncontributory defined benefit plan.
The following table shows the approximate annual annuities under the
Retirement Plan that would be payable to employees in certain higher salary
classifications, assuming retirement at age 65 after various periods of service.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF ACCREDITED SERVICE
HIGHEST AVERAGE --------------------------------------------------------------------------
ANNUAL EARNINGS 15 20 25 30 35 40 45
- ---------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 300,000 $ 69,795 $ 93,060 $116,325 $139,590 $162,855 $182,805 $202,755
400,000 93,795 125,060 156,325 187,590 218,855 245,455 272,055
500,000 117,795 157,060 196,325 235,590 274,855 308,105 341,355
700,000 165,795 221,060 276,325 331,590 386,855 433,405 479,955
900,000 213,795 285,060 356,325 427,590 498,855 558,705 618,555
1,200,000 285,795 381,060 476,325 571,590 666,855 746,655 826,455
</TABLE>
The amounts shown in the table are the straight life annuities payable under
the Retirement Plan without reduction for the joint and survivor annuity.
Retirement benefits listed in the table are not subject to any deduction for
Social Security or other offset amounts. The retirement annuity is reduced 3%
per year in the case of retirement between ages 60 and 62 and further
13
<PAGE>
reduced 6% per year in the case of retirement between ages 55 and 60. If an
employee retires after age 62, there is no reduction in the retirement annuity.
The Company maintains a supplemental retirement plan which provides for the
payment of benefits that are not payable under the Retirement Plan due primarily
to limitations imposed by Federal tax law on benefits paid by qualified plans.
The table includes supplemental retirement benefits.
Compensation upon which retirement benefits are based, for the executive
officers named in the Summary Compensation Table above, consists of the average
of the 36 consecutive months of the officer's highest aggregate salary and
Management Incentive Compensation Plan awards, shown in the "Salary" and "Bonus"
columns, respectively, of the Summary Compensation Table, out of the officer's
most recent 10 years of service. As of December 31, 1996, the number of full
years of service applicable for retirement benefit calculation purposes for such
officers were as follows: Dr. Draper, four years; Mr. DeMaria, 37 years; Mr.
Maloney, 41 years; Mr. Lhota, 32 years; and Dr. Markowsky, 25 years.
Dr. Draper has a contract with the Company and AEP Service Corporation which
provides him with a supplemental retirement annuity that credits him with 24
years of service in addition to his years of service credited under the
Retirement Plan less his actual pension entitlement under the Retirement Plan
and any pension entitlement from the Gulf States Utilities Company Trusteed
Retirement Plan, a plan sponsored by his prior employer.
Fourteen AEP System employees (including Messrs. DeMaria, Maloney and Lhota
and Dr. Markowsky) whose pensions may be adversely affected by amendments to the
Retirement Plan made as a result of the Tax Reform Act of 1986 are eligible for
certain supplemental retirement benefits. Such payments, if any, will be equal
to any reduction occurring because of such amendments. Assuming retirement in
1997 of the executive officers named in the Summary Compensation Table, only Mr.
Maloney would be affected and his annual supplemental benefit would be $2,361.
The Company made available a voluntary deferred-compensation program in 1982
and 1986, which permitted certain members of AEP System management to defer
receipt of a portion of their salaries. Under this program, a participant was
able to defer up to 10% or 15% annually (depending on the terms of the program
offered), over a four-year period, of his or her salary, and receive
supplemental retirement or survivor benefit payments over a 15-year period. The
amount of supplemental retirement payments received is dependent upon the amount
deferred, age at the time the deferral election was made, and number of years
until the participant retires. The following table sets forth, for the executive
officers named in the Summary Compensation Table, the amounts of annual
deferrals and, assuming retirement at age 65, annual supplemental retirement
payments under the 1982 and 1986 programs.
<TABLE>
<CAPTION>
1982 PROGRAM 1986 PROGRAM
---------------------------------- ----------------------------------
ANNUAL AMOUNT OF ANNUAL AMOUNT OF
ANNUAL SUPPLEMENTAL ANNUAL SUPPLEMENTAL
AMOUNT RETIREMENT AMOUNT RETIREMENT
DEFERRED PAYMENT DEFERRED PAYMENT
NAME (4-YEAR PERIOD) (15-YEAR PERIOD) (4-YEAR PERIOD) (15-YEAR PERIOD)
- ----------------------------------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
P. J. DeMaria............................ $10,000 $52,000 $13,000 $53,300
G. P. Maloney............................ 15,000 67,500 16,000 56,400
</TABLE>
14
<PAGE>
BOARD HUMAN RESOURCES COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Human Resources Committee of the Board of Directors regularly reviews
executive compensation policies and practices and evaluates the performance of
management in the context of the Company's performance. None of the members of
the Committee is or has been an officer or employee of any AEP System company or
receives remuneration from any AEP System company in any capacity other than as
a director. See page 6.
The Human Resources Committee recognizes that the executive officers are
charged with managing a $16 billion, multi-state electric utility during
challenging times and with addressing many difficult and complex issues.
AEP's executive compensation program is designed to maximize shareholder
value, to support the implementation of the Company's business strategy and to
improve both corporate and personal performance. The Committee's compensation
policies supporting this program are:
- Pay for performance, motivating both short-and long-term performance.
Compensation for short- and long-term performance focuses on meeting
specified corporate performance goals and the long-term interests of
shareholders, respectively.
- Require a significant amount of compensation for senior executives to be
"at risk," variable incentive compensation versus fixed or base pay --
with much of this risk similar to the risk experienced by other AEP
shareholders.
- Enhance the Company's ability to attract, retain, reward, motivate and
encourage the development of exceptionally knowledgeable, highly qualified
and experienced executives through compensation opportunities.
- Target compensation levels at rates that are reflective of current market
practices to maintain a stable, successful management team.
The Committee also considers management's responses to the impact of
increased competition and other significant changes in the rapidly evolving
electric utility industry. It is the Committee's opinion that, in this ever-
changing environment, Dr. Draper and the senior management team must continue to
develop effectively and implement strategies to position the Company for the
future. This includes the Company's development of unregulated business
activities and proposals and initiatives in connection with the industry's tran-
sition to competition. The success of these efforts and their benefits to the
Company cannot, of course, be quantifiably measured, but the Committee believes
they are vital to the Company's continuing success.
STOCK OWNERSHIP GUIDELINES. The Board of Directors, upon the Committee's
recommendation, underscored the importance of linking executive and shareholder
interests by adopting in December 1994 stock ownership guidelines for senior
management participants in the Performance Share Incentive Plan. The Committee
and senior management believe that linking a significant portion of an
executive's current and potential future net worth to the Company's success, as
reflected in the stock price, gives the executive a stake similar to that of the
Company's owners and further encourages long-term management for the benefit of
those owners.
Under the guidelines, the target ownership of AEP Common Stock is directly
related to the officer's corporate position with the greatest ownership target
for the chief executive officer. The target for the CEO is 45,000 shares, which
was equivalent to approximately three times his then annual base salary. The
targets for the other four officers named in the Summary Compensation Table are
15,000 shares each, equivalent to approximately 1.5 times their then annual base
salary. Each officer is expected to achieve the ownership target within a period
of five years commencing on January 1, 1995. Common Stock equivalents earned
through the Management Incentive Compensation Plan, Senior Officer Annual
Incentive Compensation Plan and Performance Share Incentive Plan, described
below, are included in determining compliance with the ownership targets. As of
January 1, 1997, Dr. Draper had acquired 95% of his ownership target and the
other four officers named in the Summary Compensation Table had exceeded their
respective ownership requirements (see the table on pages 19 and 20 for actual
ownership amounts).
15
<PAGE>
COMPONENTS OF EXECUTIVE COMPENSATION
BASE SALARY. When reviewing salaries, the Committee considers pay practices
used by other electric utilities and by industry in general. In addition, the
Committee considers the respective positions held by the executive officers,
their levels of responsibility, performance and experience, and the relationship
of their salaries to the salaries of other AEP managers and employees.
For compensation comparison purposes, the Human Resources Committee uses the
electric utility companies in the S&P Electric Utility Index, which is the peer
group used in the Comparison of Five Year Cumulative Total Return graph in this
proxy statement. In recognition of AEP's relatively large size and operational
complexity, executive officer salary levels are targeted to the second highest
quartile (between the 50th and 75th percentiles) of the range of compensation
paid by the other electric utilities in this compensation peer group. Base
salary levels in 1996 for the CEO and next four most highly compensated
executive officers of AEP named in the Summary Compensation Table were within
this second highest quartile. In establishing salary levels against that range,
the Human Resources Committee considers the competitiveness of AEP's entire
compensation package.
Salaries are reviewed and adjusted annually to reflect individual and
corporate performance and consistency with compensation changes within the
Company and the compensation peer group of other electric utilities.
The Committee meets without the presence of Dr. Draper, chairman, president
and chief executive officer, to evaluate his performance and compensation and
reports on that evaluation to the outside directors of the Board. These
directors then act on the Committee's recommendation.
ANNUAL INCENTIVE. A variable, performance-based portion of the executive
officers' total compensation has been paid through the Management Incentive
Compensation Plan ("MICP"), which is included in the "Bonus" column in the
Summary Compensation Table. The Company established the Senior Officer Annual
Incentive Compensation Plan (effective January 1, 1997) to replace the MICP for
senior officers. The division into two plans facilitates the review by the
Committee of all compensation for the most senior officers.
The MICP was established (effective January 1, 1990) to motivate and reward
superior management performance in serving customer needs and creating
shareholder value. Each participant is assigned an annual target award expressed
as a percentage of annual salary. For 1996, the target award was 30% for the
executive officers named in the compensation table. Actual awards can vary from
0-150% of the target award -- based on performance.
MICP awards are based entirely on preestablished AEP corporate performance
criteria specified in the MICP. For 1996, these criteria included return on
stockholder equity (weighted at 25%) and total investor return reflecting
changes in stock price and payment of dividends (weighted at 25%), both measured
relative to the performance of utilities in the S&P Electric Utility Index, and
the extent to which the average price of power sold to retail customers
(weighted at 50%) was lower as compared with other utilities in the states which
AEP serves. For 1996, the target was achieved to the extent of 130%. This
percentage is an estimate but should not change significantly.
To more closely align the financial interests of the executive officers with
the Company's shareholders, for 1996 and prior years, 20% of an MICP award has
been deferred for three years and treated as if invested in Common Stock of the
Company, although no stock is actually purchased. Dividend equivalents are
credited during the three-year period. Effective with the 1996 plan year, MICP
participants could elect to defer further the 20%, and to defer all or any part
of the remaining 80% of an award, for payment up to five years past termination
of employment, with the same treatment. The mandatory 20% deferral requirement
will not apply to those MICP participants who are also participants in the
Performance Share Incentive Plan described below, commencing with the 1997 plan
year, because they are subject to the above-described stock ownership
guidelines.
LONG-TERM INCENTIVE. The Performance Share Incentive Plan (the "Plan"),
approved by the shareholders in 1994 and made effective January 1, 1994,
provides longer-term, performance-driven, equity incentive award opportunities
directly related to shareholder value.
The Plan annually establishes performance share unit targets which are
earned based on
16
<PAGE>
AEP's subsequent three-year total shareholder returns measured relative to the
S&P peer utilities. In 1996, the Committee established targets for Dr. Draper
and the other executive officers named in the Summary Compensation Table
equivalent to 40% and 35%, respectively, of their then base salaries. The target
number of performance share units has been determined after an evaluation of
long-term incentive opportunities provided by the S&P peer companies, again
targeting the second highest quartile of competitive practice. However, the
awards which will ultimately be paid to participants under the Plan for a
performance period are not determinable in advance and, in fact, could be zero.
The Plan ended a three-year performance period at year end 1996. AEP's total
shareholder return for 1994-1996 ranked third relative to the S&P 24 peer
utilities and, as a result, 200% of the performance share unit targets
originally established (and dividend credits) were earned. The associated awards
are listed in the Summary Compensation Table.
Similar to that portion of the MICP awards which are deferred, payments of
earned awards under the Plan, commencing with the performance period ending in
1995, are also deferred in the form of restricted stock units (equivalent to
shares of AEP Common Stock). Such Plan deferrals continue until termination of
employment or, if so elected by the recipient, with payments commencing not
later than five years thereafter. Once the officers meet and maintain their
respective equivalent stock ownership targets discussed above, they may then
elect either to continue to defer or to receive further earned Plan awards in
cash and/or Common Stock. Dividend equivalents are credited as though reinvested
in additional restricted stock units. The Plan is further described on page 13.
TAX POLICY
The Committee has considered the impact of Section 162(m) of the Internal
Revenue Code, which provides a limit on the deductibility of compensation for
certain executive officers in excess of $1,000,000 per year. It is the
Committee's policy, consistent with sound executive compensation principles and
the needs of the Company, to qualify all compensation for deductibility where
practicable.
Award payments under the Performance Share Incentive Plan have been
structured to be
exempt from the deduction limit because they are made pursuant to a
shareholder-approved performance-driven plan. Award payments under the MICP and
Senior Officer Annual Incentive Compensation Plan ("SOIP") currently are not
eligible for the performance-based exemption under the Code. However, since Dr.
Draper has deferred MICP awards and intends to continue to defer payment of SOIP
awards to dates past his retirement from the Company, the Committee has not
deemed it necessary at this time to qualify compensation paid pursuant to these
plans for deductibility under Section 162(m).
No named officer in the Summary Compensation Table had taxable compensation
for 1996 in excess of the deduction limit. The Committee intends to continue to
evaluate the impact of this Code provision.
HUMAN RESOURCES
COMMITTEE MEMBERS
Morris Tanenbaum, Chairman
Arthur G. Hansen
Lester A. Hudson, Jr.
Donald G. Smith
17
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AEP, S&P 500 INDEX & S&P ELECTRIC UTILITY INDEX**
American Electric Power S&P 500 Index S&P Electric Utility Index
<S> <C> <C> <C>
100.00 100.00 100.00
1992 104.18 107.62 106.11
1993 124.75 118.47 119.43
1994 119.01 120.03 103.88
1995 157.06 165.14 136.06
1996 168.81 203.09 136.02
Assumes
$100
Invested
on
January
1, 1992
in AEP
Common
Stock,
S&P 500
Index
and S&P
Electric
Utility
Index
*Total
Return
Assumes
Reinvestment
of
Dividends
**Fiscal
Year
Ending
December
31
</TABLE>
The total return performance shown on the graph above is not necessarily
indicative of future performance.
18
<PAGE>
SHARE OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
THE FOLLOWING TABLE sets forth the beneficial ownership of AEP Common Stock and
stock-based units as of January 1, 1997 for all directors as of the date of this
proxy statement (except for Mr. Kujawa whose ownership is as of February 7,
1997), all nominees to the Board of Directors, each of the persons named in the
Summary Compensation Table and all directors and executive officers as a group.
Unless otherwise noted, each person had sole voting and investment power over
the number of shares of Common Stock and stock-based units of AEP set forth
across from his or her name. Fractions of shares and units have been rounded to
the nearest whole number.
<TABLE>
<CAPTION>
STOCK
NAME SHARES UNITS(A) TOTAL
- ------------------------------------------------------------------ ------------------------ --------- ---------
<S> <C> <C> <C>
P. J. DeMaria..................................................... 7,603(b)(c)(d)(e) 12,947 20,550
E. L. Draper, Jr.................................................. 6,793(b)(d) 35,915 42,708
R. M. Duncan...................................................... 2,040 3,000 5,040
R. W. Fri......................................................... 1,000 600 1,600
A. G. Hansen...................................................... 1,159(d) 3,000 4,159
L. A. Hudson, Jr.................................................. 1,853(e) 3,000 4,853
L. J. Kujawa...................................................... 300 300 600
W. J. Lhota....................................................... 14,053(b)(c)(d) 5,383 19,436
G. P. Maloney..................................................... 5,512(b)(c)(d) 12,765 18,277
J. J. Markowsky................................................... 7,123(b)(e) 11,755 18,878
A. E. Peyton...................................................... 3,491(f) 3,000 6,491
D. G. Smith....................................................... 1,600 900 2,500
L. G. Stuntz...................................................... 1,500(d) 1,200 2,700
M. Tanenbaum...................................................... 1,357 2,400 3,757
A. H. Zwinger..................................................... 12,300(d)(e) -- 12,300
All directors and executive officers as a group
(15 persons)..................................................... 152,915(c)(g) 96,165 249,080
</TABLE>
- ------------
(a) This column includes amounts deferred in stock units and held under the
Management Incentive Compensation Plan, Performance Share Incentive Plan and
Stock Unit Accumulation Plan for Non-Employee Directors. Certain of these
stock units are subject to forfeiture based on length of employment or
service as a director.
(b) Includes shares and share equivalents held in the following plans in the
amounts listed below:
<TABLE>
<CAPTION>
AEP EMPLOYEE STOCK AEP PERFORMANCE AEP EMPLOYEES
OWNERSHIP PLAN SHARE INCENTIVE SAVINGS PLAN (SHARE
(SHARES) PLAN (SHARES) EQUIVALENTS)
------------------- ----------------- -------------------
<S> <C> <C> <C>
Mr. DeMaria....................................... 90 881 2,945
Dr. Draper........................................ -- 2,050 2,383
Mr. Lhota......................................... 64 812 11,809
Mr. Maloney....................................... 92 867 3,053
Dr. Markowsky..................................... 71 775 6,154
All directors and executive officers.............. 317 5,385 26,344
</TABLE>
With respect to the shares and share equivalents held in these plans, such
persons have sole voting power, but the investment/disposition power is
subject to the terms of such plans.
(c) Does not include, for Messrs. DeMaria, Lhota and Maloney, 85,231 shares in
the American Electric Power System Educational Trust Fund over which Messrs.
DeMaria, Lhota and Maloney share voting and investment power as trustees
(they disclaim beneficial ownership). The amount of shares shown for all
directors and executive officers as a group includes these shares.
(d) Includes the following numbers of shares held in joint tenancy with a family
member: Mr. DeMaria, 1,232; Dr. Draper, 2,083; Dr. Hansen, 1,159; Mr. Lhota,
1,368; Mr. Maloney, 1,500; Ms. Stuntz, 300; and Ms. Zwinger, 3,100.
19
<PAGE>
(e) Includes the following numbers of shares held by family members over which
beneficial ownership is disclaimed: Mr. DeMaria, 2,392; Mr. Hudson, 750; Dr.
Markowsky, 18; and Ms. Zwinger, 3,000.
(f) Includes 315 shares over which Mr. Peyton shares voting and investment
power which are held by trusts of which he is a trustee, but he disclaims
beneficial ownership of 169 of such shares.
(g) Represents less than 1% of the total number of shares outstanding.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
SECTION 17(a) of the Public Utility Holding Company Act of 1935, the provisions
of which are implemented by rules adopted under Section 16(a) of the Securities
Exchange Act of 1934, requires the Company's executive officers and directors to
file initial reports of ownership and reports of changes in ownership of Common
Stock and other securities of the Company and its subsidiaries with the
Securities and Exchange Commission. Executive officers and directors are
required by SEC regulations to furnish the Company with copies of all reports
they file. Based solely on a review of the copies of such reports furnished to
the Company and written representations from the Company's executive officers
and directors during the fiscal year ended December 31, 1996, the Company notes
that Peter J. DeMaria, Controller of the Company and Executive Vice President of
AEP Service Corporation, did not timely report the redemption of 100 shares of
Cumulative Preferred Shares 9.50% Series, $100 par value, of Columbus Southern
Power Company (a subsidiary of the Company) that occurred in February 1996,
although he reported it shortly thereafter.
SHAREHOLDER PROPOSALS
TO BE INCLUDED in the Company's proxy statement and form of proxy for the 1998
annual meeting of shareholders, any proposal which a shareholder intends to
present at such meeting must be received by the Company at its office at 1
Riverside Plaza, Columbus, Ohio 43215 not later than the close of business on
November 10, 1997.
SOLICITATION EXPENSES
THE COSTS of this proxy solicitation will be paid by the Company. Proxies will
be solicited principally by mail, but some telephone, telegraph or personal
solicitations of holders of Common Stock of the Company may be made. Any
officers or employees of the Company or of American Electric Power Service
Corporation who make or assist in such solicitations will receive no
compensation, other than their regular salaries, for doing so. The Company will
request brokers, banks and other custodians or fiduciaries holding shares in
their names or in the names of nominees to forward copies of the
proxy-soliciting materials to the beneficial owners of the shares held by them,
and the Company will reimburse them for their expenses incurred in doing so at
rates prescribed by the New York Stock Exchange.
The Company has also engaged Georgeson & Company Inc. to assist in the proxy
solicitation, and has agreed to pay $12,500 plus expenses for such soliciting
services.
20
<PAGE>
EXHIBIT A
AMERICAN ELECTRIC POWER COMPANY, INC.
DEFERRED COMPENSATION AND STOCK PLAN
FOR NON-EMPLOYEE DIRECTORS
ARTICLE 1
PURPOSE
The purposes of this American Electric Power Company, Inc. Deferred
Compensation and Stock Plan For Non-Employee Directors (the "Plan") are to
enable the Company to attract and retain qualified persons to serve as
Non-Employee Directors, to provide Non-Employee Directors with an opportunity to
defer some or all of their Retainer as a means of saving for retirement or other
purposes, to solidify the common interests of its Non-Employee Directors and
shareholders by enhancing the equity interest of Non-Employee Directors in the
Company, and to encourage the highest level of Non-Employee Director performance
by providing such Non-Employee Directors with a proprietary interest in the
Company's performance and progress by permitting Non-Employee Directors to
receive all or a portion of their Retainer in Common Stock and/or to defer all
or a portion of their Retainer in Stock Units.
ARTICLE 2
EFFECTIVE DATE
The Plan is subject to the approval of a majority of the holders of the
Company's Common Stock entitled to vote thereon at the Annual Meeting of
Shareholders to be held on April 23, 1997, or such other date fixed for the next
meeting of shareholders or any adjournment or postponement thereof. Subject to
the receipt of such approval, the Plan shall be effective as of January 1, 1997.
ARTICLE 3
DEFINITIONS
Whenever used in the Plan, the following terms shall have the respective
meanings set forth below:
3.1 "Account" means, with respect to each Participant, the Participant's
separate individual account established and maintained for the exclusive
purpose of accounting for the Participant's deferred Retainer which is
accrued in terms of Stock Units.
3.2 "Beneficiary" means, with respect to each Participant, the recipient or
recipients designated by the Participant who are, upon the Participant's
death, entitled in accordance with the Plan's terms to receive the benefits
to be paid with respect to the Participant.
3.3 "Board" means the Board of Directors of the Company.
3.4 "Committee" means the Human Resources Committee of the Board.
3.5 "Common Stock" means the common stock, $6.50 par value, of the Company.
3.6 "Company" means American Electric Power Company, Inc., a New York
corporation, and any successor thereto.
3.7 "Director" means an individual who is a member of the Board.
3.8 "Market Value" means the closing price of the Common Stock, as published in
THE WALL STREET JOURNAL report of the New York Stock Exchange -- Composite
Transactions on the date in question or, if the Common Stock shall not have
been traded on such date or if the New York Stock Exchange is closed on
such date, then the first day prior thereto on which the Common Stock was
so traded.
3.9 "Non-Employee Director" means any person who serves on the Board and who is
not an officer of the Company or employee of its Subsidiaries.
A-1
<PAGE>
3.10 "Participant" means any Non-Employee Director who has made an election to
receive all or a portion of such person's Retainer in shares of Common
Stock and/or to defer payment of all or a portion of such Retainer in
Stock Units.
3.11 "Retainer" means the designated annual cash retainer, currently paid
quarterly, for Non-Employee Directors established from time to time by the
Board as annual compensation for services rendered, exclusive of
compensation for service as a member of any committee designated by the
Board or in connection with any meeting of the Board or special
assignment, and exclusive of reimbursements for expenses incurred in
performance of service as a Director.
3.12 "Stock Unit" means a measure of value, expressed as a share of Common
Stock, credited to a Participant under this Plan. No certificates shall be
issued with respect to such Stock Units, but the Company shall maintain a
bookkeeping Account in the name of the Participant to which the Stock
Units shall relate.
3.13 "Subsidiary" means any corporation in which the Company owns directly or
indirectly through its Subsidiaries, at least 50 percent of the total
combined voting power of all classes of stock, or any other entity
(including, but not limited to, partnerships and joint ventures) in which
the Company owns at least 50 percent of the combined equity thereof.
3.14 "Termination" means retirement from the Board or termination of service as
a Director for any other reason.
ARTICLE 4
ELECTION TO RECEIVE COMMON STOCK FOR RETAINER
AND/OR TO DEFER RETAINER IN STOCK UNITS
4.1 ELECTION
On or before December 31 of any year, for calendar years subsequent to 1997,
a Non-Employee Director may elect, by filing with the Company an election, (a)
to receive all or a specified portion of the Director's Retainer in shares of
Common Stock and/or (b) to defer receipt of all or a specified portion of the
Director's Retainer in Stock Units until the Director's Termination or for a
period that results in payment commencing not later than five years thereafter
as elected by the Participant. The election to defer payment beyond the
Participant's Termination must be made at least one year prior to such
Termination.
Notwithstanding the foregoing, a Non-Employee Director may choose to
participate in the Plan beginning with the Retainer payable on June 30, 1997, by
filing an election to so participate on or before March 31, 1997. A Non-Employee
Director elected to fill a vacancy on the Company's Board and who was not a
Director on the preceding December 31, or whose term of office did not begin
until after that date, may file an election to receive Common Stock and/or to
defer, for all or a specified portion of the Director's Retainer, commencing not
less than three months after the date of the election.
4.2 REVOCATION OF ELECTION
An effective election pursuant to Section 4.1 may not be revoked or modified
(except as otherwise stated herein) with respect to the Retainer payable for a
calendar year or portion of a calendar year for which such election is
effective. An effective election may be terminated or modified for any
subsequent calendar year by the filing of an election, on or before December 31
of the preceding calendar year for which such modification or termination is to
be effective.
4.3 COMMON STOCK ELECTION
When a Participant elects pursuant to Section 4.1 to receive all or a
portion of the Participant's Retainer in shares of Common Stock, the number of
whole shares to be distributed to the Participant,
A-2
<PAGE>
with any fractional shares to be paid in cash, as of the date the Retainer would
otherwise have been payable to the Participant, shall be equal to the dollar
amount of the Retainer which otherwise would have been payable to the
Participant divided by the Market Value on such date.
4.4 DEFERRED RETAINER ELECTION
When a Participant elects pursuant to Section 4.1 to defer all or a portion
of the Participant's Retainer in Stock Units, the number of whole and fractional
Stock Units, computed to three decimal places, to be credited to the
Participant's Account, on the date the deferred Retainer would otherwise have
been payable to the Participant, shall be equal to the dollar amount of the
deferred Retainer which otherwise would have been payable to the Participant
divided by the Market Value on such date.
ARTICLE 5
DIVIDENDS AND ADJUSTMENTS
5.1 REINVESTMENT OF DIVIDENDS
On each dividend payment date with respect to the Common Stock, the Account
of a Participant, with Stock Units held pursuant to Article 4, shall be credited
with an additional number of whole and fractional Stock Units, computed to three
decimal places, equal to the product of the dividend per share then payable,
multiplied by the number of Stock Units then credited to such Account, divided
by the Market Value on the dividend payment date.
5.2 ADJUSTMENTS
The number of Stock Units credited to a Participant's Account pursuant to
Article 4 shall be appropriately adjusted for any change in the Common Stock by
reason of any merger, reclassification, consolidation, recapitalization, stock
dividend, stock split or any similar change affecting the Common Stock.
ARTICLE 6
PAYMENT OF STOCK UNITS
6.1 MANNER OF PAYMENT UPON TERMINATION
In accordance with the Participant's election, filed with the Company, all
Stock Units held in a Participant's Account shall be paid to the Participant
either as (a) a lump sum distribution within 10 days after the Participant's
deferred distribution date, or (b) up to 10 annual installments commencing
within 10 days after the Participant's deferred distribution date. This election
shall be made at the same time the Participant makes a deferral election as
provided in Section 4.1. Payment may be made in cash, shares of Common Stock, or
a combination of both as elected by the Participant. The election to be paid in
cash or Common Stock must be filed with the Company at least 30 days prior to
the payment date and, in the event an election is not made, payment will be made
in cash.
6.2 MANNER OF PAYMENT UPON DEATH
Notwithstanding the Participant's election, if a Participant dies while
Stock Units are held in the Participant's Account, such Stock Units will be paid
in a lump sum in cash within 90 days from the date of the Participant's death to
the Beneficiary or the Participant's estate, as the case may be. Upon
application by the Beneficiary or the legal representative for the Participant's
estate, the lump sum payment may be deferred beyond 90 days for good cause if
the Committee consents to such deferral.
6.3 DETERMINATION
Any cash payments of Stock Units shall be calculated on the basis of the
average of the Market Value of the Common Stock for the last 20 trading days
prior to the Participant's deferred distribution
A-3
<PAGE>
date, respective installment payment dates or the date of the Participant's
death, as the case may be. Payment in Common Stock shall be at the rate of one
share of Common Stock for each Stock Unit, with any fractional shares to be paid
in cash.
ARTICLE 7
BENEFICIARY DESIGNATION
Each Participant shall be entitled to designate a Beneficiary or
Beneficiaries (which may be an entity other than a natural person) who,
following the Participant's death, will be entitled to receive any payments to
be made under Section 6.2. At any time, and from time to time, any designation
may be changed or cancelled by the Participant without the consent of any
Beneficiary. Any designation, change, or cancellation must be by written notice
filed with the Company and shall not be effective until received by the Company.
Payment shall be made in accordance with the last unrevoked written designation
of Beneficiary that has been signed by the Participant and delivered by the
Participant to the Company prior to the Participant's death. If the Participant
designates more than one Beneficiary, any payments under Section 6.2 to the
Beneficiaries shall be made in equal shares unless the Participant has
designated otherwise, in which case the payments shall be made in the
proportions designated by the Participant. If no Beneficiary has been named by
the Participant or if all Beneficiaries predecease the Participant, payment
shall be made to the Participant's estate.
ARTICLE 8
TRANSFERABILITY RESTRICTIONS
The Plan shall not in any manner be liable for, or subject to, the debts and
liabilities of any Participant or Beneficiary. No payee may assign any payment
due such party under the Plan. No benefits at any time payable under the Plan
shall be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, attachment, garnishment, levy, execution, or other legal or
equitable process, or encumbrance of any kind.
ARTICLE 9
FUNDING POLICY
The Company's obligations under the Plan shall be totally unfunded so that
the Company or any Subsidiary is under merely a contractual duty to make
payments when due under the Plan. The promise to pay shall not be represented by
notes and shall not be secured in any way.
ARTICLE 10
CHANGE IN CONTROL
Notwithstanding any provision of this Plan to the contrary, if a "Change in
Control" (as defined below) of the Company occurs, Stock Units held in a
Participant's Account will be paid in a lump sum in cash, shares of Common
Stock, or a combination of both, to the Participant, as elected by the
Participant, not later than 15 days after the date of the Change in Control. For
this purpose, the balance in the Account shall be determined by the higher of
(a) the average of the Market Value of the Common Stock for the last 20 trading
days prior to such Change in Control or (b) if the Change in Control of the
Company occurs as a result of a tender or exchange offer or consummation of a
corporate transaction, then the highest price paid per share of Common Stock
pursuant thereto. Any consideration other than cash forming a part or all of the
consideration for the Common Stock to be paid pursuant to the applicable
transaction shall be valued at the valuation price thereon determined by the
Board.
In addition, the Company shall reimburse a Participant for the legal fees
and expenses incurred if the Participant is required to seek to obtain or
enforce any right to distribution. In the event that it is determined that such
Participant is properly entitled to a cash distribution hereunder, such
Participant shall also be entitled to interest thereon at the prime rate of
interest as published in THE WALL STREET JOURNAL plus two percent from the date
such distribution should have been made to and including the
A-4
<PAGE>
date it is made. Notwithstanding any provisions of this Plan to the contrary,
the provisions of this Article may not be amended by an amendment effected
within three years following a Change in Control.
A "Change in Control" of the Company shall be deemed to have occurred if (a)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended ("Exchange Act")), other than a
trustee or other fiduciary holding securities under an employee benefit plan of
the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of more than 25 percent of the then
outstanding voting stock of the Company; (b) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board, together with any new Directors whose election or nomination for
election was approved by a vote of at least two-thirds of the Directors then
still in office who were either Directors at the beginning of the period or
whose election or nomination for election was previously so approved, cease for
any reason to constitute at least a majority of the Board; or (c) the Company's
shareholders approve a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least 75 percent of the total
voting power represented by the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation; or
(d) the shareholders of the Company approve a plan of complete liquidation of
the Company, or an agreement for the sale or disposition by the Company (in one
transaction or a series of transactions) of all or substantially all of the
Company's assets.
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur as a result of any event described in (a) or (c) above, if Directors who
were a majority of the members of the Board prior to such event and who continue
to serve as Directors after such event determine that the event shall not
constitute a Change in Control.
ARTICLE 11
ADMINISTRATION
The Plan shall be administered by the Committee. The Committee shall have
authority to inter-pret the Plan, and to prescribe, amend and rescind rules and
regulations relating to the administration of the Plan, and all such
interpretations, rules and regulations shall be conclusive and binding on all
Participants. The Committee may employ agents, attorneys, accountants, or other
persons (who also may be employees of a Subsidiary) and allocate or delegate to
them powers, rights, and duties, all as the Committee may consider necessary or
advisable to properly carry out the administration of the Plan.
ARTICLE 12
AMENDMENT AND TERMINATION
The Company, by resolution duly adopted by the Board, shall have the right,
authority and power to alter, amend, modify, revoke, or terminate the Plan;
except as provided in Article 10; and provided further, that no amendment or
termination of the Plan shall adversely affect the rights of any Participant
with respect to any Stock Units held in such Participant's Account, unless the
Participant shall consent thereto in writing.
ARTICLE 13
MISCELLANEOUS
13.1 NO RIGHT TO CONTINUE AS A DIRECTOR
Nothing in this Plan shall be construed as conferring upon a Participant any
right to continue as a member of the Board.
A-5
<PAGE>
13.2 NO INTEREST AS A SHAREHOLDER
Stock Units do not give a Participant any rights whatsoever with respect to
shares of Common Stock until such time and to such extent that payment of Stock
Units is made in shares of Common Stock as requested by the Participant.
13.3 NO RIGHT TO CORPORATE ASSETS
Nothing in this Plan shall be construed as giving the Participant, the
Participant's designated Beneficiaries or any other person any equity or
interest of any kind in the assets of the Company or any Subsidiary or creating
a trust of any kind or a fiduciary relationship of any kind between the Company
or any Subsidiary and any person. As to any claim for payments due under the
provisions of the Plan, a Participant, Beneficiary and any other persons having
a claim for payments shall be unsecured creditors of the Company or any
Subsidiary.
13.4 PAYMENT TO LEGAL REPRESENTATIVE FOR PARTICIPANT
In the event the Committee shall find that a Participant is unable to care
for his or her affairs because of illness or accident, the Committee may direct
that any payment due the Participant be paid to the Participant's duly appointed
legal representative, and any such payment so made shall be a complete discharge
of the liabilities of the Plan.
13.5 NO LIMIT ON FURTHER CORPORATE ACTION
Nothing contained in the Plan shall be construed so as to prevent the
Company or any Subsidiary from taking any corporate action which is deemed by
the Company or any Subsidiary to be appropriate or in its best interest.
13.6 GOVERNING LAW
The Plan shall be construed and administered according to the laws of the
State of New York to the extent that those laws are not preempted by the laws of
the United States of America.
13.7 HEADINGS
The headings of articles, sections, subsections, paragraphs or other parts
of the Plan are for convenience of reference only and do not define, limit,
construe, or otherwise affect its contents.
A-6
<PAGE>
- --------------------------------------------------------------------------------
[LOGO]
1 Riverside Plaza
Columbus, OH 43215-2373
[PRINTED WITH SOY INK]
[PRINTED ON RECYCLED PAPER]
<PAGE>
AMERICAN ELECTRIC POWER
1 Riverside Plaza
Columbus, Ohio 43215-2373
CONTENTS
Selected Consolidated Financial Data
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Consolidated Statements of Income and
Consolidated Statements of Retained Earnings
Consolidated Statements of Cash Flows
Consolidated Balance Sheets
Notes to Consolidated Financial Statements
Schedule of Consolidated Cumulative Preferred Stocks of Subsidiaries
Schedule of Consolidated Long-term Debt of Subsidiaries
Management's Responsibility
Independent Auditors' Report
<PAGE>
<TABLE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
SELECTED CONSOLIDATED FINANCIAL DATA
<CAPTION>
Year Ended December 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
INCOME STATEMENTS DATA
(in millions):
Operating Revenues $5,849 $5,670 $5,505 $5,269 $5,045
Operating Income 1,008 965 932 929 883
Net Income 587 530 500 354 468
December 31, 1996 1995 1994 1993 1992
BALANCE SHEETS DATA
(in millions):
Electric Utility Plant $18,970 $18,496 $18,175 $17,712 $17,509
Accumulated Depreciation
and Amortization 7,550 7,111 6,827 6,612 6,281
Net Electric Utility Plant $11,420 $11,385 $11,348 $11,100 $11,228
Total Assets $15,886 $15,902 $15,739 $15,362 $14,217
Common Shareholders' Equity 4,545 4,340 4,229 4,151 4,245
Cumulative Preferred Stocks
of Subsidiaries:
Not Subject to Mandatory
Redemption 90 148 233 268 535
Subject to Mandatory
Redemption* 510 523 590 501 234
Long-term Debt* 4,884 5,057 4,980 4,995 5,311
Obligations Under Capital
Leases* 414 405 400 284 300
*Including portion due within one year
Year Ended December 31, 1996 1995 1994 1993 1992
COMMON STOCK DATA:
Earnings per Share $3.14 $2.85 $2.71 $1.92 $2.54
Average Number of Shares
Outstanding (in thousands) 187,321 185,847 184,666 184,535 184,535
Market Price Range: High $44-3/4 $40-5/8 $37-3/8 $40-3/8 $35-1/4
Low 38-5/8 31-1/4 27-1/4 32 30-3/8
Year-end Market Price 41-1/8 40-1/2 32-7/8 37-1/8 33-1/8
Cash Dividends Paid $2.40 $2.40 $2.40 $2.40 $2.40
Dividend Payout Ratio 76.5% 84.1% 88.6% 125.2% 94.6%
Book Value per Share $24.15 $23.25 $22.83 $22.50 $23.01
</TABLE>
<PAGE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Business Outlook
With the issuance of two Federal Energy Regulatory Commission (FERC)
orders and the commencement of planning for retail competition at the state
level, we are in a better position to identify and develop strategies for
addressing the issues that face American Electric Power (AEP) and our
changing industry. We recognize that the conventional ways of maintaining
and enhancing shareholder value are becoming less effective as the industry
moves towards greater competition in the generation and sale of
electricity. The industry's transition to competition and customer choice
and the ability to fully recover costs are probably the most significant
factors affecting AEP's future profitability.
Although AEP has the financial strength, geographic reach, location and
cost structure to be an able competitor, no assurance can be given that AEP
can maintain this position in the future. However, we intend to make every
effort to maintain and strengthen our competitive position. We see a link
between a smooth transition to a competitive marketplace and the
maintaining and enhancing of shareholder value.
The new FERC orders facilitate increased competition in both the
generation and sale of bulk power to wholesale customers. They provide,
among other things, for open access to transmission facilities. AEP's
support of the FERC's open access transmission rule is evidenced by our
being among the first to file a comparability tariff, offering access to
our transmission grid at 143 interconnections to all parties under the same
terms and conditions available to AEP. This has provided AEP with greater
opportunities for transmission service revenues.
Although customer choice proposals and discussions are under way in the
states in which we operate, it is difficult to predict their result and the
timing of any resultant changes. We are actively involved in discussions
on the state and federal level regarding how best to transition to
competition in order to represent the best interests of our customers,
shareholders and employees. We favor a transition because we believe that
AEP will in the long-term fare better in a competitive market than under
continued regulation.
As the electric energy market evolves from cost-of-service ratemaking to
market-based pricing, many complex issues must be resolved, including the
recovery of stranded costs. While the new FERC orders provide, under
certain conditions, for recovery of stranded costs at the wholesale level,
the issue of stranded cost remains open at the much larger state retail
level.
Stranded Costs
Stranded costs occur when a customer switches to a new supplier for its
electric energy needs or when a component of the business, for example
generation, is no longer subject to cost-based regulation, creating the
issue of who pays for plant investment, purchased power or fuel contracts
both non-affiliated and affiliated, inventories, construction work in
progress, nuclear decommissioning, plant removal and shutdown costs,
previously deferred costs (regulatory assets) and other investments and
commitments that are no longer needed, economic or recoverable in a
<PAGE>
competitive market. The amount of any stranded costs AEP may experience
depends on the timing of and the extent to which direct competition is
introduced to our business and the then-existing market price of energy.
Under the provisions of Statement of Financial Accounting Standards
(SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation,"
assets (deferred expenses) and liabilities (deferred revenues) are included
in the consolidated financial statements in accordance with regulatory
actions to match expenses and revenues in cost-based rates. In the event a
portion of the business no longer met the requirements of SFAS 71, net
regulatory assets would have to be written off for that portion of the
business. Among other requirements SFAS 71 requires that the rates charged
customers be cost based.
Our generation business is still cost-based regulated and should remain
so for at least three to five years as the industry transitions to full
competition. Although the recent FERC orders provide for competition in
the firm wholesale market, that market is a relatively small part of our
business and many of our firm wholesale sales are still under
cost-of-service contracts. We believe that enabling state legislation should
provide for a sufficient transition period to allow for the recovery of any
generation-related stranded costs and we are dedicating ourselves to work
with regulators, customers and legislators to accomplish both an orderly
transition and a reasonable and fair disposition of the stranded cost
issue.
We favor the recovery of stranded costs during a transition period in
which rates would be fixed or frozen and electric utilities would take
steps to achieve cost savings which would be used to reduce or eliminate
stranded costs. However, if electric utilities were to no longer be
cost-based regulated and it were not possible to recover stranded costs, the
results of operations and financial condition of AEP and other electric
utilities would be adversely affected.
Since state commissions have jurisdiction over the sale and distribution
of electricity to retail customers, we believe that state legislation and
regulation should shape the future competitive market for electricity while
federal legislation should seek to ensure reciprocity among the states and
a level playing field for all power suppliers. Presently states with
higher cost power, like California and Massachusetts, are aggressively
pursuing deregulation. The states AEP operates in, however, are generally
addressing the call for customer choice more cautiously and the transition
to competition is expected to evolve at an uneven pace across the states.
Restructuring/Functional Unbundling
In 1996 we took some major steps to maintain and enhance AEP's
competitive strength and made progress towards our long-term goal of
becoming the world's premier supplier of energy and related services. We
restructured our management and operations to allow us to comply with the
new FERC orders by separating our generation and energy sales operations
from our energy transmission delivery operations and to address increasing
competition among electric suppliers through distinct functional business
units. This has achieved and should continue to achieve staffing,
managerial and operating efficiencies. The generation and marketing
business units expect to eventually compete in an open market for
customers. Our energy delivery business will remain regulated and may
ultimately be subject to some form of incentive or performance-based
ratemaking while Corporate Development and Marketing will be working to
cultivate new but related non-regulated business opportunities.
<PAGE>
Corporate Branding and Positioning
We are enhancing our marketing and customer service efforts with programs
like the Key Accounts Program which strives to build strong partnerships
with key customers in order to build customer loyalty. In 1996 AEP also
launched a series of new television commercials as part of a branding
campaign to inform our customers that we will be operating under the name
American Electric Power and that we are AEP: America's Energy Partner. The
commercials are intended to position AEP as more than just a supplier of
electricity. As we enter an increasingly competitive energy market we want
to be the energy and energy services provider of choice.
New Business Opportunities
In the non-rate-regulated environment, AEP offers energy consulting and
project management services both domestically and internationally and
contracts with other public utilities and government agencies for the
licensing of intellectual property and the delivery of energy services. In
1996 an AEP subsidiary and two Chinese companies formed a joint venture
company to finance and build a 250-megawatt electric generating facility in
China. AEP's share of the total cost of the facility is approximately $120
million and the project is expected to be operational in 1999.
On February 24, 1997 AEP and Public Service Company of Colorado with
equal interests in a joint venture announced a cash tender offer for
Yorkshire Electricity Group plc in the United Kingdom. The joint venture
proposes to pay $2.4 billion to acquire all of the stock of Yorkshire
Electricity. AEP's equity invest-ment, estimated to be $360 million, will
be made through its subsidiary AEP Resources Inc., initially using cash
borrowed under a revolving credit agreement. We consider the China
investment and Yorkshire tender offer as important steps in our long-term
goal to become the premier provider of energy and energy services
worldwide.
In addition to pursuing foreign power generation, transmission and
distribution investments we formed new subsidiaries in 1996 to explore
other new complementary business opportunities including AEP
Communications, Inc. which was formed to provide data transmission and
related telecommunications products and services. In January 1997 AEP
Communications, Inc. entered into an agreement with Sprint Communications,
Inc. to construct jointly a 150 mile fiber optic line between Charleston,
West Virginia and Roanoke, Virginia. Another new subsidiary AEP Power
Marketing is presently seeking approval to market and broker power outside
of our traditional service territory. Plans are also in place to commence
gas marketing. We are pursuing non-regulated related business
opportunities because we believe they offer the opportunity to earn
enhanced returns as compared with our traditional regulated business.
However, we recognize that these opportunities are generally riskier.
Investments in new business opportunities may be made after management
carefully assesses the risks versus the potential for enhanced shareholder
value.
Cost Containment
In 1996 we continued our efforts to reduce costs in order to maintain our
competitiveness. Reviews of our major processes led to decisions to
consolidate the management and operations of internal service functions
performed at multiple locations. Among the functions being consolidated
are fossil generation plant maintenance, nuclear operations support staff,
<PAGE>
system operations, accounting and load research. A study of the Company's
procurement and supply chain operations led to cost reductions through
better inventory management, just-in-time delivery and the increased use of
electronic purchasing. Also in 1996 we completed the installation of an
activity based management budgeting system throughout the system. This
tool will enable managers to better analyze work and control costs. While
staff reductions and cost savings are being achieved in these and other
areas, expenses for new marketing and customer services and modern
efficient management information systems are being increased to prepare for
competition. These expenditures for the future should produce further
improvements and efficiencies, enabling AEP to maintain its position as a
low-cost producer.
Fuel Costs
Coal is 70% of the production cost of electricity for AEP. Although our
coal costs per unit of electricity (per Kwh) have declined by one-half in
constant dollars in the last 10 years, we recognize that we must continue
to manage our coal costs to continue to maintain our competitive position.
Approximately 15% of the coal we burn is supplied by affiliated mines; the
remainder is acquired under long-term contracts and in the spot market. As
long-term contracts expire we are negotiating with non-affiliated suppliers
to lower purchased coal costs. Efforts also continued in 1996 to reduce
the cost of affiliated coal. We intend to continue to prudently supplement
our long-term coal supplies with spot market purchases as long as favorable
spot market prices exist.
In recent years we have agreed in our Ohio jurisdiction to certain
limitations on the recovery of affiliated coal costs. Our analysis shows
that we should be able to recover over the term of the agreement (through
2009) the Ohio jurisdictional portion of the current and deferred costs of
our affiliated mining operations including future mine closure costs.
Management intends to seek recovery of its non-Ohio jurisdictional portion
of the investment in and the liabilities and closing costs of our
affiliated mines estimated at $180 million after tax. However, should it
become apparent that the costs will not be recoverable from Ohio and/or
non-Ohio jurisdictional customers, the mines may have to be closed and
future earnings and possibly financial condition adversely affected. In
addition compliance with Phase II requirements of the Clean Air Act, which
become effective in January 2000, could also cause the mining operations to
close. Unless the cost of any mine closure is recovered either in
regulated rates or as a stranded cost in a transition to competition,
future earnings and possibly financial condition could be adversely
affected.
Nuclear Costs
Significant efforts have been made to enhance our competitiveness in
nuclear power generation and to improve our nuclear organizational
efficiency. Net generation in 1996 for the Company's only nuclear plant,
the two-unit Donald C. Cook Nuclear Plant, located on the shores of Lake
Michigan, was 16,396 gigawatts, the highest in the plant's 20-year history.
The generation record was set in part due to Unit 2's best continuous run
in its history, 226 days, reached in December 1996. Refueling costs and
related outage time have been reduced. We also reduced nuclear staff
support costs in 1996 by relocating our Columbus-based nuclear management
and support staff to Michigan to consolidate it with the plant staff.
It is difficult to reduce nuclear generation costs since certain major
cost components are impacted by federal laws and Nuclear Regulatory
<PAGE>
Commission (NRC) regulations. The Nuclear Waste Policy Act of 1982
established federal responsibility for the permanent off-site disposal of
spent nuclear fuel and high-level radioactive waste. By law we participate
in the Department of Energy's (DOE's) Spent Nuclear Fuel (SNF) disposal
program which is described in Note 4 of the Notes to Consolidated Financial
Statements. Since 1983 our customers have paid $254 million for the
disposal of spent nuclear fuel consumed at the Cook Nuclear Plant. Under
the provisions of the Nuclear Waste Policy Act, collections from customers
are to provide the DOE with money to build a repository for spent fuel. To
date the federal government has not made sufficient progress towards a
permanent repository or otherwise assuming responsibility for SNF. As long
as there is a delay in the storage repository for SNF, the cost of both
temporary and permanent storage will continue to increase.
The cost to decommission the Cook Nuclear Plant is also affected by NRC
regulations and the DOE's SNF disposal program. Studies completed in 1994
estimate the cost to decommission the Cook Nuclear Plant and dispose of
low-level nuclear waste accumulation to range from $634 million to $988
million in 1993 dollars. This estimate could escalate due to uncertainty
in the DOE's SNF disposal program and the length of time that SNF may need
to be stored at the plant site delaying decommissioning. Presently we are
recovering the estimated cost of decommissioning the Cook Nuclear Plant
over its remaining life. However, AEP's future results of operations and
possibly its financial condition could be adversely affected if the cost of
spent nuclear fuel disposal and decommissioning continues to increase and
cannot be recovered in regulated rates or as a stranded cost in a future
competitive market.
Environmental Concerns
We take great pride in our efforts to economically produce and deliver
electricity while minimizing the impact on the environment. AEP has spent
millions of dollars to equip our facilities with the latest economical
clean air and water technologies and to research possible new technologies.
We are also proud of our award winning efforts to reclaim our mining
properties. We intend to continue to take a leadership role to foster
economically prudent efforts to protect and preserve the environment.
Hazardous Material
By-products from the generation of electricity include materials such as
ash, slag, sludge, low-level radioactive waste and spent nuclear fuel.
Coal combustion by-products, which constitute the overwhelming percentage
of these materials, are typically disposed of or treated in captive
disposal facilities or are beneficially utilized. In addition, our
generating plants and transmission and distribution facilities have used
asbestos, polychlorinated biphenyls (PCBs) and other hazardous and
non-hazardous materials. We are currently incurring costs to safely dispose
of such substances, and additional costs could be incurred to comply with new
laws and regulations if enacted.
The Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA or Superfund) addresses clean-up of hazardous substances at
disposal sites and authorized the United States Environmental Protection
Agency (Federal EPA) to administer the clean-up programs. As of year-end
1996, we are currently involved in litigation with respect to five sites
being overseen by the Federal EPA and have been named by the Federal EPA as
"Potentially Responsible Parties" (PRPs) for six other sites. There are
eight additional sites for which AEP companies have received information
requests which could lead to PRP designation. Also, an AEP subsidiary has
<PAGE>
received an information request with respect to one site administered by
state authorities. Our liability has been resolved for a number of sites
with no significant effect on results of operations. In those instances
where we have been named a PRP or defendant, our disposal or recycling
activity was in accordance with the then-applicable laws and regulations.
Unfortunately, CERCLA does not recognize compliance as a defense, but
imposes strict liability on parties who fall within its broad statutory
categories.
While the potential liability for each Superfund site must be evaluated
separately, several general statements can be made regarding such potential
liability. The disposal at a particular site by AEP is often
unsubstantiated; the quantity of material we disposed of at a site was
generally small; and the nature of the material we generally disposed of
was non-hazardous. Typically, we are one of many parties named as PRPs for
a site and, although liability is joint and several, generally some of the
other parties are financially sound enterprises. Therefore, our present
estimates do not anticipate material cleanup costs for identified sites for
which we have been declared PRPs. However, if for reasons not currently
identified significant costs are incurred for cleanup, future results of
operations and possibly financial condition would be adversely affected
unless the costs can be recovered from customers.
Federal EPA Actions
Federal EPA is required by the Clean Air Act Amendments of 1990 (CAAA) to
issue rules to implement the law. In December 1996 Federal EPA issued
final rules governing nitrogen oxide emissions that must be met after
January 1, 2000 (Phase II of the CAAA). The final rules will require
substantial reductions in nitrogen oxide emissions from certain types of
power plant boilers including those in AEP's power plants. In December
1996 a group of utilities including AEP operating companies filed a
petition for review of the rules in a U.S. Court of Appeals and requested
expedited consideration of the appeal. The cost to comply with the
emission reductions required by the final rules is expected to be
substantial and could have a material adverse impact on results of
operations and possibly financial condition if these costs are not
recovered from customers.
Federal EPA is considering proposals to revise the existing ambient air
quality standard for ozone and to establish a new ambient air quality
standard for fine particulate matter. The rules being considered could
result in requirements for reductions of nitrogen oxides and sulfur dioxide
emitted from coal fired power plants and could have a significant impact on
AEP's operations. The proposals being considered are of particular concern
because they do not appear to have a sound scientific basis. The cost of
complying with any new emission reduction requirements imposed as a result
of the adoption of revised ambient air quality standards can not be
precisely determined but could be substantial. If Federal EPA ultimately
promulgates stricter ambient air quality standards, they could have a
material adverse impact on results of operations and possibly financial
condition if these costs are not recovered from customers.
Results of Operations
1996 was a good year for AEP with earnings the best since 1989 and total
shareholder return placing us among the best in our industry. We continued
to be well within our goal of being in the upper quartile of the companies
in the Standard & Poor's electric utility index, based on cumulative
three-year return.
<PAGE>
Earnings Increase
In 1996 earnings increased 11% to $587 million or $3.14 per share from
$530 million or $2.85 per share in 1995. The increase is mainly
attributable to increased sales of energy and services and reduced interest
charges and preferred stock dividends. Sales increased due to increased
transmission and other services provided to power marketers and utilities
and increased energy sales to non-affiliated utilities and industrial
customers. The reduction in interest and preferred stock dividends
resulted from the Company's refinancing program. Also contributing to the
improvement in earnings were severance pay charges recorded in 1995 in
connection with realigning operations and management and gains recorded in
1996 from emission allowance transactions.
Earnings increased 6% in 1995 to $530 million or $2.85 per share from
$500 million or $2.71 per share in 1994. The primary reason for the
earnings improvement was increased retail energy sales reflecting increased
usage and growth in the number of customers. Unseasonably warm weather in
the summer of 1995 and colder weather in the fourth quarter of 1995, were
the primary factors accounting for the increased usage. The positive
earnings impact of the increased sales was partly offset by the unfavorable
effect of severance pay.
Revenues And Sales Increase
Operating revenues increased 3% in 1996 and 1995. Increased wholesale
energy sales and transmission and coal conversion service revenues were the
primary reasons for the increase in 1996 revenues. In 1995 the revenue
increase resulted primarily from an increase in retail customers' energy
usage, growth in the number of retail customers and the effects of rate
increases.
The change in revenues can be analyzed as follows:
Increase (Decrease)
From Previous Year
(Revenues in Millions) 1996 1995
Amount % Amount %
Retail:
Price Variance $ (42.9) $ 46.5
Volume Variance 63.7 173.0
Fuel Cost Recoveries 15.0 (22.9)
35.8 0.7 196.6 4.2
Wholesale:
Price Variance (202.0) (39.3)
Volume Variance 317.3 10.8
Fuel Cost Recoveries (3.6) (4.6)
111.7 16.4 (33.1) (4.6)
Other Operating Revenues 31.4 2.2
Total $ 178.9 3.2 $165.7 3.0
In 1996 retail revenues increased slightly due to growth in the number of
customers and the addition of a major new industrial customer in December
1995. Revenues from sales to residential customers, the most weather-sensitive
customer class, were flat, increasing less than one percent, as
the effect of cold winter weather in early 1996 was offset by mild summer
and December temperatures. Revenues from commercial and industrial
<PAGE>
customers increased 1% reflecting growth in the number of customers.
Wholesale revenues increased 16% in 1996 reflecting a 46% increase in
wholesale sales attributable largely to new wholesale transactions with
power marketers and other utilities. As the wholesale energy market
evolves into a competitive marketplace the Company intends to take
advantage of new ways to market and price electricity and related services.
During 1996 the Company provided coal conversion services resulting in 6.8
billion kilowatthours of electricity generated for power marketers and
certain other utilities under a new FERC-approved interruptible, contingent
sales tariff. As a result of these new sales, the average price per
kilowatthour was significantly less in 1996 than in 1995. Also
contributing to the increased wholesale sales was a new long-term contract
with an unaffiliated utility to supply 205 MW of energy for 15 years
beginning January 1, 1996.
An increased level of activity in the wholesale energy markets encouraged
by the 1996 issuance of FERC open access transmission rules and AEP's
aggressive efforts to provide flexible and competitively priced
transmission services led to an increase in transmission service revenues.
As a result transmission revenues, which are recorded in other operating
revenues, increased by approximately $24 million.
The increase in 1995 operating revenues resulted primarily from a 4%
increase in energy sales to retail customers due mainly to increased usage
and continued growth in the number of customers in all retail customer
classes. Energy sales to residential customers, the most weather-sensitive
customer class, rose more than 6% in 1995 mainly as a result of increased
weather related usage in the last half of the year. Sales to commercial
and industrial customers rose 5% and 2%, respectively, reflecting the
effects of weather and the expanding economy.
Although revenues from wholesale customers declined in 1995, wholesale
energy sales increased by more than 1% largely due to increased short-term
sales made on an hourly basis to unaffiliated utilities. This type of
short-term sale is typically made when the unaffiliated utility can
purchase energy at a lower cost than the cost at which that utility can
generate the energy or when the customer is short on generating capacity.
Such sales increase in periods of extreme weather. The increase in 1995
wholesale energy sales occurred during the last six months of the year when
the summer was unseasonably warm and fall temperatures were colder compared
with the prior year. While wholesale energy sales increased, wholesale
revenues declined in 1995 reflecting increasing price related competition.
The level of wholesale sales tends to fluctuate due to the highly
competitive nature of the short-term energy market and other factors, such
as unaffiliated generating plant availability, the weather and the economy.
The recently adopted FERC rules which introduce a greater degree of
competition into the wholesale energy market have had the effect of
increasing short-term wholesale sales and transmission service revenues.
The Company's sales and in turn its results of operations were impacted in
1996 and prior years by the quantities of energy and services sold in
wholesale transactions. Future results of operations will be affected by
the quantity and price of wholesale transactions which often depends on the
weather and power plant availability.
Operating Expenses Increase
Operating expenses increased 3% in 1996 and 1995. The primary items
accounting for the increase in 1996 were increased fuel costs, federal
<PAGE>
income taxes and expenditures for marketing, information systems and other
items necessary to prepare for the transition to competition. In 1995
increased rent and related operating costs of the newly installed Gavin
Plant flue gas desulfurization systems (scrubbers) and expenses related to
severance pay charges were the main reasons for the increase in operating
expenses. Changes in the components of operating expenses were as follows:
Increase (Decrease)
From Previous Year
(Dollars in Millions) 1996 1995
Amount % Amount %
Fuel and Purchased Power $ 61.2 3.8 $(119.7) (6.9)
Other Operation 25.9 2.2 181.3 18.1
Maintenance (39.0) (7.2) (2.4) (0.5)
Depreciation and Amortization 7.8 1.3 20.8 3.6
Taxes Other Than Federal
Income Taxes 9.4 1.9 (5.0) (1.0)
Federal Income Taxes 70.2 25.8 58.6 27.5
Total $135.5 2.9 $ 133.6 2.9
Fuel and purchased power expense increased in 1996 due to an increase in
generation to meet the increase in industrial and wholesale customer
demand. The effect of increased generation was partially offset by reduced
average fossil fuel costs resulting from increased usage of lower cost spot
market coal and lower cost nuclear fuel.
Although generation increased 3% in 1995, fuel and purchased power
expense declined as a result of a decrease in the average cost of fossil
fuel resulting from reduced coal prices reflecting the renegotiation of
certain long-term coal contracts and other lower priced purchases under
existing and new contracts. Other factors which reduced fuel and purchased
power expense in 1995 were increased utilization of low cost nuclear
generation; decreased energy purchases due to the mild weather during the
first half of 1995 and the operation of fuel clause mechanisms. Changes in
fuel expense are generally deferred pending recovery in various fuel clause
mechanisms, as such they generally do not affect earnings.
The significant increase in other operation expense during 1995 was
primarily due to rent and other operating costs of the Gavin Plant
scrubbers which went into service in December 1994 and the first quarter of
1995; a $41 million ($27 million after-tax) provision for severance pay
recorded in 1995 related mainly to a functional realignment of operations;
and costs related to the development of a new activity based budgeting
system.
Maintenance expense decreased in 1996 due to the recovery of previously
expensed storm damage costs and reduced nuclear plant maintenance expense
due to workforce reductions and the reduction of contract labor at the Cook
Nuclear Plant.
The increases in federal income tax expense attributable to operations
was primarily due to an increase in pre-tax operating income and changes in
certain book/tax differences accounted for on a flow-through basis and in
1995 the effects of accrual adjustments for prior year tax returns.
Nonoperating Income
Nonoperating income decreased in 1996 due to the cost of the AEP branding
program and startup costs of the new business ventures. The increase in
<PAGE>
nonoperating income in 1995 was mainly due to a 1994 loss of $8.2 million
on a demand side management investment.
Interest Charges and Preferred Stock Dividend Requirements
In 1996 interest charges and preferred stock dividend requirements
decreased as the Company's subsidiaries continued their refinancing
programs. The programs reduced the average interest rate and the amount of
long-term debt and preferred stock outstanding. The cost of short-term
borrowings in 1996 increased slightly re-flecting an increased average
balance of short-term debt outstanding.
Interest charges increased in 1995 mainly due to an increase in interest
on short-term debt resulting from a higher average interest rate in 1995 on
larger levels of outstanding short-term debt.
Common Dividend Remains Constant; Payout Ratio Decreases
The Company paid a quarterly dividend in 1996 of 60 cents a share
maintaining the annual dividend rate at $2.40 per share. The payout ratio
continued an improving trend to 76% in 1996 from 84% in 1995 and 89% in
1994. It has been a management objective to reduce the payout ratio
through efforts to increase earnings in order to enhance AEP's ability to
invest in new business ventures that complement our core competencies and
can maintain and improve shareholder value.
Liquidity and Capital Resources
Electric utility construction expenditures in the United States have
been declining in recent years due to slow growth in the demand for
electricity, environmental restrictions, and delays in obtaining approvals
to construct transmission facilities. Demand-side management programs such
as direct load control, interruptible load, energy efficiency, and other
demand and load reduction programs have lessened the need for new plant
expenditures. Also in some parts of the country substantial portions of
new generation additions have been by non-utility entities. AEP's
construction expenditures have followed the industry trend and have been
generally declining since 1991 when we last completed a new generating
facility. Our electric generating plant expenditures for 1996 accounted
for only 27% of the total electric utility plant expenditures, as compared
to the historic level of investment in electric generating plant of 49%.
Transmission and distribution (T&D) expenditures, on the other hand,
accounted for approximately 68% of expenditures, compared with the historic
investment level of 46%. Construction expenditures for our domestic
utility operations are estimated to be $2 billion over the next three years
with no major plant construction planned for our service territory. Total
T&D expenditures will be related to the improvement of and additions to
delivery facilities. Approximately 88% of the domestic construction
expenditures for the next three years will be financed internally.
Allowance for funds used during construction (AFUDC) accruals also declined
during this period. The decline in AFUDC in recent years is primarily due
to the decrease in the level of generation plant construction combined with
a decrease in interest rates.
The operating subsidiaries generally issue short-term debt to provide
for interim financing of capital expenditures that exceed internally
generated funds. They periodically reduce their outstanding short-term
debt through issuances of long-term debt and historically preferred stock
and with additional capital contributions by the parent company. In 1996
short-term borrowing decreased by $45 million. At December 31, 1996
<PAGE>
American Electric Power Co., Inc. (the parent company) and its utility
subsidiaries had unused short-term lines of credit of $409 million, and
several of AEP's subsidiaries engaged in providing non-regulated energy
services had an unused line of credit of $100 million available under a
revolving credit agreement. In February 1997 the credit available under
the revolving credit agreement was increased to $500 million. The sources
of funds available to the parent company are dividends from its
subsidiaries, short-term and long-term borrowings and, when necessary,
proceeds from the issuance of common stock. The parent company issued
1,600,000 shares in 1996, 1,400,000 shares in 1995 and 700,000 shares in
1994 of common stock through a Dividend Reinvestment Program raising $65
million, $49 million and $22 million, respectively. As a result of the
common stock issuances and the reduction in long-term debt over the past
several years, the common equity to capitalization ratio has steadily
improved. At December 31, 1996 the ratio increased to 45.3% from 43.1% at
year-end 1995 and from 42.1% at year-end 1994.
The debt and preferred stock coverages of the principal operating
subsidiaries remained strong in 1996.
Coverages at December 31, 1996
Mortgage and Preferred
Long-term Debt Stock
Appalachian Power Co. 3.98 1.99
Columbus Southern Power Co. 4.44 N/A
Indiana Michigan Power Co. 6.66 3.07
Kentucky Power Co. 3.22 N/A
Ohio Power Co. 6.62 3.63
N/A = Not Applicable
Unless the subsidiaries meet certain earnings or coverage tests, they
cannot issue additional mortgage bonds or preferred stock. In order to
issue mortgage bonds (without refunding existing debt), each subsidiary
must have pre-tax earnings equal to at least two times the annual interest
charges on mortgage bonds after giving effect to the issuance of the new
debt. Generally, issuance of additional preferred stock requires after-tax
gross income at least equal to one and one-half times annual interest
and preferred stock dividend requirements after giving effect to the
issuance of the new preferred stock. The subsidiaries presently exceed
these minimum coverage requirements.
In January 1997 the Company announced a tender offer for certain
subsidiaries' preferred stock in conjunction with special meetings
scheduled to be held on February 28, 1997. The special meetings' purpose
is to consider amendments to the subsidiaries' articles of incorporation to
remove certain capitalization ratio requirements. These restrictions limit
the subsidiaries' financial flexibility and could place them at a
competitive disadvantage in the future. The amount paid to redeem the
preferred stock that is tendered could total as much as $514 million. The
subsidiaries expect to use a combination of short-term debt and unsecured
long-term debt to pay for the preferred stock tendered.
Litigation
AEP is involved in a number of legal proceedings and claims. While we
are unable to predict the outcome of such litigation, it is not expected
that the ultimate resolution of these matters will have a material adverse
effect on the results of operations and/or financial condition.
<PAGE>
Effect of Inflation
Inflation affects AEP's cost of replacing utility plant and the cost of
operating and maintaining its plant. The rate-making process limits our
recovery to the historical cost of assets resulting in economic losses when
the effects of inflation are not recovered from customers on a timely
basis. However, economic gains that results from the repayment of long-term
debt with inflated dollars partly offset such losses.
Corporate Owned Life Insurance
In connection with the audit of AEP's 1991, 1992 and 1993 federal
income tax returns the Internal Revenue Service agents sought a ruling from
the IRS National Office that certain interest deductions relating to a
corporate owned life insurance (COLI) program should not be allowed. The
Company established the COLI program in 1990 as a part of its strategy to
fund and reduce the cost of medical benefits for retired employees. AEP
filed a brief with the IRS National Office refuting the agents' position.
Although no adjustments have been proposed, a disallowance of the COLI
interest deductions through December 31, 1996 would reduce earnings by
approxiately $247 million (including interest). AEP believes it will
ultimately prevail on this issue and will vigorously contest any
disallowance that may be assessed.
In 1996 Congress enacted legislation that prospectively phases out the
tax benefits for COLI interest deductions over a three year period
beginning in 1996. As a result the Company intends to restructure its COLI
program. The restructuring of the COLI program is not expected to have a
material impact on results of operations.
New Accounting Rules
In 1996 the Financial Accounting Standards Board (FASB) issued an
exposure draft "Accounting for Certain Liabilities Related to Closure or
Removal of Long-Lived Assets." The proposal suggests that the present
value of decommissioning and certain other closure or removal obligations
be recorded as a liability when the obligation is incurred. A
corresponding asset would be recorded in the plant investment account and
recovered through depreciation charges over the asset's life. A proposed
transition rule would require that an entity report in income the
cumulative effect of initially applying the new standard. The FASB is
reconsidering the exposure draft proposal. It is unclear at this time in
what manner the FASB will adopt the proposal. Until it becomes apparent
what the FASB will decide and how certain questions raised by the exposure
draft are resolved the Company cannot determine its impact.
<PAGE>
<TABLE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands - except per share amounts)
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
OPERATING REVENUES $5,849,234 $5,670,330 $5,504,670
OPERATING EXPENSES:
Fuel and Purchased Power 1,686,754 1,625,531 1,745,245
Other Operation 1,210,027 1,184,158 1,002,822
Maintenance 502,841 541,825 544,312
Depreciation and Amortization 600,851 593,019 572,189
Taxes Other Than Federal Income Taxes 498,567 489,223 494,210
Federal Income Taxes 342,222 272,027 213,399
TOTAL OPERATING EXPENSES 4,841,262 4,705,783 4,572,177
OPERATING INCOME 1,007,972 964,547 932,493
NONOPERATING INCOME 2,212 20,204 11,485
INCOME BEFORE INTEREST CHARGES AND
PREFERRED DIVIDENDS 1,010,184 984,751 943,978
INTEREST CHARGES (net) 381,328 400,077 389,240
PREFERRED STOCK DIVIDEND REQUIREMENTS
OF SUBSIDIARIES 41,426 54,771 54,726
NET INCOME $587,430 $529,903 $500,012
AVERAGE NUMBER OF SHARES OUTSTANDING 187,321 185,847 184,666
EARNINGS PER SHARE $3.14 $2.85 $2.71
CASH DIVIDENDS PAID PER SHARE $2.40 $2.40 $2.40
<CAPTION>
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(in thousands)
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
RETAINED EARNINGS JANUARY 1 $1,409,645 $1,325,581 $1,269,283
NET INCOME 587,430 529,903 500,012
DEDUCTIONS:
Cash Dividends Declared 449,353 445,831 443,101
Other (24) 8 613
RETAINED EARNINGS DECEMBER 31 $1,547,746 $1,409,645 $1,325,581
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $587,430 $529,903 $500,012
Adjustments for Noncash Items:
Depreciation and Amortization 590,657 578,003 561,188
Deferred Federal Income Taxes (21,478) 11,916 (16,033)
Deferred Investment Tax Credits (25,808) (25,819) (31,275)
Amortization of Operating Expenses
and Carrying Charges (net) 55,458 53,479 16,022
Changes in Certain Current Assets
and Liabilities:
Accounts Receivable (net) (39,049) (71,804) 34,302
Fuel, Materials and Supplies 35,831 457 (1,627)
Accrued Utility Revenues 32,953 (40,433) 2,419
Accounts Payable (13,915) (31,044) (7,959)
Taxes Accrued (6,019) 37,515 (26,521)
Other (net) 41,002 14,437 (52,803)
Net Cash Flows From
Operating Activities 1,237,062 1,056,610 977,725
INVESTING ACTIVITIES:
Construction Expenditures (577,691) (605,974) (643,457)
Proceeds from Sale of Property and Other 12,283 20,567 49,802
Net Cash Flows Used For
Investing Activities (565,408) (585,407) (593,655)
FINANCING ACTIVITIES:
Issuance of Common Stock 65,461 48,707 22,256
Issuance of Cumulative Preferred Stock - - 88,787
Issuance of Long-term Debt 407,291 523,476 411,869
Retirement of Cumulative Preferred Stock (70,761) (158,839) (35,949)
Retirement of Long-term Debt (601,278) (469,767) (445,636)
Change in Short-term Debt (net) (45,430) 48,140 38,009
Dividends Paid on Common Stock (449,353) (445,831) (443,101)
Net Cash Flows Used For
Financing Activities (694,070) (454,114) (363,765)
Net Increase (Decrease) in Cash and
Cash Equivalents (22,416) 17,089 20,305
Cash and Cash Equivalents January 1 79,955 62,866 42,561
Cash and Cash Equivalents December 31 $57,539 $79,955 $62,866
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(In Thousands - Except Share Data)
<CAPTION>
December 31,
1996 1995
ASSETS
<S> <C> <C>
ELECTRIC UTILITY PLANT:
Production $ 9,341,849 $ 9,238,843
Transmission 3,380,258 3,316,664
Distribution 4,402,449 4,184,251
General (including mining assets and nuclear fuel) 1,491,781 1,442,086
Construction Work in Progress 353,832 314,118
Total Electric Utility Plant 18,970,169 18,495,962
Accumulated Depreciation and Amortization 7,549,798 7,111,123
NET ELECTRIC UTILITY PLANT 11,420,371 11,384,839
OTHER PROPERTY AND INVESTMENTS 892,674 825,781
CURRENT ASSETS:
Cash and Cash Equivalents 57,539 79,955
Accounts Receivable:
Customers (less allowance for uncollectible
accounts of $3,692 in 1996 and $5,430 in 1995) 415,413 417,854
Miscellaneous 115,919 74,429
Fuel - at average cost 235,257 271,933
Materials and Supplies - at average cost 251,896 251,051
Accrued Utility Revenues 174,966 207,919
Prepayments and Other 103,891 98,717
TOTAL CURRENT ASSETS 1,354,881 1,401,858
REGULATORY ASSETS 1,889,482 1,979,446
DEFERRED CHARGES 328,139 310,377
TOTAL $15,885,547 $15,902,301
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
1996 1995
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
CAPITALIZATION:
Common Stock-Par Value $6.50:
1996 1995
Shares Authorized. .300,000,000 300,000,000
Shares Issued . . ..197,234,992 195,634,992
(8,999,992 shares were held in treasury) $ 1,282,027 $ 1,271,627
Paid-in Capital 1,715,554 1,658,524
Retained Earnings 1,547,746 1,409,645
Total Common Shareholders' Equity 4,545,327 4,339,796
Cumulative Preferred Stocks of Subsidiaries:*
Not Subject to Mandatory Redemption 90,323 148,240
Subject to Mandatory Redemption 509,900 515,085
Long-term Debt* 4,796,768 4,920,329
TOTAL CAPITALIZATION 9,942,318 9,923,450
OTHER NONCURRENT LIABILITIES 1,002,208 884,707
CURRENT LIABILITIES:
Preferred Stock and Long-term Debt Due Within One Year* 86,942 144,597
Short-term Debt 319,695 365,125
Accounts Payable 206,227 220,142
Taxes Accrued 414,173 420,192
Interest Accrued 75,124 80,848
Obligations Under Capital Leases 89,553 89,692
Other 304,323 304,466
TOTAL CURRENT LIABILITIES 1,496,037 1,625,062
DEFERRED INCOME TAXES 2,643,143 2,656,651
DEFERRED INVESTMENT TAX CREDITS 404,050 430,041
DEFERRED GAIN ON SALE AND LEASEBACK -
ROCKPORT PLANT UNIT 2 240,598 249,875
DEFERRED CREDITS 157,193 132,515
CONTINGENCIES (Note 4)
TOTAL $15,885,547 $15,902,301
*See Accompanying Schedules on pages 36 - 37.
</TABLE>
<PAGE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies:
The American Electric Power System (AEP, AEP System or the Company) is a
public utility engaged in the generation, purchase, transmission and
distribution of electric power to over 2.9 million retail customers in its
seven state service territory which covers portions of Ohio, Michigan,
Indiana, Kentucky, West Virginia, Virginia and Tennessee. Electric power
is also supplied at wholesale to neighboring utility systems and power
marketers.
The organization of the AEP System consists of American Electric Power
Company, Inc., the parent holding company; seven electric utility operating
companies (utility subsidiaries); a generating subsidiary, AEP Generating
Company (AEPGEN); a service company, American Electric Power Service
Corporation (AEPSC); three active coal-mining companies and a group of
subsidiaries that complement utility activities. The following utility
subsidiaries pool their generating and transmission facilities and operate
them as an integrated system:
- - Appalachian Power Company (APCo)
- - Columbus Southern Power Company (CSPCo)
- - Indiana Michigan Power Company (I&M)
- - Kentucky Power Company (KEPCo)
- - Ohio Power Company (OPCo)
The remaining two utility subsidiaries, Kingsport Power Company and
Wheeling Power Company, are distribution companies that purchase power from
APCo and OPCo, respectively. AEPSC provides management and professional
services to the AEP System. The active coal-mining companies are wholly-owned
by OPCo and sell most of their production to OPCo. AEPGEN has a 50%
interest in the Rockport Plant which is comprised of two of the AEP
System's six 1,300 megawatt (mw) generating units. The group of
subsidiaries that complement utility activities are engaged in providing
non-regulated energy services and are seeking and considering new business
opportunities domestically and internationally that will permit AEP to
utilize its expertise and core competencies.
Effective January 1, 1996, AEPSC and the seven utility subsidiaries
began operating as American Electric Power. There has been no change to
the legal names of these companies. The AEP System's operations are
divided into major business units which are managed centrally by AEPSC.
Rate Regulation - The AEP System is subject to regulation by the Securities
and Exchange Commission (SEC) under the Public Utility Holding Company Act
of 1935 (1935 Act). The rates charged by the utility subsidiaries are
approved by the Federal Energy Regulatory Commission (FERC) or one of the
state utility commissions as applicable. The FERC regulates wholesale
rates and the state commissions regulate retail rates.
Principles of Consolidation - The consolidated financial statements include
American Electric Power Company, Inc. (AEPCo., Inc.) and its wholly-owned
subsidiaries consolidated with their wholly-owned subsidiaries.
Significant intercompany items are eliminated in consolidation.
Basis of Accounting - As the owner of cost-based rate-regulated electric
public utility companies, AEPCo., Inc.'s consolidated financial statements
<PAGE>
reflect the actions of regulators that result in the recognition of
revenues and expenses in different time periods than enterprises that are
not rate regulated. In accordance with Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation," regulatory assets (deferred expenses) and regulatory
liabilities (deferred income) are recorded to reflect the economic effects
of regulation.
Use of Estimates - The preparation of these financial statements in
conformity with generally accepted accounting principles requires in
certain instances the use of management's estimates. Actual results could
differ from those estimates.
Utility Plant - Electric utility plant is stated at original cost and is
generally subject to first mortgage liens. Additions, major replacements
and betterments are added to the plant accounts. Retirements from the
plant accounts and associated removal costs, net of salvage, are deducted
from accumulated depreciation. The costs of labor, materials and overheads
incurred to operate and maintain utility plant are included in operating
expenses.
Allowance for Funds Used During Construction (AFUDC) - AFUDC is a noncash
nonoperating income item that is recovered over the service life of utility
plant through depreciation and represents the estimated cost of borrowed
and equity funds used to finance construction projects. The average rates
used to accrue AFUDC were 6.09%, 6.91%, and 6.59% in 1996, 1995 and 1994,
respectively.
Depreciation, Depletion and Amortization - Depreciation is provided on a
straight-line basis over the estimated useful lives of property other than
coal-mining property and
is calculated largely through the use of composite rates by functional
class as follows:
Composite
Functional Class Depreciation
of Property Annual Rates
Production:
Steam-Nuclear 3.4%
Steam-Fossil-Fired 3.2% to 4.4%
Hydroelectric-Conventional
and Pumped Storage 2.7% to 3.2%
Transmission 1.7% to 2.7%
Distribution 3.3% to 4.2%
General 2.5% to 3.8%
The utility subsidiaries presently recover amounts to be used for
demolition of non-nuclear plant through depreciation charges included in
rates. Depreciation, depletion and amortization of coal-mining assets is
provided over each asset's estimated useful life, ranging up to 30 years,
and is calculated using the straight-line method for mining structures and
equipment. The units-of-production method is used to amortize coal rights
and mine development costs based on estimated recoverable tonnages at a
current average rate of $1.49 per ton. These costs are included in the
cost of coal charged to fuel expense.
Cash and Cash Equivalents - Cash and cash equivalents include temporary
cash investments with original maturities of three months or less.
Sale of Receivables - Under an agreement that was terminated in January
1997, CSPCo sold $50 million of undivided interests in designated pools of
<PAGE>
accounts receivable and accrued utility revenues with limited recourse. As
collections reduced previously sold pools, interests in new pools were
sold. At December 31, 1996, 1995 and 1994, $50 million remained to be
collected and remitted to the buyer.
Operating Revenues - Revenues include the accrual of electricity consumed
but unbilled at month-end as well as billed revenues.
Fuel Costs - Fuel costs are matched with revenues in accordance with rate
commission orders. Generally in the retail jurisdictions, changes in fuel
costs are deferred or revenues accrued until approved by the regulatory
commission for billing or refund to customers in later months. Wholesale
jurisdictional fuel cost changes are expensed and billed as incurred.
Levelization of Nuclear Refueling Outage Costs - Incremental operation and
maintenance costs associated with refueling outages at I&M's Donald C. Cook
Nuclear Plant (Cook Plant) are deferred and amortized over the period
(generally eighteen months) beginning with the commencement of an outage
and ending with the beginning of the next outage.
Income Taxes - The Company follows the liability method of accounting for
income taxes as prescribed by SFAS 109, "Accounting for Income Taxes."
Under the liability method, deferred income taxes are provided for all
temporary differences between book cost and tax basis of assets and
liabilities which will result in a future tax consequence. Where the
flow-through method of accounting for temporary differences is reflected in
rates, deferred income taxes are recorded with related regulatory assets
and liabilities in accordance with SFAS 71.
Investment Tax Credits - Investment tax credits have been accounted for
under the flow-through method except where regulatory commissions have
reflected investment tax credits in the rate-making process on a deferral
basis. Deferred investment tax credits are being amortized over the life
of the related plant investment.
Debt and Preferred Stock - Gains and losses on reacquired debt are deferred
and amortized over the remaining term of the reacquired debt in accordance
with rate-making treatment. If the debt is refinanced the reacquisition
costs are deferred and amortized over the term of the replacement debt
commensurate with their recovery in rates.
Debt discount or premium and debt issuance expenses are amortized over
the term of the related debt, with the amortization included in interest
charges.
Redemption premiums paid to reacquire preferred stock are included in
paid-in capital and amortized to retained earnings in accordance with
rate-making treatment. The excess of par value over costs of preferred stock
reacquired to meet sinking fund requirements is credited to paid-in capital
and amortized to retained earnings.
Other Property and Investments - Excluding decommissioning and spent
nuclear fuel disposal trust funds, other property and investments are
stated at cost. Securities held in trust funds for decommissioning nuclear
facilities and for the disposal of spent nuclear fuel are recorded at
market value in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Securities in the trust funds
have been classified as available-for-sale due to their long-term purpose.
Due to the rate-making process, adjustments for unrealized gains and losses
are not reported in equity but result in adjustments to regulatory assets
<PAGE>
and liabilities.
2. Rate Matters:
Recovery of Fuel Costs - Under the terms of a 1992 stipulation agreement
the cost of coal burned at the Gavin Plant is subject to a 15-year
predetermined price of $1.575 per million Btu's with quarterly escalation
adjustments through November 2009. A 1995 Settlement Agreement set the fuel
component of the EFC factor at 1.465 cents per kwh for the period June 1,
1995 through November 30, 1998 and reserved certain items including
emission allowances for later consideration in determining total fuel
recovery. The agreements provide OPCo with the opportunity to recover over
the term of the stipulation agreement the Ohio jurisdictional share of
OPCo's investment in and the liabilities and future shut-down costs of its
affiliated mines as well as any fuel costs incurred above the fixed rate to
the extent the actual cost of coal burned at the Gavin Plant is below the
predetermined price. After November 2009 the price that OPCo can recover
for coal from its affiliated Meigs mine which supplies the Gavin Plant will
be limited to the lower of cost or the then-current market price. Pursuant
to these agreements the Company has deferred $28.5 million for future
recovery at December 31, 1996.
Based on the estimated future cost of coal burned at Gavin Plant,
management believes that the Ohio jurisdictional portion of the investment
in and liabilities and closing costs of the affiliated mining operations
including deferred amounts will be recovered under the terms of the
predetermined price agreement. Management intends to seek from non-Ohio
jurisdictional ratepayers recovery of the non-Ohio jurisdictional portion
of the investment in and the liabilities and closing costs of the
affiliated Meigs, Muskingum and Windsor mines. The non-Ohio jurisdictional
portion of shutdown costs for these mines which includes the investment in
the mines, leased asset buy-outs, reclamation costs and employee benefits
is estimated to be approximately $180 million after tax at December 31,
1996.
The affiliated Muskingum and Windsor mines may have to close by January
2000 in order to comply with the Phase II requirements of the Clean Air Act
Amendments of 1990. The Muskingum and/or Windsor mines could close prior
to January 2000 depending on the economics of continued operation under the
terms of the above Settlement Agreement. Unless future shutdown costs
and/or the cost of affiliated coal production of the Meigs, Muskingum and
Windsor mines can be recovered, results of operations would be adversely
affected.
3. Effects of Regulation and Phase-In Plans:
In accordance with SFAS 71 the consolidated financial statements include
assets (deferred expenses) and liabilities (deferred income) recorded in
accordance with regulatory actions to match expenses and revenues in
cost-based rates. Regulatory assets are expected to be recovered in future
periods through the rate-making process and the regulatory liabilities are
expected to reduce future cost recoveries. The Company has reviewed all
the evidence currently available and concluded that it continues to meet
the requirements to apply SFAS 71. In the event a portion of the Company's
business no longer met these requirements net regulatory assets would have
to be written off for that portion of the business.
Regulatory assets and liabilities are comprised of the following at:
December 31,
<PAGE>
1996 1995
(In Thousands)
Regulatory Assets:
Amounts Due From Customers For
Future Income Taxes $1,459,086 $1,446,485
Rate Phase-in Plan Deferrals 27,249 74,402
Unamortized Loss on Reacquired Debt 107,305 109,551
Other 295,842 349,008
Total Regulatory Assets $1,889,482 $1,979,446
Regulatory Liabilities:
Deferred Investment Tax Credits $404,050 $430,041
Other Regulatory Liabilities* 86,609 86,347
Total Regulatory Liabilities $490,659 $516,388
* Included in Deferred Credits on Consolidated Balance Sheets
The rate phase-in plan deferrals are applicable to the Zimmer Plant and
Rockport Plant Unit 1. The Zimmer Plant is a 1,300 mw coal-fired plant
which commenced commercial operation in 1991. CSPCo owns 25.4% of the
plant with the remainder owned by two unaffiliated companies. In May 1992
the Public Utilities Commission of Ohio (PUCO) issued an order providing
for a phased in rate increase of $123 million to be implemented in three
steps over a two-year period and disallowed $165 million of Zimmer Plant
investment. CSPCo appealed the PUCO ordered Zimmer disallowance and
phase-in plan to the Ohio Supreme Court. In November 1993 the Supreme Court
issued a decision on CSPCo's appeal affirming the disallowance and finding
that the PUCO did not have statutory authority to order phased-in rates.
The Court instructed the PUCO to fix rates to provide gross annual revenues
in accordance with the law and to provide a mechanism to recover the
amounts deferred as regulatory assets under the phase-in order.
As a result of the Supreme Court decision, in January 1994 the PUCO
approved a 7.11% rate increase effective February 1, 1994. The increase is
comprised of a 3.72% base rate increase to complete the rate increase
phase-in and a temporary 3.39% surcharge, which will be in effect until the
deferrals are recovered, estimated to be 1997. In 1996, 1995 and 1994
$31.5 million, $28.5 million and $18.5 million, respectively, of net phase-in
deferrals were collected through the surcharge. The deferrals were
$15.4 million at December 31, 1996 and $46.9 million at December 31, 1995.
The recovery of amounts deferred under the phase-in plan and the increase
in rates to the full rate level did not affect net income. From the
in-service date of March 1991 until rates went into effect in May 1992
deferred carrying charges of $43 million were recorded on the Zimmer Plant
investment. Recovery of the deferred carrying charges will be sought in
the next PUCO base rate proceeding in accordance with the PUCO accounting
order that authorized the deferral.
The Rockport Plant consists of two 1,300 mw coal-fired units. I&M and
AEPGEN each own 50% of one unit (Rockport 1) and lease a 50% interest in
the other unit (Rockport 2) from unaffiliated lessors under an operating
lease. The gain on the sale and leaseback of Rockport 2 was deferred and
is being amortized, with related taxes, over the initial lease term which
expires in 2022. Rate phase-in plans in I&M's Indiana and FERC
jurisdictions for its share of Rockport 1 provide for the recovery and
straight-line amortization through 1997 of prior-year cost deferrals.
Unamortized deferred amounts under the phase-in plans were $11.9 million
and $27.5 million at December 31, 1996 and 1995, respectively.
Amortization was $16 million in 1996, 1995 and 1994.
<PAGE>
4. Commitments and Contingencies:
Construction and Other Commitments - The AEP System has made substantial
construction commitments for utility operations. Such commitments do not
presently include any expenditures for new generating capacity. The
aggregate construction program expenditures for 1997-1999 are estimated to
be $2 billion.
Long-term fuel supply contracts contain clauses for periodic
adjustments, and most jurisdictions have fuel clause mechanisms that
provide for recovery of changes in the cost of fuel with the regulators'
review and approval. The contracts are for various terms, the longest of
which extend to the year 2014, and contain various clauses that would
release the Company from its obligation under certain force majeure
conditions.
The AEP System has contracted to sell up to 1,350 mw of capacity on a
long-term basis to unaffiliated utilities. Certain contracts totaling 705
mw of capacity are unit power agreements requiring the delivery of energy
regardless of whether the unit capacity is available. The power sales
contracts expire from 1997 to 2010.
Tender Offer - On February 24, 1997 AEP and Public Service Company of
Colorado with equal interests in a joint venture announced a cash tender
offer for Yorkshire Electricity Group plc in the United Kingdom. The joint
venture proposes to pay $2.4 billion to acquire all of the stock of
Yorkshire Electricity. AEP's equity investment, estimated to be $360
million, will be made through its subsidiary AEP Resources Inc., initially
using cash borrowed under a revolving credit agreement.
Nuclear Plant - I&M owns and operates the two-unit 2,110 mw Cook Nuclear
Plant under licenses granted by the Nuclear Regulatory Commission. The
operation of a nuclear facility involves special risks, potential
liabilities, and specific regulatory and safety requirements. Should a
nuclear incident occur at any nuclear power plant facility in the United
States, the resultant liability could be substantial. By agreement I&M is
partially liable together with all other electric utility companies that
own nuclear generating units for a nuclear power plant incident. In the
event nuclear losses or liabilities are underinsured or exceed accumulated
funds and recovery in rates is not possible, results of operations and
financial condition could be negatively affected.
Nuclear Incident Liability - Public liability is limited by law to $8.9
billion should an incident occur at any licensed reactor in the United
States. Commercially available insurance provides $200 million of
coverage. In the event of a nuclear incident at any nuclear plant in the
United States the remainder of the liability would be provided by a
deferred premium assessment of $79.3 million on each licensed reactor
payable in annual installments of $10 million. As a result, I&M could be
assessed $158.6 million per nuclear incident payable in annual installments
of $20 million. The number of incidents for which payments could be
required is not limited.
Nuclear insurance pools and other insurance policies provide $3.6
billion of property damage, decommissioning and decontamination coverage
for the Cook Plant. Additional insurance provides coverage for extra costs
resulting from a prolonged accidental Cook Plant outage. Some of the
policies have deferred premium provisions which could be triggered by
losses in excess of the insurer's resources. The losses could result from
claims at the Cook Plant or certain other non-affiliated nuclear units.
<PAGE>
I&M could be assessed up to $35.8 million under these policies.
Spent Nuclear Fuel Disposal - Federal law provides for government
responsibility for permanent spent nuclear fuel disposal and assesses
nuclear plant owners fees for spent fuel disposal. A fee of one mill per
kilowatthour for fuel consumed after April 6, 1983 is being collected from
customers and remitted to the U.S. Treasury. Fees and related interest of
$172 million for fuel consumed prior to April 7, 1983 have been recorded as
long-term debt. I&M has not paid the government the pre-April 1983 fees
due to continued delays and uncertainties related to the federal disposal
program. At December 31, 1996, funds collected from customers towards
payment of the pre-April 1983 fee and related earnings thereon approximate
the liability.
Decommissioning and Low Level Waste Accumulation Disposal - Decommissioning
costs are accrued over the service life of the Cook Plant. The licenses to
operate the two nuclear units expire in 2014 and 2017. After expiration of
the licenses the plant is expected to be decommissioned through
dismantlement. The Company's latest estimate for decommissioning and low
level radioactive waste accumulation disposal costs range from $634 million
to $988 million in 1993 nondiscounted dollars. The wide range is caused by
variables in assumptions including the estimated length of time spent
nuclear fuel must be stored at the plant subsequent to ceasing operations.
This in turn depends on future developments in the federal government's
spent nuclear fuel disposal program. Continued delays in the federal fuel
disposal program can result in increased decommissioning costs. I&M is
recovering estimated decommissioning costs in its three rate-making
jurisdictions based on at least the lower end of the range in the most
recent decommissioning study at the time of the last rate proceeding. I&M
records decommissioning costs in other operation expense and records a
noncurrent liability equal to the decommissioning cost recovered in rates;
such amount was $27 million in 1996, $30 million in 1995 including $4
million of special deposits and $26 million in 1994. Decommissioning costs
recovered from customers are deposited in external trusts. Trust fund
earnings increase the fund assets and the recorded liability and decrease
the amount needed to be recovered from ratepayers. At December 31, 1996
I&M has recognized a decommissioning liability of $314 million which is
included in other noncurrent liabilities.
Litigation - The Company is involved in a number of legal proceedings and
claims. While management is unable to predict the ultimate outcome of
litigation, it is not expected that the resolution of these matters will
have a material adverse effect on the results of operations or financial
condition.
5. Dividend Restrictions:
Mortgage indentures, charter provisions and orders of regulatory
authorities place various restrictions on the use of the subsidiaries'
retained earnings for the payment of cash dividends on their common stocks.
At December 31, 1996, $30 million of retained earnings were restricted. To
pay dividends out of paid-in capital the subsidiaries need regulatory
approval.
6. Lines of Credit and Commitment Fees:
At December 31, 1996 and 1995 unused short-term bank lines of credit were
available in the amounts of $409 million and $372 million, respectively.
Commitment fees of approximately 1/8 of 1% of the unused short-term lines
of credit are required to maintain the lines of credit. In addition
<PAGE>
several of the subsidiaries engaged in providing non-regulated energy
services share a $100 million line of credit under a revolving credit
agreement which requires the payment of a commitment fee of approximately
1/8 of 1% of the unused balance. At December 31, 1996 no borrowings were
outstanding under the revolving credit agreement. In February 1997 the
credit available under this agreement was increased to $500 million.
Outstanding short-term debt consisted of:
December 31,
(Dollars In Thousands) 1996 1995
Balance Outstanding:
Notes Payable $ 91,293 $ 128,425
Commercial Paper 228,402 236,700
Total $319,695 $365,125
Year-End Weighted
Average Interest Rate:
Notes Payable 6.2% 6.1%
Commercial Paper 7.2% 6.1%
Total 6.9% 6.1%
7. Benefit Plans:
AEP System Pension Plan - The AEP pension plan is a trusteed,
noncontributory defined benefit plan covering all employees meeting
eligibility requirements, except participants in the United Mine Workers of
America (UMWA) pension plans. Benefits are based on service years and
compensation levels. The funding policy is to make annual contributions to
a qualified trust fund equal to the net periodic pension cost up to the
maximum amount deductible for federal income taxes, but not less than the
minimum required contribution in accordance with the Employee Retirement
Income Security Act of 1974.
<PAGE>
Net AEP pension plan costs were computed as follows:
Year Ended December 31,
1996 1995 1994
(In Thousands)
Service Cost-Benefits Earned
During the Year $ 40,000 $ 30,400 $ 40,000
Interest Cost on Projected Benefit
Obligation 119,500 116,700 114,500
Actual Return on Plan Assets (302,400) (416,800) (6,700)
Net Amortization (Deferral) 161,800 281,800 (123,300)
Net AEP Pension Plan Costs $ 18,900 $ 12,100 $ 24,500
AEP pension plan assets and actuarially computed benefit obligations are:
December 31,
1996 1995
(In Thousands)
AEP Pension Plan Assets at
Fair Value (a) $2,009,500 $1,805,300
Actuarial Present Value
of Benefit Obligation:
Vested 1,377,000 1,321,600
Nonvested 136,500 147,400
Accumulated Benefit
Obligation 1,513,500 1,469,000
Effects of Salary Progression 162,700 181,000
Projected Benefit
Obligation 1,676,200 1,650,000
Funded Status - AEP
Pension Plan Assets
in Excess of Projected
Benefit Obligation 333,300 155,300
Unrecognized Prior
Service Cost 133,200 147,000
Unrecognized Net Gain (488,200) (295,200)
Unrecognized Net Transition
Assets (Being Amortized
Over 17 Years) (68,900) (78,700)
Accrued Net AEP
Pension Plan
Liability $ (90,600) $ (71,600)
(a) AEP pension plan assets primarily consist of common stocks, bonds and
cash equivalents and are included in a separate entity trust fund.
Assumptions used to determine AEP pension plan's funded status were:
December 31,
1996 1995 1994
Discount Rate 7.75% 7.25% 8.5%
Average Rate of Increase in
Compensation Levels 3.2% 3.2% 3.2%
Expected Long-Term Rate of Return
on Plan Assets 9.0% 9.0% 8.5%
AEP System Savings Plan - An employee savings plan is offered to non-UMWA
employees which allows participants to contribute up to 17% of their
salaries into various investment alternatives, including AEP common stock.
<PAGE>
An employer matching contribution, equaling one-half of the employees'
contribution to the plan up to a maximum of 3% of the employees' base
salary, is invested in AEP common stock. The employer's annual
contributions totaled $19 million in 1996, $18.8 million in 1995 and $18.6
million in 1994.
UMWA Pension Plans - The coal-mining subsidiaries of OPCo provide UMWA
pension benefits for UMWA employees meeting eligibility requirements.
Benefits are based on age at retirement and years of service. As of June
30, 1996, the UMWA actuary estimates the OPCo coal-mining subsidiaries'
share of the UMWA pension plans' unfunded vested liabilities was
approximately $26 million. In the event the OPCo coal-mining subsidiaries
cease or significantly reduce mining operations or contributions to the
UMWA pension plans, a withdrawal obligation may be triggered for all or a
portion of their share of the unfunded vested liability. Contributions are
based on the number of hours worked, are expensed when paid and totaled
$1.6 million in 1996, $1.4 million in 1995 and $1.6 million in 1994.
Postretirement Benefits Other Than Pensions (OPEB) - The AEP System
provides certain other benefits for retired employees. Substantially all
non-UMWA employees are eligible for postretirement health care and life
insurance if they retire from active service after reaching age 55 and have
at least 10 service years.
Postretirement medical benefits for UMWA employees at affiliated mining
operations who have or will retire after January 1, 1976 are the liability
of the OPCo coal-mining subsidiaries. They are eligible for postretirement
medical benefits if they retire from active service after reaching age 55
and have at least 10 service years. In addition, non-active UMWA employees
will become eligible for postretirement benefits at age 55 if they have had
20 service years.
The funding policy for AEP's plan is to make contributions to an
external Voluntary Employees Beneficiary Association trust fund equal to
the incremental OPEB costs (i.e., the amount that the total postretirement
benefits cost under SFAS 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," exceeds the pay-as-you-go amount).
Contributions were $45.8 million in 1996, $53 million in 1995 and $29.5
million in 1994. In several jurisdictions the utility subsidiaries
deferred the increased OPEB costs resulting from the SFAS 106 required
change from pay-as-you-go to accrual accounting which were not being
recovered in rates. No additional deferrals were made in 1996. At
December 31, 1996 and 1995, $14.5 million and $24.6 million, respectively,
of incremental OPEB costs were deferred.
<PAGE>
Aggregate OPEB costs were computed as follows:
Year Ended December 31,
1996 1995 1994
(In Thousands)
Service Cost $ 15,300 $ 13,500 $16,500
Interest Cost on Projected
Benefit Obligation 53,500 54,900 47,300
Net Amortization of
Transition Obligation 32,300 32,000 31,100
Return on Plan Assets (21,100) (25,400) 900
Net Amortization (Deferral) 9,900 16,800 (6,800)
Net OPEB Costs $ 89,900 $ 91,800 $89,000
OPEB assets and actuarially computed benefit obligations are:
December 31,
1996 1995
(In Thousands)
Fair Market Value of
Plan Assets (a) $ 232,500 $ 165,600
Accumulated Postretirement
Benefit Obligation:
Active Employees Fully
Eligible for Benefits 57,800 59,200
Current Retirees 423,000 398,400
Other Active Employees 245,600 282,400
Total Benefit Obligation 726,400 740,000
Unfunded Benefit Obligation (493,900) (574,400)
Unrecognized Net Loss (Gain) (3,300) 48,500
Unrecognized Net Transition
Obligation Being
Amortized Over 20 Years 448,500 485,600
Accrued Net OPEB Liability $ (48,700) $ (40,300)
(a) Plan assets consist of cash surrender value of life insurance contracts
on certain employees owned by the trust and short-term tax exempt municipal
bonds.
Assumptions used to determine OPEB's funded status were:
December 31,
1996 1995 1994
Discount Rate 7.75% 7.25% 8.5%
Expected Long-Term Rate
of Return on Plan Assets 8.75% 8.75% 8.25%
Initial Medical Cost
Trend Rate 7.5% 8.0% 8.0%
Ultimate Medical Cost
Trend Rate 4.75% 4.5% 5.25%
Medical Cost Trend Rate
Decreases to Ultimate
Rate in Year 2005 2005 2005
Assuming a one percent increase in the medical cost trend rate, the 1996
OPEB cost for all employees, both non-UMWA and UMWA, would increase by $8
<PAGE>
million and the accumulated benefit obligations would increase by $82
million.
Several UMWA health plans pay the postretirement medical benefits for
the Company's UMWA retirees who retired before January 2, 1976 and their
survivors plus retirees and others whose last employer is no longer a
signatory to the UMWA contract or is no longer in business. The UMWA
health plans are funded by payments from current and former UMWA wage
agreement signatories, the 1950 UMWA Pension Plan surplus and the Abandoned
Mine Land Reclamation Fund Surplus. Required annual payments to the UMWA
health funds made by AEP's active and inactive coal-mining subsidiaries
were recognized as expense when paid and totaled $0.9 million in 1996, $2.8
million in 1995 and $3.1 million in 1994.
By law, excess Black Lung Trust funds may be used to pay certain
postretirement medical benefits under one of the UMWA health plans. Excess
AEP Black Lung Trust funds used to reimburse the coal companies totaled
$7.4 million in 1996, $7.9 million in 1995 and $6.9 million in 1994. The
Black Lung Trust had excess funds at December 31, 1996 of approximately $12
million, of which $10.8 million may be used to pay future costs.
8. Fair Value of Financial Instruments:
Nuclear Trust Funds Recorded at Market Value - The trust investments,
reported in other property and investments, are recorded at market value in
accordance with SFAS 115 and consist of long-term tax-exempt municipal
bonds and other securities.
At December 31, 1996 and 1995 the fair values of the trust investments
were $491 million and $434 million, respectively. Accumulated gross
unrealized holding gains were $21.9 million and $19.1 million and
accumulated gross unrealized holding losses were $1.2 million and $1
million at December 31, 1996 and 1995, respectively. The change in market
value in 1996 was a net unrealized holding gain of $2.6 million, in 1995 a
net unrealized holding gain of $24.9 million and in 1994 a net unrealized
holding loss of $27.1 million.
The trust investments' cost basis by security type were:
December 31,
1996 1995
(In Thousands)
Tax-Exempt Bonds $340,290 $336,073
Equity Securities 54,389 24,101
Treasury Bonds 26,958 12,992
Corporate Bonds 7,977 1,971
Cash, Cash Equivalents
and Accrued Interest 40,430 40,356
Total $470,044 $415,493
Proceeds from sales and maturities of securities of $115.3 million
during 1996 resulted in $2.6 million of realized gains and $2.1 million of
realized losses. Proceeds from sales and maturities of securities of $78.2
million during 1995 resulted in $1.4 million of realized gains and $0.3
million of realized losses. During 1994 proceeds from sales and maturities
of securities of $20.1 million resulted in $52,000 of realized gains and
$155,000 of realized losses. The cost of securities for determining
realized gains and losses is original acquisition cost including amortized
premiums and discounts.
At December 31, 1996, the year of maturity of trust fund investments
<PAGE>
other than equity securities, was:
(In Thousands)
1997 $ 56,452
1998 - 2001 120,327
2002 - 2006 163,250
After 2006 75,626
Total $415,655
Other Financial Instruments Recorded at Historical Cost - The carrying
amounts of cash and cash equivalents, accounts receivable, short-term debt,
and accounts payable approximate fair value because of the short-term
maturity of these instruments. Fair values for preferred stock subject to
mandatory redemption were $517 million and $544 million and for long-term
debt were $5.0 billion and $5.3 billion at December 31, 1996 and 1995,
respectively. The carrying amounts on the financial statements for
preferred stock subject to mandatory redemption were $510 million and $523
million and for long-term debt were $4.9 billion and $5.1 billion at
December 31, 1996 and 1995, respectively. Fair values are based on quoted
market prices for the same or similar issues and the current dividend or
interest rates offered for instruments of the same remaining maturities.
The carrying amount of the pre-April 1983 spent nuclear fuel disposal
liability approximates the Company's best estimate of its fair value.
<PAGE>
<TABLE>
9. Federal Income Taxes:
The details of federal income taxes as reported are as follows:
<CAPTION>
Year Ended December 31,
1996 1995 1994
(In Thousands)
Charged (Credited) to Operating Expenses (net):
<S> <C> <C> <C>
Current $375,528 $265,313 $240,655
Deferred (17,008) 22,990 (10,177)
Deferred Investment Tax Credits (16,298) (16,276) (17,079)
Total 342,222 272,027 213,399
Charged (Credited) to Nonoperating Income (net):
Current (5,636) 11,325 (2,907)
Deferred (4,470) (11,074) (5,856)
Deferred Investment Tax Credits (9,510) (9,543) (14,196)
Total (19,616) (9,292) (22,959)
Total Federal Income Tax as Reported $322,606 $262,735 $190,440
The following is a reconciliation of the difference between the amount of federal
incometaxes computed by multiplying book income before federal income taxes by the statutory
tax rate, and the amount of federal income taxes reported.
<CAPTION>
Year Ended December 31,
1996 1995 1994
(In Thousands)
<S> <C> <C> <C>
Income Before Preferred Stock Dividend
Requirements of Subsidiaries $628,856 $584,674 $554,738
Federal Income Taxes 322,606 262,735 190,440
Pre-Tax Book Income $951,462 $847,409 $745,178
Federal Income Tax on Pre-Tax Book
Income at Statutory Rate (35%) $333,012 $296,593 $260,812
Increase (Decrease) in Federal Income
Tax Resulting from the Following Items:
Depreciation 50,537 46,453 31,212
Removal Costs (15,327) (14,640) (13,818)
Corporate Owned Life Insurance (12,009) (25,506) (22,970)
Investment Tax Credits (net) (25,813) (26,179) (31,273)
Federal Income Tax Accrual Adjustments - - (16,100)
Other (7,794) (13,986) (17,423)
Total Federal Income Taxes as Reported $322,606 $262,735 $190,440
Effective Federal Income Tax Rate 33.9% 31.0% 25.6%
</TABLE>
<PAGE>
<TABLE>
The following tables show the elements of the net deferred tax liability and the significant
temporary differences:
<CAPTION> December 31,
1996 1995
(In Thousands)
<S> <C> <C>
Deferred Tax Assets $ 784,349 $ 723,196
Deferred Tax Liabilities (3,427,492) (3,379,847)
Net Deferred Tax Liabilities $(2,643,143) $ 2,656,651)
Property Related Temporary Differences $(2,162,099) $(2,139,387)
Amounts Due From Customers For Future
Federal Income Taxes (428,698) (442,311)
Deferred State Income Taxes (229,429) (183,981)
All Other (net) 177,083 109,028
Total Net Deferred Tax Liabilities $(2,643,143) $(2,656,651)
</TABLE>
The Company has settled with the Internal Revenue Service (IRS) all
issues from the audits of the consolidated federal income tax returns for
the years prior to 1991. Returns for the years 1991 through 1993 are
presently being audited by the IRS. During the audit the IRS agents
requested a ruling from their National Office that certain interest
deductions relating to corporate owned life insurance (COLI) claimed by
the Company for 1991 through 1993 should not be allowed. The Company
filed a brief with the IRS National Office refuting the agents' position.
Although no adjustments have been proposed, a disallowance of the COLI
interest deductions through December 31, 1996 would reduce earnings by
approximately $247 million (including interest). AEP believes it will
ultimately prevail on this issue and will vigorously contest any
adjustments that may be assessed. Accordingly, no provision for this
amount has been recorded. In the opinion of management, the final
settlement of open years will not have a material effect on results of
operations.
<PAGE>
10. Leases:
Leases of property, plant and equipment are for periods up to 35 years
and require payments of related property taxes, maintenance and operating
costs. The majority of the leases have purchase or renewal options and
will be renewed or replaced by other leases.
Lease rentals are primarily charged to operating expenses in
accordance with rate-making treatment. The components of rentals are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
(In Thousands)
<S> <C> <C> <C>
Operating Leases $262,451 $259,877 $233,805
Amortization of Capital Leases 114,050 101,068 79,116
Interest on Capital Leases 28,696 27,542 23,280
Total Rental Payments $405,197 $388,487 $336,201
</TABLE>
<PAGE>
<TABLE>
Properties under capital leases and related obligations on the Consolidated Balance
Sheets are as follows:
<CAPTION> December 31,
1996 1995
(In Thousands)
<S> <C> <C>
ELECTRIC UTILITY PLANT:
Production $ 44,390 $ 44,849
Transmission 6 7
Distribution 14,699 14,753
General:
Nuclear Fuel (net of amortization) 59,681 69,442
Mining Plant and Other 466,797 424,952
Total Electric Utility Plant 585,573 554,003
Accumulated Amortization 200,931 179,952
Net Electric Utility Plant 384,642 374,051
OTHER PROPERTY 33,439 34,536
Accumulated Amortization 3,854 3,994
Net Other Property 29,585 30,542
Net Property under Capital Leases $414,227 $404,593
Obligations under Capital Leases $414,227 $404,593
Less Portion Due Within One Year 89,553 89,692
Noncurrent Capital Lease Liability $324,674 $314,901
Properties under operating leases and related obligations are not included in the
Consolidated Balance Sheets.
<CAPTION>
Future minimum lease rentals, consisted of the following at December 31, 1996:
Noncancelable
Capital Operating
Leases Leases
(In Thousands)
<S> <C> <C>
1997 $ 90,813 $ 240,923
1998 73,817 232,903
1999 63,356 230,994
2000 53,027 229,039
2001 41,634 225,733
Later Years 150,278 3,858,008
Total Future Minimum Lease Rentals 472,925 (a) $5,017,600
Less Estimated Interest Element 118,379
Estimated Present Value of Future
Minimum Lease Rentals 354,546
Unamortized Nuclear Fuel 59,681
Total $414,227
(a) Minimum lease rentals do not include nuclear fuel rentals. The rentals are paid in
proportion to heat produced and carrying charges on the unamortized nuclear fuel balance.
There are no minimum lease payment requirements for leased nuclear fuel.
</TABLE>
<PAGE>
11. SUPPLEMENTARY INFORMATION:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
(In Thousands)
<S> <C> <C> <C>
Purchased Power - Ohio Valley Electric Corp.
(44.2% owned by AEP) $22,156 $10,546 $5,755
Cash was paid for:
Interest (net of capitalized amounts) $373,570 $395,169 $379,361
Income Taxes $404,297 $273,671 $312,233
Noncash Acquisitions under
Capital Leases were $136,988 $106,256 $227,055
<CAPTION>
12. CAPITAL STOCKS AND PAID-IN CAPITAL:
Changes in capital stocks and paid-in capital during the period January 1, 1994 through December 31, 1996 were:
Cumulative Preferred Stocks
Shares of Subsidiaries
Cumulative Not Subject Subject to
Common Stock- Preferred Stocks Paid-in To Mandatory Mandatory
Par Value $6.50(a) of Subsidiaries Common Stock Capital Redemption Redemption(b)
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
January 1, 1994 193,534,992 7,687,768 $1,257,977 $1,624,176 $ 268,240 $ 500,537
Issuances 700,000 900,000 4,550 17,706 - 90,000
Retirements and Other - (351,517) - (1,221) (35,000) (152)
December 31, 1994 194,234,992 8,236,251 1,262,527 1,640,661 233,240 590,385
Issuances 1,400,000 - 9,100 39,607 - -
Retirements and Other - (1,526,500) - (21,744) (85,000) (67,650)
December 31, 1995 195,634,992 6,709,751 1,271,627 1,658,524 148,240 522,735
Issuances 1,600,000 - 10,400 55,061 - -
Retirements and Other - (707,518) - 1,969 (57,917) (12,835)
December 31, 1996 197,234,992 6,002,233 $1,282,027 $1,715,554 $ 90,323 $509,900
(a) Includes 8,999,992 shares of treasury stock.
(b) Including portion due within one year.
</TABLE>
<PAGE>
13. Unaudited Quarterly Financial Information:
<TABLE>
<CAPTION>
Quarterly Periods Ended
1996
March 31 June 30 Sept. 30 Dec. 31
(In Thousands - Except
Per Share Amounts)
<S> <C> <C> <C> <C>
Operating Revenues $1,517,781 $1,400,941 $1,484,422 $1,446,090
Operating Income 292,122 220,625 259,745 235,480
Net Income 180,012 112,666 162,324 132,428
Earnings per Share 0.96 0.60 0.87 0.71
<CAPTION>
Quarterly Periods Ended
1995
March 31 June 30 Sept. 30 Dec. 31
(In Thousands - Except
Per Share Amounts)
<S> <C> <C> <C> <C>
Operating Revenues $1,416,169 $1,305,342 $1,523,390 $1,425,429
Operating Income 257,556 211,284 262,548 233,159
Net Income 147,850 96,478 154,156 131,419
Earnings per Share 0.80 0.52 0.83 0.70
</TABLE>
<PAGE>
<TABLE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
SCHEDULE OF CONSOLIDATED CUMULATIVE PREFERRED STOCKS OF
SUBSIDIARIES
<CAPTION>
December 31, 1996
Call
Price per Shares Shares Amount (in
Share (a) Authorized(b) Outstanding thousands)
<S> <C> <C> <C> <C>
Not Subject to Mandatory Redemption:
4.08% - 4.56% (c) $102-$110 932,403 903,233 $ 90,323
Subject to Mandatory Redemption (d):
5.90% - 5.92% (c) (e) 1,950,000 1,904,000 $190,400
6.02% - 6-7/8% (c) (f) 1,950,000 1,945,000 194,500
7% - 7-7/8% (c) $107.80-$107.88(g) 1,250,000 1,250,000 125,000
Total Subject to Mandatory
Redemption (h) $509,900
______________________________________________________________________________________________________
<CAPTION>
December 31, 1995
Call
Price per Shares Shares Amount (in
Share (a) Authorized Outstanding thousands)
<S> <C> <C> <C> <C>
Not Subject to Mandatory Redemption:
4.08% - 4.56% $102-$110 932,403 932,403 $ 93,240
7.08% - 7.40% $101.85-$102.11 550,000 550,000 55,000
Total Not Subject to Mandatory
Redemption $148,240
Subject to Mandatory Redemption (d):
4.50% $102 19,625 2,348 $ 235
5.90% - 5.92% (e) 1,950,000 1,950,000 195,000
6.02% - 6-7/8% (f) 1,950,000 1,950,000 195,000
7% - 7-7/8% $107.80-$107.88(g) 1,250,000 1,250,000 125,000
9.50% (i) 750,000 75,000 7,500
Total Subject to Mandatory
Redemption (h) 522,735
Less Portion Due Within One Year 7,650
Long-term Portion $515,085
NOTES TO SCHEDULE OF CUMULATIVE PREFERRED STOCKS OF SUBSIDIARIES
(a) At the option of the subsidiary the shares may be redeemed at the call price plus accrued dividends.
The involuntary liquidation preference is $100 per share for all outstanding shares.
(b) As of December 31, 1996 the subsidiaries had 4,708,320, 22,200,000 and 5,801,850 shares of $100, $25
and no par value preferred stock, respectively, that were authorized but unissued.
(c) In January 1997 a tender offer for certain series of preferred stock was announced. In conjunction
with the tender offer a special shareholders meeting is scheduled to be held on February 28, 1997 for the
purpose of considering amendments to the subsidiaries' articles of incorporation to remove certain
capitalization ratio requirements.
(d) With sinking fund. Shares outstanding and related amounts are stated net of applicable retirements
through sinking funds (generally at par) and reacquisitions of shares in anticipation of future
requirements.
(e) Not callable prior to 2003; after that the call price is $100 per share.
(f) Not callable prior to 2000; after that the call price is $100 per share.
(g) Redemption is restricted prior to 1997.
<PAGE>
(h) The sinking fund provisions of the series subject to mandatory redemption aggregate $5,000,000,
$5,000,000, $16,000,000 and $16,000,000 in 1998, 1999, 2000 and 2001, respectively.
(i) On February 1, 1996 the outstanding balance of 75,000 shares was redeemed at $100 per share.
</TABLE>
<PAGE>
<TABLE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
SCHEDULE OF CONSOLIDATED LONG-TERM DEBT OF SUBSIDIARIES
<CAPTION>
Weighted Average
Maturity Interest Rate Interest Rates at December 31, December 31,
December 31, 1996 1996 1995 1996 1995
(in thousands)
<S> <C> <C> <C> <C> <C>
FIRST MORTGAGE BONDS
1996-1999 7.35% 6-1/4%-9.15% 5%-9.15% $ 383,671 $ 496,866
2001-2006 7.10% 6%-8.95% 6%-9.31% 1,511,000 1,530,020
2020-2025 8.07% 7.10%-9.35% 7.10%-9-7/8% 1,276,750 1,473,127
INSTALLMENT PURCHASE CONTRACTS (a)
1998-2002 4.80% 4.10%-7-1/4% 5%-7-1/4% 209,500 209,500
2007-2025 6.45% 5.45%-7-7/8% 5.45%-7-7/8% 756,745 756,745
NOTES PAYABLE (b)
1996-2008 7.31% 5.29%-9.60% 5.29%-10.78% 282,681 221,000
DEBENTURES
1996 - 1999 (c) - - 5-1/8%-7-7/8% - 30,759
2025 - 2026 8.28% 8%-8.72% 8.16%-8.72% 315,000 200,000
OTHER LONG-TERM DEBT (d) 182,943 172,403
Unamortized Discount (net) (34,580) (33,144)
Total Long-term Debt
Outstanding (e) 4,883,710 5,057,276
Less Portion Due Within One Year 86,942 136,947
Long-term Portion $4,796,768 $4,920,329
NOTES TO SCHEDULE OF CONSOLIDATED LONG-TERM DEBT OF SUBSIDIARIES
(a) For certain series of installment purchase contracts interest rates are subject to periodic adjustment.
Certain series will be purchased on demand at periodic interest-adjustment dates. Letters of credit from banks
and standby bond purchase agreements support certain series.
(b) Notes payable represent outstanding promissory notes issued under term loan agreements with a number of
banks and other financial institutions. At expiration all notes then issued and outstanding are due and
payable. Interest rates are both fixed and variable. Variable rates generally relate to specified short-term
interest rates.
(c) All sinking fund debentures were reacquired on March 1, 1996.
(d) Other long-term debt consists primarily of a liability along with accrued interest for disposal of spent
nuclear fuel (see Note 4 of the Notes to Consolidated Financial Statements).
(e) Long-term debt outstanding at December 31, 1996 is payable as follows:
Principal Amount (in thousands)
1997 $ 86,942
1998 224,274
1999 210,678
2000 183,652
2001 252,575
Later Years 3,960,169
Total $4,918,290
</TABLE>
<PAGE>
Management's Responsibility
The management of American Electric Power Company, Inc. is responsible
for the integrity and objectivity of the information and representations in
this annual report, including the consolidated financial statements. These
statements have been prepared in conformity with generally accepted
accounting principles, using informed estimates where appropriate, to
reflect the Company's financial condition and results of operations. The
information in other sections of the annual report is consistent with these
statements.
The Company's Board of Directors has oversight responsibilities for
determining that management has fulfilled its obligation in the preparation
of the financial statements and in the ongoing examination of the Company's
established internal control structure over financial reporting. The Audit
Committee, which consists solely of outside directors and which reports
directly to the Board of Directors, meets regularly with management,
Deloitte & Touche LLP - Certified Public Accountants and the Company's
internal audit staff to discuss accounting, auditing and reporting matters.
To ensure auditor independence, both Deloitte & Touche LLP and the internal
audit staff have unrestricted access to the Audit Committee.
The financial statements have been audited by Deloitte & Touche LLP,
whose report appears on the next page. The auditors provide an objective,
independent review as to management's discharge of its responsibilities
insofar as they relate to the fairness of the Company's reported financial
condition and results of operations. Their audit includes procedures
believed by them to provide reasonable assurance that the financial
statements are free of material misstatement and includes a review of the
Company's internal control structure over financial reporting.
<PAGE>
Independent Auditors' Report
To the Shareholders and Board of Directors
of American Electric Power Company, Inc.:
We have audited the accompanying consolidated balance sheets of American
Electric Power Company, Inc. and its subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of income, retained
earnings, and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of American Electric Power
Company, Inc. and its subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Columbus, Ohio
February 25, 1997
<PAGE>
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/ X / PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE.
THE PROXIES ARE DIRECTED TO VOTE AS SPECIFIED BELOW AND IN THEIR DISCRETION ON
ALL OTHER MATTERS COMING BEFORE THE MEETING. IF NO DIRECTION IS MADE, THE
PROXIES WILL VOTE FOR ALL NOMINEES LISTED ON THE REVERSE SIDE AND FOR PROPOSALS
2, 3 AND 4.
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR all nominees for election as
directors and FOR proposals 2, 3 and 4.
- --------------------------------------------------------------------------------
FOR WITHHELD
1. ELECTION OF DIRECTORS / / / /
(SEE REVERSE).
For, except vote withheld from the following nominee(s):
_______________________________________________________
FOR AGAINST ABSTAIN
2. APPROVAL OF AUDITORS. / / / / / /
3. DEFERRED COMPENSATION AND / / / / / /
STOCK PLAN FOR DIRECTORS.
FOR AGAINST ABSTAIN
4. REDUCE MINIMUM NUMBER OF / / / / / /
DIRECTORS FROM 12 TO NINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SPECIAL ATTENTION
Mark here if you have written a comment on reverse. / /
ANNUAL REPORT
Mark here to discontinue annual report mailing for / /
this account (for multiple-account holders only).
ANNUAL MEETING
Mark here if you plan to attend the annual meeting. / /
- --------------------------------------------------------------------------------
Please sign exactly as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.
__________________________________________________________________________, 1997
__________________________________________________________________________, 1997
SIGNATURE(S) DATE
- --------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
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ADMISSION TICKET
---------------------------------------------------------------------------
ANNUAL MEETING OF SHAREHOLDERS
Wednesday, April 23, 1997 - 9:30 a.m.
Grand Ballroom
MeadowView Conference Resort & Convention Center
1901 Meadowview Parkway
Kingsport, Tennessee
---------------------------------------------------------------------------
AGENDA
- Introduction and Welcome
- Election of Directors
- Ratification of Auditors
- Deferred Compensation and Stock Plan for Non-Employee Directors
- Amendments to Restated Certificate of Incorporation and By-Laws to
Reduce Minimum Required Number of Directors from 12 to Nine
- Chairman's Report
- Comments and Questions from Shareholders
- --------------------------------------------------------------------------------
IF YOU PLAN TO ATTEND THE 1997 ANNUAL MEETING OF SHAREHOLDERS, PLEASE MARK THE
"ANNUAL MEETING" BOX ON THE PROXY CARD ABOVE. PRESENT THIS TICKET FOR
ADMITTANCE OF SHAREHOLDER(S) NAMED ABOVE AND A GUEST.
SEE REVERSE FOR MAP OF AREA.
- --------------------------------------------------------------------------------
[SOY INK]
[RECYCLED PAPER]
<PAGE>
AMERICAN ELECTRIC POWER COMPANY, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING TO BE HELD APRIL 23, 1997
P
R
O
X
Y
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The undersigned appoints E. Linn Draper, Jr., Peter J. DeMaria and Gerald P.
Maloney, and each of them, acting by a majority if more than one be present,
attorneys and proxies of the undersigned, with power of substitution, to
represent the undersigned at the annual meeting of shareholders of American
Electric Power Company, Inc. to be held on April 23, 1997, and at any
adjournments thereof, and to vote all shares of Common Stock of the Company
which the undersigned is entitled to vote on all matters coming before said
meeting.
TRUSTEE'S AUTHORIZATION. The undersigned authorizes Fidelity Management Trust
Company to vote all shares of Common Stock of the Company credited to the
undersigned's account under the American Electric Power System Employees Savings
Plan at the annual meeting in accordance with the instructions on the reverse
side.
Election of Directors, Nominees: P.J. DeMaria, E.L. Draper, Jr., R.M. Duncan,
R.W. Fri, A.G. Hansen, L.A. Hudson, Jr.,
L.J. Kujawa, G.P. Maloney, A.E. Peyton,
D.G. Smith, L.G. Stuntz, M. Tanenbaum.
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES (SEE
REVERSE SIDE), BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN ACCORDANCE
WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. THE PROXIES CANNOT VOTE YOUR
SHARES UNLESS YOU SIGN AND RETURN THIS CARD.
- --------------------------------------------------------------------------------
Comments:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(If you have written in the above space, please mark the "Special Attention" box
on the other side of this card.)
- --------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
[MAP]
Directly off Interstate 181,
MeadowView Exit 52,
MeadowView Conference
Resort & Convention Center
Free Parking Available
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