Notice of 2003 Annual Meeting Proxy Statement
March 24, 2003
This years annual meeting of shareholders will be held at The Ohio State Universitys Fawcett Center, 2400 Olentangy River Road, Columbus, Ohio, on Wednesday, April 23, 2003, at 9:30 a.m.
Your Board of Directors and I cordially invite you to attend. Due to increased security procedures at the universitys facilities, you should plan to arrive early. Please note that space limitations make it necessary to limit attendance to shareholders and one guest. Admission to the meeting will be on a first-come, first-served basis. Shareholders holding stock in brokerage accounts need to bring a copy of a brokerage statement reflecting stock ownership as of the record date.
During the course of the meeting there will be the usual time for discussion of the items on the agenda and for questions regarding AEPs affairs. Directors and officers will be available to talk individually with shareholders before and after the meeting.
Your vote is very important. Shareholders of record can vote in any one of the following three ways:
If your shares are held in the name of a bank, broker or other holder of record, you will receive instructions from the holder of record that you must follow in order for you to vote your shares.
If you plan to attend the meeting and are a shareholder of record, please mark the Annual Meeting box on your proxy card or, if you are voting by telephone or Internet, follow the prompts when you vote. 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 on March 4 which will enable you to gain admittance to the meeting.
NOTICE OF 2003 ANNUAL MEETING
American Electric Power Company,
Our annual meeting of shareholders also will be webcast at http://www.aep.com/go/webcasts at 9:30 a.m. on April 23, 2003.
March 24, 2003
Proxy and Voting Information
THIS PROXY STATEMENT and the accompanying proxy card are to be mailed to shareholders, commencing on or about March 24, 2003, 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, 2003 in Columbus, Ohio.
Who Can Vote. Only the holders of shares of Common Stock at the close of business on March 4, 2003 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 that date, there were 394,993,420 shares of AEP Common Stock, $6.50 par value, outstanding.
How You Can Vote. Shareholders of record can give proxies by (i) mailing their signed proxy cards, (ii) calling a toll-free telephone number or (iii) using the Internet. The telephone and Internet voting procedures are designed to authenticate shareholders identities, to allow shareholders to give their voting instructions and to confirm that shareholders instructions have been properly recorded. Instructions for shareholders of record who wish to use the telephone or Internet voting procedures are set forth on the enclosed proxy card.
When proxies are returned, the shares represented thereby will be voted by the persons named on the proxy card or by their substitutes in accordance with shareholders directions. 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. The proxies 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 4, 2003.
Revocation of Proxies. 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.
How Votes are Counted. 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. The determination by the shareholders of the shareholder proposals 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. Unvoted shares are termed non-votes when a nominee holding shares for beneficial owners has not received instructions from the beneficial owner and may not exercise discretionary voting power on certain matters, but with respect to other matters may vote pursuant to discretionary authority or beneficial owner instructions.
Your Vote is Confidential. It is AEPs policy that shareholders be provided privacy in voting. All proxies, voting instructions and ballots, which identify shareholders, are held confidential, except as may be necessary to meet any applicable legal requirements. We direct proxies to an independent third-party tabulator, who receives, inspects, and tabulates them. Voted proxies and ballots are not seen by nor reported to AEP 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.
Multiple Copies of Annual Report or Proxy Statement to Shareholders. Securities and Exchange Commission rules provide that more than one annual report or proxy statement need not be sent to the same address. This practice is commonly called householding and is intended to eliminate duplicate mailings of shareholder documents. Mailing of your annual report or proxy statement is being householded indefinitely unless you instruct us otherwise. If more than one annual report or proxy statement is being sent to your address, at your request, mailing of the duplicate copy to the account you select will be discontinued. If you wish to resume or discontinue receiving separate annual reports or proxy statements at the same address, you may call our transfer agent, EquiServe Trust Company, N.A., at 800-328-6955 or write to them at P.O. Box 2500, Jersey City, NJ 07303-2500. The change will be effective 30 days after receipt. We will deliver promptly upon oral or written request a separate copy of the annual report or proxy statement to a shareholder at a shared address. To receive a separate copy of the annual report or proxy statement, contact AEP Shareholder Direct at 800-551-1AEP (1237) or write to AEP, attention: Financial Reporting, at 1 Riverside Plaza, Columbus, OH 43215.
1. Election of Directors
THIRTEEN 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. AEPs By-Laws provide that the number of directors of AEP shall be such number, not less than 9 nor more than 17, as shall be determined from time to time by resolution of AEPs Board of Directors.
The 13 nominees named on pages 3-7 were selected by the Board of Directors on the recommendation of the Committee on Directors and Corporate Governance of the Board. The proxies named on the proxy card or their substitutes will vote for the Boards nominees, unless instructed otherwise. Shareholders may withhold authority to vote for any or all of such nominees on the proxy card. All of the Boards nominees were elected by the shareholders at the 2002 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 or the number of directors may be reduced accordingly.
Cumulative Voting. 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 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.
Biographical Information. 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 AEPs Common Stock, options exercisable within 60 days and stock-based units beneficially owned by each of them appears on page 29.
Nominees For Director
Dr. Draper and Mr. Shockley are directors of certain subsidiaries of AEP with one or more classes of publicly held preferred stock or debt securities and other subsidiaries of AEP.
AEPs Board of Directors and Committees
UNDER NEW YORK LAW, AEP 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 2002, the Board held eight regular and five special meetings.
The Board has seven standing committees and the table below provides membership and meeting information for each of them. The functions of the committees are described in the paragraphs following the table.
During 2002, 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.
The Company regularly monitors developments in the area of corporate governance. In July 2002, Congress passed the Sarbanes-Oxley Act which, among other things, sets forth a number of new corporate governance standards and disclosure requirements. When effective, many of the requirements may be subject to transitional provisions. In anticipation of the final effectiveness of these requirements, the Board of Directors and several of its Committees have initiated actions to pre-comply with certain rules. These actions include (i) adopting an amended Audit Committee Charter, which reflects certain changes required under the Sarbanes-Oxley Act; (ii) adopting a set of Corporate Governance Principles; (iii) drafting amended charters for the Human Resources Committee and the Directors and Corporate Governance Committee; and (iv) conducting preliminary evaluations of the independence of each member of the Board. A copy of the new Audit Committee Charter is attached hereto as Exhibit A. A copy of the Corporate Governance Principles is available on the Companys website at www.AEP.com.
The Company, the Board and the Directors and Corporate Governance Committee will continue to monitor the progress of pending corporate governance legislation and related rule-making initiatives and will continue to evaluate Committee charters, duties and responsibilities with the intention of maintaining full compliance.
The Committee on Directors and Corporate Governance is responsible for:
The Committee on Directors and Corporate Governance 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 and Corporate Governance 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 Policy Committee is responsible for examining AEPs policies on major public issues affecting the AEP System, including environmental, industry change and other matters, as well as established System policies which affect the relationship of AEP 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 AEP management on any such policy matters presented to the Committee for consideration and study.
The Executive Committee 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 Finance Committee monitors and reports to the Board with respect to the capital requirements and financing plans and programs of AEP and its subsidiaries including, among other things, reviewing and making recommendations as it considers appropriate concerning the short and long-term financing plans and programs of AEP and its subsidiaries.
The Human Resources Committee is responsible for ensuring that the executive officers and other key employees of the Company and its subsidiaries are fairly and appropriately compensated in accordance with the Companys compensation strategy, internal equity considerations and competitive practices. The Committee also communicates the Companys compensation policies to shareholders (as required by the Securities and Exchange Commission and other regulatory bodies) and plays an oversight role in employee compensation, employee benefit programs, safety, workforce diversity, senior management succession planning, the annual merit budget and related issues.
The Nuclear Oversight Committee is responsible for overseeing and reporting to the Board with respect to the management and operation of AEPs nuclear generation.
Audit Committee Disclosure
THE AUDIT COMMITTEE of the Board is responsible for, among other things, the appointment of the independent auditors for the Company; reviewing with the auditors the plan and scope of the audit and audit fees; the monitoring of the adequacy of reporting and internal controls and meeting periodically with internal and independent auditors. In February 2003 the Board approved and adopted an amended Audit Committee Charter. A more detailed discussion of the purposes, duties and responsibilities of the Audit Committee is found in the Audit Committee Charter, which is attached to this Proxy Statement as Exhibit A.
Consistent with the rules of the New York Stock Exchange, all members of the Audit Committee are independent. The Board of Directors has determined that Mr. Kujawa is an audit committee financial expert as defined by the Securities and Exchange Commission.
Audit Committee Report
THE AUDIT COMMITTEE reviews AEPs financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process, including the system of internal controls.
In this context, the Committee has met and held discussions with management and the independent auditors. Management represented to the Committee that AEPs consolidated financial statements were prepared in accordance with generally accepted accounting principles, and the Committee has reviewed and discussed the consolidated financial statements with management and the independent auditors. The Committee discussed with the independent auditors matters required to be discussed by Statement on Auditing Standards No. 61, as amended (Communication With Audit Committees).
In addition, the Committee has discussed with the independent auditors, the auditors independence from AEP and its management, including the matters in the written disclosures required by the Independence Standards Board Standard No. 1 (Independence Discussions With Audit Committees).
In reliance on the reviews and discussions referred to above, the Committee recommended to the Board of Directors, and the Board has approved, that the audited financial statements be included in AEPs Annual Report on Form 10-K for the year ended December 31, 2002, for filing with the Securities and Exchange Commission.
Audit Committee Members
Directors Compensation and Stock Ownership Guidelines
Annual Retainers and Meeting Fees. Directors who are officers of AEP or employees of any of its subsidiaries do not receive any compensation, other than their regular salaries and the accident insurance coverage described below, for attending meetings of AEPs Board of Directors. The other members of the Board receive an annual retainer of $35,000 for their services, an additional annual retainer of $5,000 for each Committee that they chair (except for the Chairman of the Audit Committee, who receives an annual retainer of $15,000), a fee of $1,200 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 $1,200 per day for any inspection trip or conference. Members of the Audit Committee (other than the Chairman) also receive an annual retainer of $10,000.
Deferred Compensation and Stock Plan. The Deferred Compensation and Stock Plan for Non-Employee Directors permits non-employee directors to choose to receive up to 100 percent of their annual Board retainer in shares of AEP Common Stock and/or units that are equivalent in value to shares of Common Stock (Stock Units), deferring receipt by the non-employee director until termination of service or for a period that results in payment commencing not later than five years thereafter. AEP Common Stock is distributed and/or Stock Units are credited to directors, as the case may be, when the retainer is payable, and are based on the closing price of the Common Stock on the payment date. Amounts equivalent to cash dividends on the Stock Units accrue as additional Stock Units. Payment of Stock Units to a director from deferrals of the retainer and dividend credits is made in cash or AEP Common Stock, or a combination of both, as elected by the director.
Stock Unit Accumulation Plan. The Stock Unit Accumulation Plan for Non-Employee Directors annually awards 1,200 Stock Units to each non-employee director as of the first day of the month in which the non-employee director becomes a member of the Board. Amounts equivalent to cash dividends on the Stock Units accrue as additional Stock Units. Stock Units are paid to the director in cash 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.
Insurance. AEP maintains a group 24-hour accident insurance policy to provide a $1,000,000 accidental death benefit for each director. The current policy, effective September 1, 2001 through September 1, 2004, has a premium of $31,050. In addition, AEP pays each director (excluding officers of AEP 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 ($622 for 2002).
Central and South West Corporation Programs. AEP is continuing a memorial gift program for former CSW directors and executive officers who had been previously participating in this program. The five former CSW directors who are members of AEPs Board are participants. Under this program, AEP makes donations in a directors name to up to three charitable organizations in an aggregate amount of up to $500,000, payable by AEP upon such persons death. AEP maintains corporate-owned life insurance policies to support the program. The annual premiums paid by AEP are based on pooled risks and averaged $2,497 per participant for 2002.
Stock Ownership Guidelines. AEPs Board of Directors considers stock ownership in AEP by management to be of great importance. Such ownership enhances managements commitment to the future of AEP and further aligns managements interests with those of AEPs shareholders. In keeping with this philosophy, the Board has 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, with such ownership to be acquired by the end of the third year of service. All non-employee directors have met their stock ownership guidelines. For further information as to the guidelines for AEPs executive officers, see the Board Human Resources Committee Report on Executive Compensation below under the caption Stock Ownership Guidelines.
THE DIRECTORS and officers of AEP 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, effective January 1, 2003 through December 31, 2003, is provided by: Associated Electric & Gas Insurance Services, Energy Insurance Mutual, Zurich American Insurance Company, Zurich Specialties London (UK) Ltd., National Union Fire Insurance Company of Pittsburgh, PA, Federal Insurance Company, Starr Excess International and Oil Casualty Insurance Limited. The total cost of this insurance is $18,327,168.
Fiduciary liability insurance provides coverage for AEP 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 Associated Electric & Gas Insurance Services, Federal Insurance Company and Zurich American Insurance Company, was renewed, effective July 1, 2000 through June 30, 2003, for a cost of $355,350.
2. First Shareholder Proposal
A SHAREHOLDER, First Investors Trust, 370 Seventeenth Street, Denver, Colorado 80202, has informed the Company that it intends to present the proposal set forth below at the meeting. First Investors Trust states that it is the beneficial owner of 22,276 shares of our Common Stock.
Resolved, that the shareholders of American Electric Power (the Company) request that the Board of Directors adopt an executive compensation policy that all future stock option grants to senior executives shall be performance-based. For the purposes of this resolution, a stock option is performance-based if the option exercise price is indexed or linked to an industry peer group stock performance index so that the options have value only to the extent that the Companys stock price performance exceeds the peer group performance level.
Statement of Support: As long-term shareholders of the Company, we support executive compensation policies and practices that provide challenging performance objectives and serve to motivate executives to achieve long-term corporate value maximization goals. While salaries and bonuses compensate management for short-term results, the grant of stock and stock options has become the primary vehicle for focusing management on achieving long-term results. Unfortunately, stock option grants can and do often provide levels of compensation well beyond those merited. It has become abundantly clear that stock option grants without specific performance-based targets often reward executives for stock price increases due solely to a general stock market rise, rather than to extraordinary company performance.
Indexed stock options are options whose exercise price moves with an appropriate peer group index composed of a companys primary competitors. The resolution requests that the Companys Board ensure that future senior executive stock option plans link the options exercise price to an industry performance index associated with a peer group of companies selected by the Board, such as those companies used in the Companys proxy statement to compare 5 year stock price performance.
Implementing an indexed stock option plan would mean that our Companys participating executives would receive payouts only if the Companys stock price performance was better then that of the peer group average. By tying the exercise price to a market index, indexed options reward participating executives for outperforming the competition. Indexed options would have value when our Companys stock price rises in excess of its peer group average or declines less than its peer group average stock price decline. By downwardly adjusting the exercise price of the option during a downturn in the industry, indexed options remove pressure to reprice stock options. In short, superior performance would be rewarded.
At present, stock options granted by the Company are not indexed to peer group performance standards. As long-term owners, we feel strongly that our Company would benefit from the implementation of a stock option program that rewarded superior long-term corporate performance. In response to strong negative public and shareholder reactions to the excessive financial rewards provided executives by non-performance based option plans, a growing number of shareholder organizations, executive compensation experts, and companies are supporting the implementation of performance-based stock option plans such as that advocated in this resolution. We urge your support for this important governance reform.
Your Board of Directors recommends a vote AGAINST the preceding shareholder proposal for the following reasons:
The shareholder proposal requests that the Board of the Company adopt an executive compensation policy that all future stock option grants to senior executives be performance-based. According to the proposal, a stock option is performance-based if the option exercise price is indexed or linked to an industry peer group stock performance index so that options have value only to the extent that the Companys stock price performance exceeds the peer group performance level. The Board believes that it is appropriate and necessary for the Human Resources Committee of the Board to retain the flexibility to fashion stock option grants in a manner it believes to be necessary to attract and retain the senior executives essential to our future success. AEP grants all stock based compensation under the American Electric Power System 2000 Long-Term Incentive Plan, which was approved by shareholders at the 2000 annual meeting and all stock options granted by AEP are already performance-based because the exercise price equals or exceeds the fair market value of AEPs Common Stock at the time of grant. Therefore, no economic benefit is conferred to the optionee unless the stock increases in value subsequent to the grant date. As such, AEP stock option grants already motivate executives to maximize long-term corporate value because executive compensation is aligned with the interest of shareholders. To go further by compelling the Company to grant options with conditions or other terms (such as those contained in the shareholder proposal) that are inconsistent with competitive compensation practices could place the Company at a substantial disadvantage in attracting and retaining highly qualified senior executives.
In addition to the competitive disadvantages of proponents proposal, implementing the shareholder proposal would also have negative tax consequences. In the event that the shareholder proposal resulted in a downward adjustment to the option price, implementation of the shareholder proposal would disqualify the Companys stock options as performance-based compensation under Internal Revenue Code regulations, thereby limiting the deductibility of compensation attributable to options to the ultimate disadvantage of shareholders. The Internal Revenue Code §162(m) limits the deductibility of compensation expense over $1 million paid to specified executives. Specific performance-based compensation meeting IRS criteria is excluded from the calculation to determine whether the $1 million cap has been exceeded. If the exercise price of a stock option were less than the fair market value of the stock on the date of grant of the option, any compensation arising from the exercise would not qualify as performance-based compensation and, thus, would be includable as compensation subject to the $1 million limit on deductibility.
There also may be serious accounting consequences for the Companys financial reporting in implementing the shareholder proposal. Accounting Principles Board Opinion No. 25, FAS 123 and FASB Interpretation No. 44 provide the accounting and financial reporting guidance relative to stock options. The measurement date for determining compensation costs for stock options is the first date on which are known both (1) the number of shares that an individual employee is entitled to receive and (2) the stock option price. If executives stock options were indexed in accordance with the shareholder proposal, the Company would have to re-measure the compensation cost related to these stock options at each quarterly financial reporting period and recognize that expense over the period the employee performs the related services. Accordingly, if the shareholder proposal were adopted, the additional compensation expense would negatively impact the Companys reported financial performance as compared to other companies.
In summary, the Board believes that implementation of this shareholder proposal could have serious competitive, tax and financial consequences to the Company and that the Company already achieves an appropriate mix of performance based incentive compensation through its current compensation program.
Accordingly, the Board of Directors recommends a vote AGAINST the above proposal.
Vote Required. Approval of this proposal requires the affirmative vote of holders of a majority of the shares of Common Stock present in person or by proxy at the meeting.
3. Second Shareholder Proposal
TWO SHAREHOLDERS, Connecticut Retirement Plans & Trust Funds, 55 Elm Street, Hartford, Connecticut 06106, and the Christian Brothers Investment Services, Inc., 90 Park Avenue, New York, New York 10016, have informed the Company that they intend to present jointly the proposal set forth below at the meeting. The Connecticut Retirement Plans & Trust Funds states that it is the beneficial owner of 161,670 shares of our Common Stock. The Christian Brothers Investment Services, Inc. states that it is the beneficial owner of 119,940 shares of our Common Stock.
In 2000 power plants owned and operated by American Electric Power Corporation emitted more carbon dioxide, sulfur dioxide, nitrogen oxide and mercury into the atmosphere of the United States than the electric generating power plants owned by any other electric utility company.
In 2001 The Intergovernmental Panel on Climate Change concluded that there is new and stronger evidence that most of the warming observed over the last 50 years is attributable to human activities.
The United States governments Climate Action Report 2002, concluded that global climate change might harm the country. The report highlights risks to coastal communities in the Southeast due to sea level rise, water shortages throughout the West, and increases in the heat index and frequency of heat waves.
In July 2002, eleven state Attorneys General wrote President Bush, outlining their concern over the U.S. Climate Action Reports failure to recommend mandatory reductions of greenhouse gas emissions. They declared that States are being forced to fill the federal regulatory void through state-by-state regulation and litigation, increasing the ultimate costs of addressing climate change. They urged a reconsideration of his regulatory position, and adoption of a comprehensive policy that will protect both our citizens and our economy.
U.S. power plants are responsible for about two-thirds of the countrys sulfur dioxide emissions, one-quarter of its nitrogen oxides emissions, one-third of its mercury emissions, approximately 40 percent of its carbon dioxide emissions, and 10 percent of global carbon dioxide emissions.
Scientific studies show that air pollution from U.S. power plants causes tens of thousands of premature deaths and hospitalizations, hundreds of thousands of asthma attacks, and several million lost workdays nationwide every year from pollution-related ailments.
Standards for carbon dioxide emissions and other pollutants are emerging across multiple fronts. Ninety-seven countries have ratified the Kyoto Protocol, requiring carbon dioxide reductions. Massachusetts and New Hampshire have enacted legislation capping power plants emissions of carbon dioxide and other air pollutants.
We believe that taking early action on reducing emissions and preparing for standards could better position companies over their peers, including being first to market with new high-efficiency and low-emission technologies. Changing consumer preferences, particularly those relating to clean energy, should also be considered.
Inaction and opposition to emissions control efforts could expose companies to reputation and brand damage, and regulatory and litigation risk.
RESOLVED: Shareholders request that the Board of Directors report (at reasonable cost and omitting proprietary information) by August 2003 to shareholders on (a) the economic risks associated with the companys past, present and future emissions of carbon dioxide, sulfur dioxide, nitrogen oxide and mercury emissions, and the public stance of the company regarding efforts to reduce these emissions and (b) the economic benefits of committing to a substantial reduction of those emissions related to its current business activities (i.e. potential improvement in competitiveness and profitability.)
Your Board of Directors recommends a vote AGAINST the preceding shareholder proposal for the following reasons:
As you know, AEP is the largest generator of electricity in the country. We utilize indigenous energy resources, largely coal and natural gas, to produce a reliable supply of affordable power for our customers. The size of our generation fleet and our use of fossil fuels is the primary reason why the Company is a large emitter of air emissions.
For many years, AEP has publicly disclosed its emissions of sulfur dioxide (SO2), nitrogen oxides (NOx), mercury (Hg) and carbon dioxide (CO2). From 1994 to 2001, our emissions of SO2 and NOx have fallen steadily, 35% and 30% respectively, as we have complied, at considerable expense, with various statutory and regulatory requirements. As a result of pollution controls installed to reduce SO2 and NOx emissions, our Hg emissions also have declined. The Company remains in full compliance with applicable emission limitations, many of which support attainment of national ambient air quality standards that are explicitly designed to protect public health and the environment, with an extra margin for safety. These emissions will decline substantially over the next decade as the Company complies with existing and new regulations.
The resolution relies on studies that claim serious human health impacts from power plant air emissions. There are other studies that have not found an association between power plant air emissions and human health effects. This contrary research is newer, more comprehensive and, unlike the cited research, has been subjected to the rigors of the scientific peer-review process. Importantly, the conclusions reached by this research have been validated by other studies. Given the benefits to the economy and the standard of living of the nations citizens from reliable, low-cost electricity, it is critical that the government base future environmental control policies on sound science.
AEP believes that it has already addressed the issue of the economic risks associated with its emissions, and the public stance taken on proposed policies, in public communications and financial reports such as AEPs website, bi-annual environmental performance report and its Annual Report to Shareholders. The economic risks associated with past and present air emissions have been minimized or eliminated by the Companys compliance with existing laws and regulations. The Company fully intends to comply with future legal requirements pertaining to these emissions. The cost of compliance with future requirements that are still in development could be considerable, and the Company has factored those economic risks into its business strategy and disclosed the potential costs of compliance with specific regulations in its financial reports.
The Company advocates enactment of comprehensive legislation to reduce emissions of SO2, NOx and Hg so that compliance planning can be coordinated and collateral emission reductions maximized. Optimally, such legislation would establish reasonable emission reduction targets and compliance timetables based on sound science, utilize nationwide cap-and-trade programs for achieving compliance as cost-effectively as possible, protect fuel diversity and preserve the reliability of the nations electric supply. With respect to CO2 emissions, the Company for many years has been a leader in pursuing voluntary actions to reduce, avoid and sequester greenhouse gas (GHG) emissions. The Company recently expanded on its commitment in this area by joining the Chicago Climate Exchange, a pilot GHG emission reduction and trading program, under which the Company is obligated to reduce or offset 18 million tons of CO2 emissions from 2003-2006.
Based on current emission reduction technologies, there are no direct economic benefits to shareholders from existing or future emission reduction programs. Substantial reductions in emissions can only be accomplished at a capital cost of billions of dollars to retrofit existing plants with advanced pollution control technology and/or replace a significant percent of capacity with new generation that emits lower levels of these emissions. The Companys ability to recover these costs through the price of electricity charged to customers is subject to public utility commission approval in states that regulate generation, and complete recovery is not assured. In states that have deregulated generation costs, market prices would dictate the extent to which recovery is achieved. If a substantial portion of these costs is not recovered from customers, there could be a material adverse impact on shareholders.
Accordingly, your Board of Directors recommends a vote AGAINST this proposal.
Vote Required. Approval of this proposal requires the affirmative vote of holders of a majority of the shares of Common Stock present in person or by proxy at the meeting.
THE BOARD OF DIRECTORS does not intend to present to the meeting any business other than the election of directors.
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.
THE FOLLOWING TABLE shows for 2002, 2001 and 2000 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 AEP at December 31, 2002.
Aggregated Option Exercises in 2002 and Year-end Option Values
Long-Term Incentive Plans Awards In 2002
The performance share units set forth in the table below were awarded in 2002 pursuant to the Companys 2000 Long-Term Incentive Plan. Performance share units are equivalent to shares of AEP Common Stock. Dividends are reinvested at the closing price of the AEP Common Stock on the dividend payment date and produce additional performance share units for the same performance period. The value of performance share unit awards is dependent on the Companys total shareholder return for the 3-year performance period relative to the S&P electric utilities, the market price of AEP Common Stock at the end of the performance period, the value of dividends paid during the performance period and the AEP Common Stock price on each dividend payment date. The number of performance share units earned can vary between 0% and 200% of the initial award plus reinvested dividends.
The number of common stock equivalent units that may be earned at threshold, target and maximum performance levels, excluding any reinvested dividends, is shown in the table below. The 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 20%, 100% and 200%, respectively, of the performance share unit awards. No payment will be made for performance below the threshold.
Deferral of earned performance share units into phantom stock units (equivalent to shares of AEP Common Stock) is mandatory until the officer has met his or her stock ownership target discussed in the Human Resources Committee Report. Once this target is met, officers may elect to continue to defer earned performance share units or to receive subsequently earned awards in cash and/or Common Stock.
AEP maintains qualified and nonqualified defined benefit ERISA pension plans for eligible employees. The tax-qualified plans are the American Electric Power System Retirement Plan (AEP Retirement Plan) and the Central and South West Corporation Cash Balance Retirement Plan (CSW Cash Balance Plan). The nonqualified plans are the American Electric Power System Excess Benefit Plan (AEP Excess Benefit Plan) (together with the AEP Retirement Plan, the AEP Plans) and the Central and South West Corporation Special Executive Retirement Plan (CSW SERP) (together with the CSW Cash Balance Plan, the CSW Plans), each of which provides (i) benefits that cannot be payable under the respective tax-qualified plans because of maximum limitations imposed on such plans by the Internal Revenue Code and (ii) benefits pursuant to individual agreements with certain AEP employees. The CSW Plans continue as separate plans for those AEP System employees who were participants in the CSW Cash Balance Plan as of December 31, 2000. Each of the executive officers named in the Summary Compensation Table (other than Mr. Shockley) participates in the AEP Plans. Mr. Shockley participates in the CSW Plans.
The benefit formula generally used for all plan participants (including the executive officers named in the Summary Compensation Table) to calculate benefit additions under the pension plans is a cash balance formula. When the cash balance formula was added to each plan, an opening balance was established for employees then participating under each plans prior benefit formula (as further described below), using a number of factors as set forth in the appropriate plan. Under the cash balance formula, each participant has an account established (for record keeping purposes only) to which dollar amount credits are allocated each year based on a percentage of the participants eligible pay not in excess of $1,000,000. The applicable percentage is determined by the participants age and years of vesting service as of December 31 of each year (or as of the participants termination date, if earlier). The following table shows the applicable percentage used to determine the annual dollar amount credits based on the sum of age and years of service indicated:
All dollar amount balances in the cash balance accounts of participants earn a fixed rate of interest that is also credited annually. The interest rate for a particular year is the average rate of return of the 30-year Treasury Rate for November of the prior year. For 2002, the interest rate was 5.12%. Interest continues to be credited as long as the participants balance remains in the plan.
Under the cash balance formula, an amount equal to the vested balance (including tax-qualified and nonqualified benefits) then credited to the account is payable to the participant in the form of an immediate or deferred lump-sum or an annuity or, with respect to the nonqualified benefits, in installments. Benefits (both from the tax-qualified plans and the nonqualified plans) under the cash balance formula are not subject to reduction for Social Security benefits or other offset amounts. The estimated annual benefit that would be payable under the cash balance formula to each of the executive officers named in the Summary Compensation Table as a single life annuity at age 65 is:
These amounts are based on the following assumptions:
In addition, certain employees who met certain defined criteria conditions continue to earn a benefit using the pension formula that had been maintained under their plans before the cash balance formula was implemented. Under the AEP Plans, the pension formula had been based upon a participants final average pay. That final average pay benefit accrual formula will terminate on December 31, 2010. Only employees who have continuously participated in the AEP Plans since December 31, 2000 accrue retirement benefits under both the cash balance and final average pay formulas. Employees accruing benefits under both formulas whose employment has terminated may choose to receive their benefits in any of the forms permitted under the AEP Plans, and their benefits will be provided under the formula that provides the greater amount for the chosen form. The accrued benefit earned by an employee under the final average pay formula as of December 31, 2010 (the date the final average pay formula will be discontinued) is the minimum benefit an employee can receive from the AEP Plans after that time.
The final average pay formula under the AEP Plans uses compensation for the executive officers named in the Summary Compensation Table above (other than Mr. Shockley) consisting of the average of the 36 consecutive months of the officers highest aggregate salary and Senior Officer Annual Incentive Compensation Plan awards, shown in the Salary and Bonus columns, respectively, of the Summary Compensation Table, out of the officers most recent 10 years of service.
The following table shows the approximate annual annuities that would be payable to employees in certain higher salary classifications under the final average pay formula provided through the AEP Plans, assuming termination of employment on December 31, 2002 after various periods of service and with benefits commencing at age 65.
Pension Plan Table
The amounts shown in the table are the straight life annuities payable under the AEP Plans final average pay formula without reduction for the joint and survivor annuity. Retirement benefits listed in the table are not subject to any further deduction for Social Security or other offset amounts. The retirement annuity is reduced 3% per year in the case of a termination of employment if an employee commences benefits between ages 55 and 62. If an employee terminates employment and commences benefits at or after age 62, there is no reduction in the retirement annuity.
As of December 31, 2002, for the executive officers named in the Summary Compensation Table (except for Mr. Shockley as discussed below in connection with the CSW Plans), the number of years of service applicable for the final average pay formula were as follows: Dr. Draper, 34.9 years; Mr. Fayne, 28.1 years; Ms. Tomasky, 24.5 years; and Ms. Koeppel, 17.8 years. The years of service for Dr. Draper, Ms. Tomasky and Ms. Koeppel include years of service provided by their respective agreements with AEP as described above in connection with the cash balance formula. The agreements for Dr. Draper and Ms. Koeppel each provide that their supplemental retirement benefits are reduced by pension entitlements, if any, from plans sponsored by prior employers.
Under the CSW Plans, certain employees who were 50 or over and had completed at least 10 years of service as of July, 1997, continued to earn a benefit under prior benefit formulas that are based on career average pay and final average pay. Of the executive officers named in the Summary Compensation Table, only Mr. Shockley is an eligible participant under the CSW Plans and has a choice following the termination of his employment to elect his benefit based on the cash balance formula or the prior pension formulas.
Under the CSW Plans, the estimated annual annuity payable to Mr. Shockley at age 65 under the final average pay formula computed as of December 31, 2002, is $183,600. The annual normal retirement benefit payable to Mr. Shockley under the final average pay formula is based on 1.67% of Average Compensation times the number of years of credited service (reduced by no more than 50 percent of his age 62 or later Social Security benefit), provided that the annual benefit would be increased annually based upon percentage increases in the consumer price index. Average Compensation equals the average annual compensation, reported as Salary in the Summary Compensation Table, during the 36 consecutive months of highest pay during the 120 months prior to retirement. Mr. Shockley has an agreement entered into with CSW prior to the merger with AEP under which he is entitled to a retirement benefit that will bring his credited years of service to 30 if he remains employed with AEP until age 60 or thereafter. Mr. Shockleys years of credited service and age, as of December 31, 2002, are 19 and 57.
In addition to the benefits described above, Mr. Fayne is the only executive officer named in the Summary Compensation Table who is eligible for certain supplemental retirement benefits if his pension benefits are adversely affected by amendments to the AEP Retirement Plan made as a result of the Tax Reform Act of 1986. Such benefits, if any, will be equal to any reduction occurring because of such amendments. If Mr. Faynes employment would have terminated by December 31, 2002, he would not be eligible for any additional annual supplemental benefit.
AEP also made available a voluntary deferred-compensation program in 1986, which permitted certain members of AEP System management to defer receipt of a portion of their salaries. Under this program, a participant was able to annually defer up to 10% of his or her salary over a four-year period, and receive supplemental retirement or survivor benefit payments over a 15-year period. The amount of supplemental retirement payments received is dependent upon the amount deferred, age at the time the deferral election was made, and number of years until the participant retires. Mr. Fayne was the only executive officer named in the Summary Compensation Table who participated in this program. He deferred $9,000 of his salary annually over a four-year period and therefore qualified for supplemental retirement payments of $95,400 per year for fifteen years assuming he would retire at age 65.
Severance Plan and Change-In-Control Agreements
Severance Plan. In connection with the merger with Central and South West Corporation, AEPs Board of Directors adopted a severance plan on February 24, 1999, effective March 1, 1999, that included Mr. Fayne and Ms. Tomasky. The severance plan provided for payments and other benefits if, at any time before June 15, 2002 (the second anniversary of the merger consummation date), the officers employment was terminated (i) by AEP without cause or (ii) by the officer because of a detrimental change in responsibilities or a reduction in salary or benefits. Both Mr. Fayne and Ms. Tomasky remained employed with AEP after June 15, 2002, such that the severance plan did not take effect for them. Under the severance plan, the officer would have received:
AEPs obligation for the payments and benefits under the severance plan was subject to the waiver by the officer of any other severance benefits that may have been provided by AEP. In addition, the officer would have agreed to refrain from the disclosure of confidential information relating to AEP.
Change-in-Control Agreements. AEP has change-in-control agreements with its executives, including all of the executive officers named in the Summary Compensation Table. If there is a change-in-control of AEP and the executive officers employment is terminated (i) by AEP without cause or (ii) by the officer because of a detrimental change in responsibilities, a required relocation or a reduction in salary or benefits, these agreements provide for substantially the same payments and benefits as the severance plan with the following additions:
Under these agreements, change-in-control means:
In addition to the severance plan and the change-in-control agreements described above, the American Electric Power System 2000 Long-Term Incentive Plan authorizes the Human Resources Committee to include change-in-control provisions in an award agreement (defined in a manner similar to the change-in-control agreements described above). Such provisions may include one or more of the following: (1) the acceleration or extension of time periods for purposes of exercising, vesting in or realizing gains from any award; (2) the waiver or modification of performance or other conditions related to the payment or other rights under an award; (3) provision for the cash settlement of an award for an equivalent cash value; and (4) modification or adjustment to the award as the Committee deems appropriate to protect the interests of participants upon or following a change-in-control. The outstanding award agreements issued to the executive officers contain provisions that accelerate the vest- ing and exercise dates of unexercised options and that offer a cash settlement upon a change-in-control.
The AEP Excess Benefit Plan also provides that all accrued supplemental retirement benefits become fully vested upon a change-in-control.
Board Human Resources Committee Report
All Other Fees(4)
|(1)||Audit fees consisted of audit work performed in the preparation of financial statements, as well as work generally only the independent auditor can reasonably be expected to provide, such as statutory audits.|
|(2)||Audit related fees consisted principally of audits of employee benefit plans, audits in connection with acquisitions and dispositions and unbundling audits of prior years in connection with corporate separation.|
|(3)||Tax fees consisted principally of tax compliance, tax advice and tax planning.|
|(4)||All other fees in 2002 consisted principally of advisory services in connection with process efficiency improvements.|
The Audit Committee has considered whether the provision of services other than audit services by Deloitte & Touche LLP and its global affiliates is compatible with maintaining that firms independence and the Committee believes that this provision of services is compatible with maintaining Deloitte & Touche LLPS independence.
THE FOLLOWING TABLE sets forth the beneficial ownership of AEP Common Stock and stock- based units as of January 1, 2003 for all directors as of the date of this proxy statement, 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 AEP Common Stock and stock-based units of AEP set forth across from his or her name. Fractions of shares and units have been rounded to the nearest whole number.
| Options Exercisable
Within 60 Days
E. R. Brooks
D. M. Carlton
J. P. DesBarres
E. L. Draper, Jr.
H. W. Fayne
R. W. Fri
W. R. Howell
L. A. Hudson, Jr.
H. K. Koeppel
L. J. Kujawa
R. L. Sandor
T. V. Shockley, III
D. G. Smith
L. G. Stuntz
K. D. Sullivan
All directors, nominees and executive officers as a group (18 persons)
|(a)||This column includes amounts deferred in stock units and held under AEPs various director and officer benefit plans.|
|(b)||Includes the following numbers of share equivalents held in the AEP Retirement Savings Plan: Mr. Brooks, 47,669; Dr. Draper, 4,659; Mr. Fayne, 5,804; Mr. Shockley, 7,104; Ms. Tomasky, 1,116; Ms. Koeppel, 223; and all directors and executive officers, 69,686.|
|(c)||Includes the following numbers of shares held in joint tenancy with a family member: Mr. DesBarres, 5,000; Dr. Draper, 661; and Ms. Stuntz, 300.|
|(d)||Does not include, for Messrs. Fayne and Shockley and Ms. Tomasky, 85,231 shares in the American Electric Power System Educational Trust Fund over which Messrs. Fayne and Shockley and Ms. Tomasky share voting and investment power as trustees (they disclaim beneficial ownership). The amount of shares shown for all directors and executive officers as a group includes these shares.|
|(e)||Includes the following numbers of shares held by family members over which beneficial ownership is disclaimed: Dr. Hudson, 750; Mr. Kujawa, 28; and Mr. Shockley, 496.|
|(f)||Represents less than 1% of the total number of shares outstanding.|
Section 16(a) Beneficial Ownership Reporting Compliance
SECTION 16(a) of the Securities Exchange Act of 1934 requires AEPs executive officers and directors to file initial reports of ownership and reports of changes in ownership of Common Stock of AEP with the Securities and Exchange Commission. Executive officers and directors are required by SEC regulations to furnish AEP with copies of all reports they file. Based solely on a review of the copies of such reports furnished to AEP and written representations from AEPs executive officers and directors during the fiscal year ended December 31, 2002, AEP notes that Robert W. Fri, Lester A. Hudson, Jr. and Kathryn D. Sullivan, directors, did not timely report acquisitions of 1,200 Stock Units on December 1, 2002, although each of them reported the acquisitions shortly thereafter.
Share Ownership of Certain Beneficial Owners
SET FORTH BELOW are the only persons or groups known to AEP as of December 31, 2002, with beneficial ownership of five percent or more of AEP Common Stock.
Name, Address of Beneficial Owner
Inc., parent holding company of Alliance Capital
1290 Avenue of the Americas
New York, NY 10104
AXA Rosenberg Investment Management LLC
4 Orinda Way
Orinda, CA 94563
Capital Research and Management Company
333 South Hope St.
Los Angeles, CA 90071
|(a)||Based on the Schedule 13G jointly filed with the SEC, AXA, as a parent holding company of AXA Conseil Vie Assurance Mutuelle, AXA Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle, AXA Courtage Assurance Mutuelle, AXA Rosenberg Investment Management LLC and AXA Financial, Inc., parent holding company of Alliance Capital Management L.P., an investment adviser, and The Equitable Life Assurance Society of the U.S., an insurance company and an investment adviser, reported that they have sole voting power for 14,935,436 shares, shared voting power for 3,813,181 shares, sole dispositive power for 30,946,161 shares.|
|(b)||Based on the Schedule 13G, Capital Research and Management Company, an investment adviser, reported that it has sole dispositive power for 27,963,000 shares.|
TO BE INCLUDED in AEPs proxy statement and form of proxy for the 2004 annual meeting of shareholders, any proposal which a shareholder intends to present at such meeting must be received by AEP, attention: Susan Tomasky, Secretary, at AEPs office at 1 Riverside Plaza, Columbus, OH 43215 by November 24, 2003.
For any proposal intended to be presented by a shareholder without inclusion in AEPs proxy statement and form of proxy for the 2004 annual meeting, the proxies named in AEPs form of proxy for that meeting will be entitled to exercise discretionary authority on that proposal unless AEP receives notice of the matter by February 4, 2004. However, even if notice is timely received, the proxies may nevertheless be entitled to exercise discretionary authority on the matter to the extent permitted by Securities and Exchange Commission regulations.
THE COSTS of this proxy solicitation will be paid by AEP. Proxies will be solicited principally by mail and the Internet, but some telephone, telegraph or personal solicitations of holders of AEP Common Stock may be made. Any officers or employees of the AEP System who make or assist in such solicitations will receive no compensation, other than their regular salaries, for doing so. AEP 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 AEP will reimburse them for their expenses incurred in doing so at rates prescribed by the New York Stock Exchange. Morrow & Co., Inc. will assist in the solicitation of proxies by AEP for a fee of $12,000, plus reasonable out-of-pocket expenses.
The Audit Committee (the Committee) shall:
A. Provide assistance to the Board of Directors in fulfilling its responsibilities to the shareholders, potential shareholders and investment community with respect to its oversight of:
(i) The quality and integrity of the corporations financial statements;
(ii) The corporations compliance with financial reporting related legal and regulatory requirements;
(iii) The independent auditors qualifications and independence; and
(iv) The performance of the corporations internal audit function and independent auditors.
B. Prepare the report that SEC rules require be included in the corporations annual proxy statement.
II. STRUCTURE AND OPERATIONS
A. Composition and Qualifications
The Committee shall be comprised of three or more members of the Board of Directors, each of whom is determined by the Board of Directors to be independent under the rules of the New York Stock Exchange, Inc. and the Sarbanes-Oxley Act (and any rules promulgated thereunder).
All members of the Committee shall have a working familiarity with basic finance and accounting practices (or acquire such familiarity within a reasonable period after his or her appointment) and at least one member must be a financial expert under the requirements of the Sarbanes-Oxley Act (and any rules promulgated thereunder).
No member of the Committee shall receive compensation from the corporation other than directors fees for service as a director of the corporation, including reasonable compensation for serving on Committees and regular benefits that other directors receive.
B. Appointment and Removal
The members of the Committee shall be appointed by the Board of Directors and shall serve until such members successor is duly elected and qualified or until such members earlier resignation or removal. The members of the Committee may be removed, with or without cause, by a majority vote of the Board of Directors.
The Board of Directors will appoint the Chairman of the Committee. The Chairman shall be entitled to cast a vote to resolve any ties. The Chairman will chair all regular sessions of the Committee and set the agendas for Committee meetings.
The Committee shall meet at least quarterly, or more frequently as circumstances dictate or as requested by the Companys independent auditors, chief accounting officer or manager of internal audits. As part of its goal to foster open communication, the Committee shall periodically meet separately with each of management, the manager of the internal auditing department, the independent auditors and the Board to discuss any matters that the Committee or each of these groups believe would be appropriate to discuss privately. In addition, the Committee should meet with the independent auditors and management quarterly to review the corporations financial statements in a manner consistent with that outlined in Section IV of this Charter. The Chairman of the Board or any member of the Committee may call meetings of the Committee. Meetings of the Committee may be held telephonically.
All non-management directors that are not members of the Committee may attend meetings of the Committee but may not vote. Additionally, the Committee may invite to its meetings any director, management of the corporation and such other persons as it deems appropriate in order to carry out its responsibilities. The Committee may also exclude from its meetings any persons it deems appropriate in order to carry out its responsibilities.
IV. RESPONSIBILITIES AND DUTIES
The following functions shall be the common recurring activities of the Committee in carrying out its responsibilities outlined in Section I of this Charter. These functions should serve as a guide with the understanding that the Committee may carry out additional functions and adopt additional policies and procedures as may be appropriate in light of changing business, legislative, regulatory, legal or other conditions. The Committee shall also carry out any other responsibilities and duties delegated to it by the Board of Directors from time to time related to the purposes of the Committee outlined in Section I of this Charter.
The Committee, in discharging its oversight role, is empowered to study or investigate any matter of interest or concern that the Committee deems appropriate. In this regard, the Committee shall have the authority to retain outside legal, accounting or other advisors for this purpose, including the authority to approve the fees payable to such advisors and any other terms of retention.
The Committee shall be given full access to the corporations internal audit group, Board of Directors, corporate executives and independent accountants as necessary to carry out these responsibilities. While acting within the scope of its stated purpose, the Committee shall have all the authority of the Board of Directors.
Notwithstanding the foregoing, the Committee is not responsible for certifying the corporations financial statements or guaranteeing the auditors report. The fundamental responsibility for the corporations financial statements and disclosures rests with management and the independent auditors.
A. Documents/Reports Review
1. Review with management and the independent auditors prior to public dissemination the corporations annual audited financial statements and quarterly financial statements, including the corporations disclosures under Managements Discussion and Analysis of Financial Condition and Results of Operations and a discussion with the independent auditors of the matters required to be discussed by Statement of Auditing Standards No. 61.
2. Review and discuss with management and the independent auditors the corporations earnings press releases (paying particular attention to the use of any pro forma or adjusted non-GAAP information), as well as financial information and earnings guidance provided to analysts and rating agencies. The Committees discussion in this regard may be general in nature (i.e., discussion of the types of information to be disclosed and the type of presentation to be made) and need not take place in advance of each earnings release or each instance in which the corporation may provide earnings guidance.
3. Perform any functions required to be performed by it or otherwise appropriate under applicable law, rules or regulations, the corporations by-laws and the resolutions or other directives of the Board, including review of any certification required to be reviewed in accordance with applicable law or regulations of the SEC.
B. Independent Auditors
1. Responsibility for the appointment, compensation, retention and oversight of the work of the independent auditor engaged (including resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work or performing other audit, review or attest services for the corporation. The independent auditor reports directly to the Committee. These oversight responsibilities include the authority to retain (or to terminate) the outside auditor. In addition, in connection with these oversight responsibilities, the Committee has ultimate authority to approve all audit engagement fees and terms, as well as all significant non-audit engagements of the independent auditor.
2. Evaluate, at least annually, the qualifications, performance and independence of the independent auditors, including an evaluation of the lead partner. In conducting its review and evaluation, the Committee should:
(a) Obtain and review a written report by the corporations independent auditor describing: (i) the auditing firms internal quality-control procedures; (ii) any material issues raised by the most recent internal quality-control review, or peer review, of the auditing firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the auditing firm, and any steps taken to deal with any such issues; and (iii) to assess the auditors independence, all relationships between the independent auditor and the corporation;
(b) Ensure the rotation of partner rules are met and consider whether there should be regular rotation of the audit firm itself.
C. Financial Reporting Process
1. In consultation with the independent auditors, management and the internal auditors, review the integrity of the corporations financial reporting processes, both internal and external. In that connection, the Committee should obtain and discuss with management and the independent auditor, reports from management and the independent auditor regarding: (i) critical accounting policies and practices to be used by the corporation; (ii) analyses prepared by management and/or the independent auditor setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including alternative treatments of financial information within generally accepted accounting principles that have been discussed with the corporations management, the ramifications of the use of the alternative disclosures and treatments, and the treatment preferred by the independent auditor; (iii) major issues regarding accounting principles and financial statement presentations, including any significant changes in the corporations selection or application of accounting principles; (iv) major issues as to the adequacy of the corporations internal controls and any specific audit steps adopted in light of material control deficiencies; (v) any other material written communications between the independent auditor and the corporations management; and (vi) internal auditing, accounting and financial controls.
2. Review periodically the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on the financial statements of the corporation.
3. Review with the independent auditor (i) any audit problems or other difficulties encountered by the auditor in the course of the audit process, including any restrictions on the scope of the independent auditors activities or on access to requested information, and any significant disagreements with management and (ii) managements responses to such matters. Without excluding other possibilities, the Committee may wish to review with the independent auditor (i) any accounting adjustments that were noted or proposed by the auditor but were passed (as immaterial or otherwise), (ii) any significant communications between the audit team and the audit firms national office respecting auditing or accounting issues presented by the engagement and (iii) any management or internal control letter issued, or proposed to be issued, by the independent auditor to the corporation.
D. Legal Compliance/General
1. Review periodically, with the corporations counsel, any legal matter that could have a significant impact on the corporations financial statements.
2. Discuss with management and the independent auditors the corporations guidelines and policies with respect to risk assessment and risk management. The Committee should discuss the corporations major financial risk exposures and the steps management has taken to monitor and control such exposures.
3. Set clear hiring policies for employees or former employees of the independent auditors.
4. Establish procedures for: (i) the receipt, retention and treatment of complaints received by the corporation regarding accounting, internal controls over financial reporting, or auditing matters; and (ii) the confidential, anonymous submission by employees of the corporation of concerns regarding questionable accounting or auditing matters.
5. Supervise on a continuing basis the implementation of the AEP Corporate Compliance Program, including reporting by the chief compliance officer, the development of specific programs of legal compliance in various important areas of concern to the operation of AEP System companies, and the designation of successor chief compliance officers.
1. Prepare all reports required to be included in the corporations proxy statement, pursuant to and in accordance with applicable rules and regulations of the SEC.
2. Report regularly to the full Board of Directors including:
(i) with respect to any issues that arise with respect to the quality or integrity of the corporations financial statements, the corporations compliance with legal or regulatory requirements, the performance and independence of the corporations independent auditors or the performance of the internal audit function;
(ii) following all meetings of the Committee; and
(iii) with respect to such other matters as are relevant to the Committees discharge of its responsibilities.
The Committee shall provide such recommendations as the Committee may deem appropriate. The report to the Board of Directors may take the form of an oral report by the Chairman or any other member of the Committee designated by the Committee to make such report.
3. Maintain minutes or other records of meetings and activities of the Committee.
V. ANNUAL PERFORMANCE EVALUATION
The Committee shall evaluate, at least annually, the performance of the Committee and its members. In addition, the Committee shall review and reassess, at least annually, the adequacy of this Charter and recommend to the Board of Directors any modifications to this Charter. The Committee shall conduct such evaluations and reviews in such manner as it deems appropriate.